If cow/calf producers have calves to market this fall, the best strategy is to turn freshly weaned calves into yearlings and sell them immediately, said a prominent agricultural economist.
Dan Childs, senior consultant for the Samuel Roberts Noble Foundation said in a market analysis that marketing those yearlings through a value-added sale would be even better.
Stockers should plan to buy later in the year or early next year to minimize a negative buy/sell price spread, he said.
Risk management should be a consideration when contemplating retained ownership as market conditions can change, sometimes rapidly, which could affect any strategy.
CALF PRICE VOLATILITY GREAT
Calf prices have experienced considerable volatility since the market started its downward spiral in June 2015, and there is no reason to think it will lessen in the future, Childs said.
Feeder cattle prices declined nearly 40% in the six-month period, ending just before Christmas 2015, resulting in a roughly $600-per-head lower price for a 750-pound steer.
Cow/calf producers with spring-calving herds have many options, Childs said. A selected list includes 1) strip and sell, 2) precondition 45 to 60 days and sell and 3) retain ownership through spring.
Currently, the Mar’17 feeder cattle futures contract is trading at about a $10 per hundredweight discount to the Sep’16 contract. It is difficult to gain cattle cheap enough to overcome this kind of price decline.
Without getting too deep in the weeds discussing assumptions, his calculations revealed that a bawling five-weight steer will net roughly $750 a head in early October. If this calf was preconditioned, gained 1.67 pounds per day for 60 days and was sold in early December, the value increases to more than $900 a head.
Does that make a producer any more money? It depends, but likely turning a bawling calf into a yearling, then selling it will generate a favorable rate of return, he said.
What about retaining ownership until early March and selling the calf at 850 pounds? Turning a profit from this strategy is a bit more of a stretch, Childs said, but it is doable, assuming the cost of gain can be kept in check.
Futures quotes indicate a value of gain near 60 cents a pound. If producers have their own small grain pasture or access to 30-cents-to-35-cents cost of gain, it can work, he said. The key to making money on retained ownership to 850 pounds is keeping cost of gain much lower than the 60 cents-a-pound value of gain.
THIN MARGINS FOR STOCKERS
Winter stocker enterprises also have fairly thin margins projected, Childs said. A strategy worth considering is waiting until late 2016 or early 2017 before buying the calves.
Most of the $10-per-cwt adjustment from September 2016 to next March through May 2017 is completed by year end, he said. Therefore, by waiting, a stocker producer can buy and sell on a nearly flat market, which allows for a much higher value of gain.
CASH CATTLE MARKETS TRADE LIGHTLY
Cash cattle markets Wednesday traded lightly with bids of $102 to $103.50 per cwt on a live basis, compared with $103 to mostly $104 last week. Dressed-basis sales were not reported with bids at $158 and asking prices at $160.
The USDA’s choice cutout Wednesday was $2.24 per cwt lower at $184.10, while select was off $1.22 at $176.26. The choice/select spread narrowed to $7.84 from $8.86 with 134 loads of fabricated product sold into the spot market.
The CME Feeder Cattle Index for the seven days ended Monday was $130.94 per cwt, down $0.37. This compares with the Oct settlement Wednesday of $127.45, down $0.55.