Current market pricing suggests stocker producers could benefit by choosing lighter-weight calves and allowing the larger ones to go to the feedlot, said Derrell Peel, agricultural economist at Oklahoma State University in a market analysis.
“Lightweight feeder cattle appear to be underpriced relative to feedlot value at the current cost of gain,” Peel said.
Stocker producers have numerous decisions to make when purchasing stocker cattle including weight, gender, and quality, he said. The appropriate choice depends on the stocker’s objectives and the type of production system, but feeder cattle price relationships can help sort out market incentives.
COST OF GAIN CONSIDERATIONS
Feeder cattle prices by weight typically reflect the feedlot’s cost of gain, Peel said. All else being equal, a lower cost of gain (cheaper grain) will imply a sharper rollback in feeder prices as weight increases.
Conversely, higher cost of gain means feedlots only can afford to pay less for light weight cattle.
On average, feeder markets will be in “equilibrium,” meaning the value of putting weight on cattle ahead of the feedlot is roughly equal to the cost of putting weight on in the feedlot, he said. But this is not the case currently.
It is very apparent that September average market prices, diverge significantly at lighter weights from a baseline of cattle prices assuming a $75-per-cwt feedlot cost of gain, making lightweight feeder cattle appear to be underpriced relative to feedlot value at the current cost of gain, Peel said.
THE OPPORTUNITY IS IN LIGHTER WEIGHTS
It appears feedlots have a preference for heavy weight cattle and that the resulting slump in lightweight feeder prices is an opportunity and a purchase signal for stocker producers, he said.
The implied value of gain for lightweight stocker cattle is higher than the feedlot cost of gain and is averaging from $1.00 to about $1.15 a pound, Peel said. The market is encouraging pasture-based gains in feeder cattle weight.
September average market prices find support at about 600 pounds, which translates into the highest value of gain at weights between 600 and 750 pounds, he said.
Stocker producers typically purchase lightweight stockers, say 450 to 500 pounds, Peel said. However, if less weight gain is an objective, for example, if a producer is considering two sets of stockers this winter to graze out wheat, then purchasing slightly heavier cattle may be worth considering.
These considerations help stocker producers understand purchase signals at the current time, but the ultimate value of gain depends on market prices for cattle at the time of sale, he said. The risk of owning cattle over time and the challenges of managing that risk are additional considerations beyond the purchase opportunities in the current market.
CASH CATTLE MARKETS QUIET
Cash cattle markets Monday were quiet with no bids or offers. Estimates of feedlot showlists are down, which should increase seller footing in price negotiations.
Cash cattle markets last week were up $4 to $5 per cwt at $109 to mostly $110 on a live basis. Dressed-basis markets were at $170 to $171.
The USDA’s choice cutout Monday was $0.65 per cwt lower at $185.55, while select was up $0.79 at $179.17. The choice/select spread narrowed to $6.38 from $7.82 with 111 loads of fabricated product sold into the spot market.
The CME Feeder Cattle Index for the seven days ended Friday was $134.14 per cwt, down $0.32. This compares with the Sep settlement Monday of $135.45, down $0.05.