November 2013 Articles

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Retained Ownership an Attractive Opportunity this Fall

Retained Ownership an Attractive Opportunity this Fall
Source: Ross Pruitt, Department of Agricultural Economics and Agribusiness LSU AgCenter
This year appears to be another strong year for winter stocker returns. While returns are estimated to be greater than last year, there are some significant differences compared to last year. The first difference is that the number of cattle available is smaller than last year. Although there is no Cattle on Feed report being issued by USDA this month, analysts estimate that the total number of cattle on feed is 7.3% smaller than last year. The number of cattle placed in September is also thought to be 1% higher compared to last year which was the lowest number of cattle placed for September since 1996.
The second primary difference is the substantially lower cost of grain compared to last year. Corn futures are 39% lower than a year ago. Cash prices were showing approximately the same decline prior to the government shutdown ending the flow of USDA information on cash grain prices throughout the country. DTN is reporting cash corn prices that are ranging from the mid $3/bu to $4.50/bu early in this week (DTN corn index was $4.23/bu tues). The decline in corn prices have provided feedlots the ability to bid up feeder cattle prices. With feedlots facing lower input costs and higher purchase prices for cattle, they may have already bid the potential profit our of feeder cattle barring an increase in the price of fed cattle.
With the above factors considered, procuring the right type of cattle to excel in a stocker program this winter may be difficult. The benefit of a stocker program is that there is flexibility present in what is purchased and marketed. Tight supplies of cattle will provide producers who retain calves an easy option to procure cattle than those who purchase calves and may not be able to do so as uniformly and at a price they want as in the past. Even if calves are retained to stocker, the cost of production should be known as it serves as a proxy for the purchase price of calves.
The table below indicates the potential returns available for those interested in a stocker program, but doesn’t include any risk management strategies. Forecasts from the Livestock Marketing Information Center are projecting $157/cwt to $163/cwt for feeder cattle in the second quarter 2014, lower than what feeder cattle futures for that quarter are currently suggesting. Adjusting some of the assumptions below with regards to how long the cattle are retained, death loss, and average daily gain can result in higher returns as the expected cost of gain decreases. With the May feeder cattle futures contract at a slight premium to the April contract, it may make sense to consider extending the grazing period to take advantage of heavier cattle sold for a higher price. Adding thirty additional pounds to the cattle in the scenario would drop the cost of gain ten cents per pound and result in a program that on a cost basis would be very competitive to winter wheat grazing in the Southern Plains.
Ryegrass grazing (Cash Costs) Ryegrass grazing (All Costs)
Beginning Weight 512 lbs 512 lbs
COG1 $1.00/lb $1.13/lb
Days in Program 132 days 132 days
ADG 1.92 lbs 1.92 lbs
Death Loss 2.00% 2.00%
Transportation $38.78/head $38.78/head
Marketing $15/head $15/head
Ending Weight2 750 lbs 750 lbs
Selling Price3 $167.28/cwt $167.28/cwt
Estimated Revenue $1,254.56/head $1,254.56/head
Total Cost $295.15/head $326.56/head
Returns to Stocker Phase $959.42/head $928.00/head
Cow/Calf Production Costs4 $446.04/head $670.90/head
Returns above Cow/Calf Costs $513.38/head $257.10/head