Cheap Calves And Timely Rains
Boost Stockers In Some Areas

By Jose G. Peña
Extension economist

UVALDE — After a devastating drouth from March through early August, the forage situation in South Central Texas has improved substantially as a result of excellent rains in August and September. With indications that the cattle market may improve this winter, ranchers are looking for alternatives to harvest the extra forage.

Retaining ownership of calves and/or buying steers to carry them through the stocker/feeder phase or possibly the finishing phase may be profitable this winter and into next spring. Retaining the ownership of calves allows producers to spread the risk from one production activity to another and from one period of time to another. In this case, a retained ownership enterprise and/or buying relatively inexpensive stockers will provide an opportunity to market available forage while at the same time attempt to take advantage of an expected market improvement in 1999.

Record high average slaughter weights and continued beef herd liquidation of both cows and heifers this spring and summer due to the drouth pushed beef production to near-record levels during the first half of the year, resulting in weak cattle prices. With sharply curtailed feeder cattle supplies and a large decline in beef production expected next year, the market should improve later this winter and into 1999. Market analysts anticipate that lower supplies will lead to stronger prices for most classes of cattle, especially calves and feeders.

Feedgrains

USDA's September '98 corn production forecast of 9.738 billion bushels, the second largest crop on record, is 1.5 percent higher than last month's estimate of 9.592 billion bushels and four percent higher than the 9.366 billion bushels produced last year.

Abundant supplies of corn, a reduced livestock inventory (reduced domestic demand), and a meltdown of the economies of some of our principal export customers in Southeast Asia have caused the price of corn to drop to about the loan rate, and raise the potential that prices may fall further.

Relatively inexpensive livestock feed this fall and winter is providing some flexibility for cattle producers. Cost of gain through feedlots, for example, is substantially lower than last year.

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

Stockers Retained Ownership Profit Margin

With four to five-weight calves trading around the low 70's compared to feeder cattle futures contracts for March through May '99 delivery trading in the $70-72 range at the Chicago Mercantile Exchange, the cattle market may be offering some profit opportunities for stocker retained ownership enterprises this winter.

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 year. 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.

The accompanying table provides an estimate of potential profits for a 450 pound steer with a current value of $70 cwt. by varying the cost of gain and the sale price next spring (150 days on pasture).

If, for example, the total cost of gain averages 32 cents per pound at 1.7 pounds average daily gain for 150 days and the steers are sold for about the current futures price quote for a March '99 delivery of about $71 cwt., a rancher could average about $90 per head in profit.

Price risk management would be an essential part of this five-month commitment. 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 $71 cwt. (on Tuesday, September 29, 1998) with March '99 delivery date would cost about $2 cwt.

This means that after option costs and commissions are deducted, a price base of about $68 cwt. could be established with a March '99 put options contract. Using the same basic assumptions as above, this alternative would provide a price risk managed profit potential of $69 per stocker.