Weston Givens doesn’t delve into futures or options. But with high-quality, VAC-45 preconditioned calves, he can forward-contract at 10% to 15% above futures prices, and usually hedge against any market discounts. For 2014, his “quality hedge” saw calves bring $20 per cwt over the next-closest sales at a regional sale barn.
Givens is part of a sprawling western Oklahoma ranch headquartered in Arnett. Like other cow-calf businesses, producing a quality calf comes first. But a plan to get them marketed is always in the back of his mind. And using straight hedges or options when his area basis is $8 to $10 per cwt above futures prices doesn’t get him excited about calling a broker.
“The basis [difference between cash and futures prices] holds them back,” says Kevin Good, analyst for CattleFax, adding a decline in outside investors into commodities is partly to blame. “The commodity bull story is behind us and we have lost outside participation in the markets. They helped build premiums to take advantage of. We don’t have those today. There is less opportunity for traditional risk management.”
Thus, Givens stresses the continued need for higher-quality genetics as his form of price protection. The ranch, set mainly in rolling hills just north of the Canadian River, has a reputation for producing Hereford-Angus cross calves that perform at the feedyard.
Givens is one of four family partners, including his mentor and father-in-law, Charles Nichols, a former animal science professor at Oklahoma State University. Black baldy calves have been grazing the place since the 1970s. “We tried other breeds as crosses, but couldn’t get anything to work as well as the Angus-Hereford crosses,” Givens says.
Hereford bulls are bred to Angus-sired cows. Angus bulls are bred to Hereford-sired cows. Calves are normally marketed through the Woodward, Okla., auction or Superior Livestock Auction video sale. Virtually all calves go through an extensive preconditioning program that includes a VAC-45 or longer weaning system and a detailed vaccination regimen.
Calves are typically born in early January. Weaning starts in early August at about 600 pounds “It takes us about six weeks to get them all weaned,” Givens says, noting that all calves are PI BVD (bovine viral diarrhea persistent infection)-tested. “Before weaning, they have had a round of modified-live vaccine [MLV] for prevention of respiratory diseases, as well as blackleg.
“When we wean, we give the same vaccinations again. If we’re selling those calves, we’ll give them a third round of the MLV before we sell them. We make sure they’ve been weaned 45 days before being sold in late October or early November.”
In 2014, calves were marketed through the Woodward sale. Potential buyers wanted them weaned at least 60 days and assurance they had been PI-tested. “Those calves brought $20 per cwt over the highest other cattle in the sale,” Givens says.
For 2015, he is considering marketing 700-pound steers through Superior Livestock Auction video sale. With the October and November 2015 feeder cattle futures contracts trading at about $206 per cwt in early August, he was looking at forward-contracting the cattle at 10% over.
“That’s about the closest as we would come to hedging,” he says, adding that he knows the market may see additional pressure as cattle supplies increase from the herd buildup now underway.
Continued market volatility illustrates just how high the financial risks are. For instance, last November, the October feeder contract topped $230 per cwt. By February this year, it was below $200 — that’s about $200 per head for a 6-7 weight. After climbing above $220 again in May and June, it tanked down to $204 to $206 by Aug. 1. During that time, a strong basis held potential hedgers back, says Tyler Keeling, analyst-consultant for Amarillo Brokerage Co. of Amarillo, Texas.
“We’ve seen guys switch to forward-contracting because the curve has shifted,” Keeling says. “Three to five years ago, the back of the curve was higher; futures would be above the cash price. It was easier to hedge then. Now, the best shot to get a price close to today’s cash market is through the forward contract.”
As an example, Keeling says the feeder index was about $215 per cwt on Aug. 1, compared with the $206 futures price. “Producers don’t want to hedge at $10 below today’s cash price,” he says. “But when they call a feedyard and say ‘Will you give me $8 to $10 over the board?’ they can often lock in that contract.”
Ted Schroeder, Kansas State University agricultural economist, says some form of risk management may be prudent as cattle numbers grow. “Dollars at stake are so much greater than historically,” he says. “Any time we have a lot of capital at risk, there is certainly increased incentive to lay off some of that risk. You can’t just sit back. The magnitude of the dollar is huge. You have to be ready and willing to
protect some of that.”
However, cow-calf operators have traditionally not been active hedgers, says K-State livestock marketing economist Glynn Tonsor. “A vast majority of producers just take what the market gives them and are not proactive,” he says. “But there is an opportunity now to lock in a profit margin to help manage risk.”
He encourages ranchers to compare their marketing alternatives. One place to do so is at the K-State agmanager.info website. Using their own information, users can compare pricing opportunities through futures, options and Livestock Risk Protection insurance from USDA’s Risk Management Agency.
While calves still generate a big profit, CattleFax forecasts profits will likely decline in 2016 and beyond, Good says. “From a big picture, producers need to recognize that the cycle has turned. Our absolute high in prices is behind us,” he says. “The long-term trend is going to start working against us segment by segment.”
That means, Good says, that cow-calf producers may need to reach out further on sales. “The news over time gets a little tougher. If he can get cattle contracted out front, it may be better than [selling] when the time comes.”
As for Givens’ efforts to maintain quality, he occasionally sends steers or heifers to the feedyard to gauge their performance. “Most recently, our heifer calves had an ADG [average daily gain] of 3.9 pounds and a conversion rate of 5.3 [pounds of feed per pound of gain],” he says. “Cost of gain was 75 cents per pound, and they dressed out at 64.5%.
“That gave us a good idea of how our calves perform. We were pleased. That’s a hedge we can live with.”
Larry Stalcup is a freelance writer based in Amarillo, Texas.
You might also enjoy: