S. Texas Forage Improvements
Providing Risky Temptations

While a large portion of South Texas remains at approximately 50 percent of longterm stocking rates, excellent rains which began in early July have improved the outlook for winter forage production in native and small grain pastures. Consequently, ranchers are looking for ways to harvest the anticipated extra forage, especially since calf prices are lower this fall than last year and it appears that the cattle market may improve next year.

While it appears that retained ownership enterprises may be a profitable way to market the anticipated extra forage, high price rollbacks of 10-15 cents per pound between current calf prices and next spring's price forecast for feeder cattle may erode profits. This will require careful planning, monitoring and a review of alternatives to market the extra forage. Besides selling the forage through a gain or other related contract, alternatives include retaining owned calves and/or buying calves to carry through the stocker/feeder phase on native or small grain pastures.

A retained ownership enterprise and/or buying stockers this fall will provide an opportunity to market available forage while at the same time attempt to take advantage of indications of improved markets next spring.

The effect of the 9-11 disaster and last fall's indications of a weakening U.S. economy caused the U.S. market system to slow down, significantly weakening prices for many agriculture products, including beef. Furthermore, while the January 1, 2002 and the mid-year cattle inventory report indicated that cattle liquidation continues, USDA's October '02 estimate of this year's beef production was a near record of 27.2 billion pounds. This was up 977 million pounds (3.7 percent) from 26.2 billion pounds produced last year, further aggravating the market weakness. USDA's September 20 Livestock Slaughter Report indicates commercial U.S. red meat production totaled 4.14 billion pounds in August, up two percent from the 4.06 billion pounds produced in August '01. Beef production in August '02, at 2.47 billion pounds, was two percent above August '01. Cattle slaughter during August '02 totaled 3.21 million head, down one percent from August '01, but the average liveweight was up 31 pounds to 1259 pounds from an average of 1228 pounds during August '01.

The market situation, however, appears to be changing as supplies are cleared from the market. While prices for most cattle categories weakened this summer, prices appear to have bottomed and are showing a slight up-turn with prices for calves showing some improvement.

Cattle placements are down and feedlots are emptying out after this summer's back-up. Cattle on feed on September 1 in the historic seven states for feedlots with capacity of 1000 or more head totaled 8.85 million, down six percent from the previous year and one percent below September 1, 2000. While total placements in feedlots during August were one percent above 2001, August '02 placements were nine percent below August of 2000.

Cattle and calves on feed for the slaughter market in the United States for feedlots with capacity of 1000 or more head totaled 10.13 million head on September 1, seven percent below September 1, 2001 and two percent below September 1, 2000.

A smaller corn crop and potentially higher corn prices and feed costs may dampen a strong cattle market improvement. USDA's October corn production forecast of 8.97 billion bushels was up 121 million bushels from the September estimate of 8.849 billion bushels, but down 537 million bushels from 9.507 billion bushels produced last year.

Futures prices rebounded and appear to be settling at about $2.55-$2.70 per bushel for December '02 through May '03 deliveries. The estimate of usage at 9.82 billion bushels is higher than the production estimate. Ending stocks are now estimated at 764 million bushels, up 35 million bushels from last month's estimate, but down 835 million bushels from last year. Improved weather conditions and the start of harvest across the Cornbelt may keep a lid on further market improvement.

While feed prices are much higher, they remain relatively inexpensive in terms of the cost of gain, but not in terms of what the market is offering for feeders next spring.

The price of cost of gain contracts on winter forages varies widely depending on the quality of the forage. However, relatively inexpensive feedgrains and fairly abundant supplies of forage are keeping these prices at manageable levels. Prices vary from a low of about 25 cents per pound of gain to more than 40 cents, depending on the forage quality and the services provided.

With four to five-weight calves trading in the $90-95 cwt. range compared to cattle-feeder futures contracts for November '02 through April '03 delivery trading in the $79-82 cwt. range at the Chicago Mercantile Exchange, price roll-backs may erode profits. Stocker retained ownership enterprises this winter could be profitable if properly planned, managed and monitored.

The accumulated cost of the calves, their current market value and the owner's financial situation should serve as the benchmark to evaluate the profit potential and risk associated with a retained ownership enterprise this coming winter. Keep in mind that retaining ownership will increase management and decision-making requirements. More capital will be required for the additional production expenses, and annual cash flows will change because retaining ownership will delay income and add production costs.

If, for example, the total cost of gain averages 37 cents per pound, at 1.7 pound average daily gain for 150 days, and the steers are sold at the current futures price quote for April '01 delivery ($78.90 cwt.), a rancher could average close to $20 per head in profits.

Similar profit opportunities may not work in native pasture since the rate of gain and the days left before a killing frost may be limited.

Price risk management would be an essential part of a five-month retained ownership commitment on small grains. A price base for the steers next spring could be established by selling a feeder cattle futures contract or buying a put option (option to sell a futures contract) contract. A put option contract with a strike price at $78 cwt. (Tuesday, October 15, 2002) with a March '01 delivery date would cost about $2.25 cwt.

This means that after option costs and commissions are deducted, a price base of about $75.75 cwt. could be established with a March '01 put options contract. Using the same basic assumptions as above, this alternative would erode profits completely.

As a result, while lower calf prices, improved forage availability and indications of a potential market improvement next spring are causing increased interest in retained ownership enterprises, high price roll-backs between current calf and feeder prices next spring indicates that such enterprises will require very careful planning and monitoring. Any pricing alternatives that are utilized should provide a floor price yet keep any price improvement open. These alternatives include buying a put option and/or using a minimum price contract.