HUNTIN' DAYLIGHT -- VALUE OF GAIN OFFERS STOCKER OPPORTUNITY

by: Wes Ishmael

Although calf prices will likely continue to decline seasonally, they remain at a higher level than many expected when the year began. Plus, value of gain continues to offer opportunity for adding more weight to calves before selling.

First, the price trend, which is under pressure from both seasonality and the cattle cycle.

“Looking at the rest of 2018, feeder prices are expected to be a little lower than during the same period of 2017,” says Josh Maples, Extension livestock economist at Mississippi State University, in recent issue of In the Cattle Markets. “We typically see seasonal feeder price declines heading into September and October, and the large supplies of calves this year provide some reasoning for that seasonal pattern to hold this year. Looking beyond 2018, the slower herd growth numbers begin to paint a brighter price picture for 2019 and 2020. If the strong domestic economy maintains or grows and exports continue to gain steam, it is not difficult to project higher prices in the Fall of 2019 compared to fall 2018.”

As for seasonality, Derrell Peel, Extension livestock marketing specialist at Oklahoma State University explained in recent market comments, “Prices for feeder cattle typically decline seasonally for all weight classes after August. Calves and stockers up to 600 lbs. (which peak in March) typically have a seasonal low price in October, while heavier feeder cattle decline from an August peak lower through the end of the year. On average, feeder cattle prices decline four to five percent from August to lows in the fourth quarter.”

Likewise, Andrew P. Griffith, agricultural economist at the University of Tennessee, notes in his late-August market comments, “The classes of cattle with the most downside risk at this point in the year are freshly weaned calves and slaughter cows. As marketings of these two classes of cattle begin to increase moving through September and then peak in October and November, prices will most likely decline due to calf supply and forage availability. Readers of this information should not take this information as a guarantee, but it should be considered that the probability of prices declining is much higher than prices increasing.

“The options that remain available to producers include sacrificing a few pounds and marketing calves as quickly as possible, continuing to grow calves and selling on a market where prices are five to seven percent lower than today (during the fall), or continuing to grow the calves following weaning and marketing the cattle sometime after the first of the year.”

In other words, make the calves part of a stocker enterprise first. After all, cow-calf producers represent the largest segment of stocker production, according to the National Stocker Survey conducted by BEEF magazine several years ago.

Individually and collectively, stocker producers are the reason consumers have year-round access to any cut of beef they want. Besides balancing the supply of calves—the mass majority born in the spring months—stocker production serves as a shock absorber against all sorts of things, from drought to spikes in grain prices.

The stocker sector also removes variation from the industry. You can't make a diamond out of coal in just a few months, but stocker operations assemble, manage, sort and market load-lots and pen-lots of similar cattle. That means subsequent management can be more consistent, offering more efficiency and value to the industry overall.

At the same time, depending on multiple factors, stocker production can provide positive margins. In the case of cow-calf producers, it can provide an opportunity to add value to calves through both pounds and market timing.

Determining Future Value

First of all, I'd never bet against someone with years of hard-won experience in the stocker business when it comes to figuring out whether a particular group of calves or spot in the market represents a solid buy.

For the rest us, though, value of gain serves as an objective gauge of opportunity.

Some apply it on a general basis, looking at the difference in the current cash price of same-class steers at two different weights, for instance, then dividing that price difference by the weight difference. That provides some notion, but the cattle bought that day aren't going to be sold the same day at a heavier weight.

Consequently, others use the current cash price, then assess the opportunity by estimating a selling price for those calves when they're ready to sell weeks and pounds down the road.

For instance, consider a Medium and Large #1-#2 steer calf weighing 518 lbs. and purchased for $157.30/cwt. at Dickson Regional Livestock in Tennessee on Sept. 3. Adding 232 lbs. and selling in January results in a projected value of gain of *$1.08/lb. (see calculation below).

That's with an estimated selling price of $142/cwt. in January, using a weighted average basis (from beefbasis.com) for Dickson, TN of -$6.72/cwt and the Jan Feeder Cattle contract of $148.725 at the time.

The difference between the $1.08 value of gain in this example and cost of gain represents the revenue potential.

Peel ran the numbers for Oklahoma the first week of August and came up with a value of gain of $1.19/lb. for adding 319 lbs. to a steer calf weighing 465 lbs. and purchased at $171.59/cwt. and then selling at 774 lbs. for $150.65.

“Value of gain for added feeder cattle weight is largely a reflection of feedlot demand for feeder cattle of various weights,” Peel says. “A value of gain at this level indicates relatively less feedlot demand for lightweight feeders and is an economic signal for increased stocker production. If feeder cattle prices maintain a similar price relationship into the fall and forage conditions are good, fall feeder markets may follow seasonal price patterns rather closely.”

For his neck of the woods, Peel considered growing calves on wheat pasture.

“Profitability of winter stockers (purchased in October) will depend on numerous budget factors including purchase price, length of grazing period, rate of stocker gain, wheat pasture cost and, of course, selling price in late February or early March,” Peel explains.

When asked recently whether cow-calf or stocker production offered the most economic opportunity, Griffith responded via the Think Tank section of his market comments: “Determining which option is best for an individual producer is not always simply solved through budgeting. Availability of resources such as labor, production knowledge, and feed may be the deciding factor. For assistance answering this question, contact the local Extension office and get in touch with the Farm Area Management specialist. They are a tremendous resource.”

At the same time, Peel says stocker demand will be the key to calf prices this fall. He points out forage conditions will determine the degree to which stockers can demand calves, while economic conditions will dictate their willingness to do so. That could be the difference between seasonal declines in calf prices or steeper reductions based on more cattle numbers. He points to the mid-year Cattle report indicating a calf crop this year nearly two percent more than in 2017 and estimated feeder supplies 0.5 percent larger.

*Value of Gain Example: steer purchased at $157.30/cwt. and 518 lbs. Steer sold at 750 lbs. for $142/cwt.
• Purchase price (518 lbs. X $157.30/lb.= $814.81) – sell price (750 X $1.42/lb. = $1,065.00) = $250.19.
• $250.19 ÷ 232 lbs. of added weight = value of gain of $1.08/lb.







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