We are approaching the end of graze-out season for stocker calves on winter wheat. What are your options? What kind of price can you expect for feeder calves at the sale barn? Is there any profit in retaining ownership in 2021?
Dates and Deadlines
5/18/2021 – Northeast Panhandle Wheat Field Day
5/20/2021 – Online Forage Production Program
5/21/2021 – Cattle on Feed
5/28/2021 – Texas Sheep & Goat Expo Mini Series – Market Update
6/3-4/2021 – AFPC Fed Cattle Marketing Workshop
What I’m Reading
Corn prices cause ripple through economy – AgriLife Today
Conservation management offers benefits – Southwest Farm Press
A little before this time last year feeder calf prices were collapsing. During the one-month period (approximately April) in which we normally see support for the price of heavier calves, cash prices fell dramatically. In one month, the cash price of a 5-weight calf fell from $171/cwt to $144.58/cwt. In the same period the value of an 8-weight calf fell from $120.33/cwt to $112.45/cwt. The collapse felt more pronounced in these heavier ranges given the divergence from normal seasonal trends.
MED. & LRG. #1 FEEDER STEER PRICES
Though the federal government would later attempt to indemnify producers for these losses through aid payments, ranchers were understandably concerned. My colleagues and I received dozens (collectively hundreds) of questions about options to weather the storm. One of the few solutions to stave off disaster for cow-calf and stocker producers was to consider retained ownership. We revisit that decision today as heavy stocker calves begin to leave grazed-out wheat pasture. Much of the analysis in this post is the result of work developed by my colleague Pancho Abello, the Extension Economist in Vernon.
First, let’s consider what returns would be on the sale of an 800 lb. stocker calf. For this analysis we assume the budgetary setup in the District 1 AgriLife Winter Stocker Calf Budget. The key assumptions to update if you conduct this analysis yourself are the purchase and sale price. We’re assuming the purchase of a 475 stocker calf on October 1, 2020 grazed on winter wheat until today. The average of cash prices for ~475 lb. calves on the high plains that day was $1.55/lb. Last week’s average high plains sale price for 8-weight calves was $1.30/lb.
In the first matrix of potential profit for 800 lb. stockers under these assumptions you can see a profit of $19/head. By using the matrix of varying sale prices and purchase prices you can see what variations of those assumptions lead to, in terms of profit. However, because we are considering immediate sales it is unlikely that we’ll see 10%+ swings in price over the next week or two.
Stockers ~800 Lb. – Returns Sensitivity Analysis ($/Head)
Next, let’s take a look at the potential financial outcomes of calves for which you retained ownership. Since we don’t have retrospective data available as we do with stockers for sale right now, a bit more prediction is involved. Once again, we’ll operate under the assumption that the calves were purchased in October 1, 2020 at 475 lbs. and currently (May 17, 2021) weigh approximately 800 lbs. We’ll assume that you contributed the same inputs at the same costs through the winter grazing period on wheat.
The difference now is that we’ll assume that, rather than sell your 8-weight calves at the sale barn or to a yard, you’ll be retaining ownership through the feeding stage. There are a few new key assumptions to consider under this enterprise. Remember that we are buying this feeder calf from ourselves in order to add weight through the feeding period of approximately 180 days.
We know that we’re selling our feeder calf to our own fed cattle business, so the purchase price of our feeder calf is the $1.30/lb. price we discussed in the previous section. In order to forecast our sale price, I’ve taken the CME Oct. Live Cattle Future’s price as of May 17, 2021. I chose October to account for the approximate six month period on feed. As of today, you could lock in a price of $1.23/lb.
Retained Feed Yard Sensitivity Analysis – Sale Weight w/ Shrink
Next, we need to make some assumptions regarding average daily gain (ADG). For our purposes we assume 3.5 lbs./head/day gain. If we start with an 800 lb. calf and add 3.5 lbs./day multiplied by 180 days we come to a finished weight of 1,430 lbs. Gains of 3.5 lbs./day is a solidly optimistic figure. In the matrix above you can see different combinations of outcomes for different sale prices and different sale weights.
Even at the best potential ADG, with prices in their current state we forecast a loss of $25/head. If you are able to take advantage of a possible 5% increase in price between now and October to achieve a sale price of $1.29/lb. you could lock in a profit of $62/head. Due to steadily decreasing inventory, we do expect support for feeder and fed cattle prices through the fall. However, it is important to note that, even with an ADG of 3.5/lbs., a 5% decrease in price between now and October would net a loss of $112/head. If you assume an equal chance of prices remaining equal, falling, or rising, then there is a 60% chance of netting losses from retaining ownership. It is also possible that your calves may gain less than 3.5 lbs./day.
A final, vital piece of the puzzle to consider is the cost of gain (COG) for feeding cattle. The COG is the cost, expressed in dollars per pound, to achieve a pound of gain. Keep in mind that we are including a yardage charge and other costs in this figure. This is different from the explicit COG in terms of the cost of feed to achieve a pound of gain and is a measure of the actual price you will pay to a custom feeder to retain ownership.
Retained Feed Yard Sensitivity Analysis – COG – ($/Head)
The price of commodities, primarily corn, have a huge impact on COG. There are different formulations of rations for different yards and pens within yards, but we primarily use the price of corn to estimate COG.
According to AMS Daily Grain Bids report for Texas the average bid price of corn delivered to livestock feeding operations on last Friday was $7.97/bu. We assume 7 pounds of grain to a pound of gain, yielding a cost of $0.96/pound from feed. We can then assume a yardage fee of approximately $0.40/head/day; this can be as high as $0.50/head/day. Once that is adjusted to pounds by dividing by our assumed 3.5 lbs. gained/day we come to $0.11/pound in yardage fees. Finally, when we add miscellaneous cost of $25/head ($0.05/lb.), we come to a COG of $1.13/lb.
You can see from the matrix of expected outcomes above that reasonable possible combinations of sale price and COG indicate ~50/50 chance profit from retained ownership. Again, the most likely outcome yields a loss of $25/head. Keep in mind that COG may be over $1.20/lb. in some yards right now due to high feed costs.
Where does this leave you? We expect a $19/head profit on the sale of feeder calves and a$25/head loss from the retained ownership enterprise; a $44/head discrepancy. There are other things to consider. Maybe you have supreme quality cattle and you want to take advantage of a grid. Maybe you locked in feed last fall when grain prices were half their current level. Some years, retained ownership is profitable. However, this year the average calf leaving wheat pasture will likely represent a loss to whoever is putting weight on through the feeding stage.
Do you have questions on evaluating the expected outcomes from retained ownership? Do you have some recommendations? Feel free to reach out to me or Pancho with suggestions and input at benavidezjustin@tamu.edu or pancho.abello@ag.tamu.edu