by: Wes Ishmael
�Large numbers of un-weaned calves are still making their way to the local auction markets as many cow-calf producers view prices as too high not to sell calves now,� says Andrew P. Griffith, University of Tennessee agricultural economist in his November 8 marketing comments. �Is marketing calves now instead of backgrounding the most profitable decision?�
Griffith captures in a few words the wonderments many producers are facing this fall with record-high and near-record-high prices.
On the one hand, it's hard to quibble with bird-in-hand logic. On the other, supply and demand fundamentals suggest calf prices should increase overall for at least the next couple of years.
Stocker Potential Has Shifted
Griffith notes part of the recent strength in calf markets likely stems from stocker producers looking to exploit what appears to be the lushest Southern Plains wheat pasture in years. Likewise, producers in the Southeast are exploring the potential for adding pounds on stockpiled forage and winter annuals.
In doing so, Derrell Peel, Oklahoma State University extension livestock marketing specialist explains in his November 11 market comments, �The strong demand for lightweight stockers is maintaining a sharp price rollback on initial stocker gains. In last week's seven-market Oklahoma auction averages, the steer price rollback for the 425-525 lbs. weight range was $21.61/cwt.; $16.75/cwt. for 525-625 lbs.; $3.07/cwt. for 625-725 lbs.; and $5.87/cwt. for 725-825 lbs. This means that the value of gain is heavily loaded towards the later stocker gains, i.e., in animals above 600 lbs.�
�Stocker producers should determine a target end weight that captures this higher value of gain and work backwards, considering production conditions and time available for weight gain, to determine the best purchase weight for stockers,� Peel says. �For example, at current prices, a 550 lbs. beginning stocker weight has a 46 percent higher value of gain on 200 lbs. of gain, compared to a 450 lbs. beginning weight.�
Peel emphasizes producers should also consider the current difference between steer and heifer prices.
�In the last three weeks, an increasing number of feeder auction reports from several states have included heifers sold as replacements at significantly higher prices than feeder heifers,� Peel explains. �In many cases, the replacement heifers are selling $8-$12/cwt. above comparable feeder heifers. This implies heifers selling at a five percent to six percent discount to comparable steers, compared to the more typical 11 percent to 12 percent heifer discount. In several instances, replacement heifers are selling at prices at or above comparable steer prices. For the most part, replacement heifer demand this fall is centered in the central and northern Plains and the western Corn Belt. However, replacement heifer demand is likely to spread into the Southern Plains, where much herd rebuilding is ahead, if drought conditions continue to moderate.�
Exploring Net Present Value of Heifers
The heifer retention option with the current calf crop also represents a vexing question for the industry. The national cowherd needs to expand in the name of preserving infrastructure and future opportunity. Feed supplies and economic incentive are growing for expansion, but costs remain historically high.
For perspective, according to the Livestock Marketing Information Center (LMIC), cash cow costs plus pasture jumped from about $550 per cow five years ago to nearly $800 in 2013. That's $100 more than last year, based on 14 cost categories.
�Fortunately for the cow-calf sector, cattle prices this fall are higher than a year ago. So, estimated cow-calf returns per cow will be up in 2013 compared to 2012's,� LMIC analysts say. They estimate returns over cash costs plus pasture rent his year at $125/cow, compared to $32 last year.
�However, there is a major cautionary note, �LMIC analysts add: �Due to drought many cow-calf operations had to sell off many cows. Even if per-cow returns are higher, their enterprise is providing limited net income because in 2013 they have fewer calves to sell than in prior years.�
LMIC analysts expect cow costs to decline slightly next year with lower feed prices. �That cost drop plus high cattle prices set the stage for much improved per-cow returns in 2014. In fact, those cash returns could substantially exceed 2004's record high,� they say.
Figuring out the worth of replacement females in the midst of this environment isn't necessarily easy, but there are plenty of tools that can help assess the potential.
For example, in a recent issue of In the Cattle Markets, Glynn Tonsor, Kansas State University (KSU) livestock economist mentions a free spreadsheet, KSU Beef Replacement, developed by KSU colleague, Kevin Dhuyvetter.
The spreadsheet calculates Net Present Value � what heifers are worth relative to expected production, annual costs, interest rates and other factors, versus the value of selling in the current market.
�Using what currently appears to be fairly conservative calf prices over upcoming years (averaging $169/cwt. for 562 lbs. calves) and a base for cow costs of $700/year the spreadsheet suggests purchasing a replacement for $1,420 in anticipation of her producing calves for the next five years would provide an expected return on investment of 7.5 percent,� Tonsor says. �Similarly, if a replacement was purchased for $1,522, where 10 years of production were expected, the estimated return on investment would be 7.5 percent. Any purchases at levels lower (higher) than these price level levels would provide better (worse) expected returns. Similarly, producers with lower (higher) annual cow costs can pay significantly higher (lower) prices for replacements to achieve the same expected rate of return. Stated differently, producers with lower annual cow costs or expectations of a given replacement producing for longer periods will see higher economic value in replacements available for purchase.�
Tonsor explains the spreadsheet can be adjusted easily for a given producer's situation regarding costs and production along with expectations of cattle prices over upcoming years and targeted rates of return.
Likewise, Lisa Elliott, South Dakota State University extension commodity marketing specialist explains, �The net cash flows are calculated from the expected annual calf value and the value of the cull cow.�
Running the numbers in her part of the world, she says, the adjusted time value of money shows that a five-calf heifer (Net Present Value) is worth $1,335.
�If the female could sell for more than $1,335 today, then one should consider selling her,� Elliott says. �However, if the producer couldn't sell the female for more than $1,335, he should keep her in the herd.�
Keep in mind, this is a specific example. Each producer will make a number of adjustments specific to their own operation that will determine the value. If you're not familiar with the process or available spreadsheets, contact your extension agent.
Keep or Sell?
Thinking back to the question Griffith posed at the outset�marketing calves now or later�he says, �The answer to that question depends on the resources available and the alternative marketing avenues producers have available to them.�
That includes risk tolerance and the ability to manage price and financial risk.
�Purchasing 60 to 70 lightweight calves that result in a 50,000 lbs. load 120 to 150 days down the road requires a significant investment when compared to a couple of years ago or when even compared to last fall,� Griffith says. �The market currently has more downside potential than upside potential as feeder cattle futures are currently trading in the mid $160s for next spring. It may be beneficial for producers to hedge feeder cattle sales for next spring as it is more likely for some outside factor to disrupt the market causing price declines than it is for prices to escalate further. It is suggested that producers do something to protect against downside price risk to protect against the large investment in cattle. If producers want to protect against downside price risk but leave the opportunity to gain on upside potential then a put option or livestock risk protection insurance may be the tools to use.�
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