| MMM 339 | September 11, 1996 |
Marketing time is approaching for many Carolina cattle producers. And, again considerable uncertainty is in the market. Feeder calf prices are at their lowest point since the mid eighties. In addition, the projected size of the 1996 corn crop suggests calf prices will not improve much, if any, this fall.
Retained ownership is generally considered a viable alternative when the market is experiencing lower prices. Producers can keep their calves until spring and hope that market prices will improve. In evaluating whether retained ownership will be worthwhile for your cattle operation this year you should consider several points.
Many factors might lead a producer to consider retained ownership. Producers may elect to hold calves over because they have an inexpensive supply of feed and pasture on hand, an under-used supply of farm labor or they need to roll the tax liability of a calf sale into the next tax year. Regardless of your reason, the underlying question should still be "will the net income from retained ownership be larger than the net income from selling the calves today?"
Retained ownership can also significantly affect your cash flow. If your calves are not sold in the fall but are now sold next spring, your ability to meet loan payments or other farm or family commitments may be significantly altered. Your lender may want to be part of your retained ownership decision.
Additional inputs might also be required to successfully hold calves over. Feed or capital expenditures for fencing or increased labor requirements may be more than producers can handle. Someone will have to feed and babysit these calves during the winter. This decision might keep you and "the Mrs." from going to Florida.
Because it is difficult to second guess livestock markets and Mother Nature's influence on production, the retained ownership decision does have some risk. The market price might actually decline or weight gains might be smaller than expected. Consequently, retained ownership is not always a sure bet.
If you can not handle these other factors, sell your calves and be done with it. You and everybody around you will be happier. If you can handle these other factors, then grab a pencil and start analyzing your break-even costs and your profit potential.
Today, in the Carolinas, feeder calves (300 to 500 pounds) are selling between $55 and $68 per cwt. Out-of-pocket production costs for this calf range from $300 to $325 per head on the cow; suggesting a $50 to $100 per head loss if the calves are sold today. If we considered total costs, our loss would be closer to $100 to $150 per head.
The evaluation process for retained ownership starts with the producer comparing the potential returns between a fall sale and a spring sale. The analysis also requires the determination of the cost of gain on the calves through the retention period. Let's try to analyze the potential of retained ownership for the 1996 season. Keep in mind that your situation is probably different than mine so you should do your own calculations and not rely on mine for any decisions that you might make.
First consider what the market is offering this fall and then estimate a spring price. The best estimate for what our price might be in these months can be found in the futures market for feeder cattle. Today the October feeder cattle futures price (700-799 pound steer) is $63.92 per cwt. But, local auctions are selling 400-500 weight calves between $55 and $63 per cwt. Why is there a difference between the futures and local prices? This difference between local auction prices for 400-500 pound calves and the feeder cattle futures price is called the "basis". Historically, the basis for our 400-500 pound calves in October is $3 to $5 per cwt over the October feeder cattle futures price. Hence, the futures market is saying that historically the local price for 400-500 weight calves should increase to between $67 to $69 per cwt as we approach the month October. This would mean a 500 pound medium number one feeder calf would be worth about $335 to $345 per head in October. This is close to our estimated out-of-pocket cost of producing the calf ($300 to $325 per head). The producer could walk away and come close to breaking even.
But, will this historical price pattern hold up this year? The big kicker in 1995 and 1996 has been and will continue to be corn prices. Extremely high corn prices have severally depressed calf prices. Lighter weight calves, because it takes more corn to feed them up to slaughter weight, are discounted in comparison to heavier weight feeders. This is why the difference between 400-500 pound calf and the 700 pound plus feeder price has been so small these last two years. Feedlots are not willing to pay the premium for calves that will cost them more to feed when the supply of heavier feeders is plentiful and they don't have to feed the heavier steers as much corn.
USDA expects corn prices in 1996/97 to be near 1995/96 levels. If this holds, then the historical feeder basis is likely to be much lower (exactly what happened last year). Consequently local October calf prices will be lower this fall. Our calculated price of $67 to $69 will be closer to $60 to $65 per cwt. If this reasoning holds, then the October sales price will likely be near or below our out-of-pocket expenses and appreciably lower than our total expenses.
Given this less than happy fall prospect, let's consider keeping the calves until March. The futures market today is suggesting that feeder cattle will sell near $63.92 in March. The futures market is saying that feeder cattle prices will increase only $.18 per cwt between October and March. This is $5 to $8 per cwt below the historical price improvement between fall and spring that we are accustomed to in the local Carolina cash markets. The market is saying that based on today's analysis of the cattle market, feeder cattle prices in the spring will not be much higher than what we see in the fall--the seasonal price improvement won't be there this year.
And, the historical basis for Carolina feeder cattle is $10 below the March feeder cattle futures price. Hence, if we keep these calves over the winter we can expect a price in March of $53.92 per cwt on a 700 plus pound calf based on past price patterns in the Carolina's. Now that we have some expectations on market prices the next question becomes what will it cost you to carry these calves from October to March.
Clemson stocker budgets indicate that winter stocker feeding alternatives can cost from $25 to $50 per cwt. These budgets cover feeding regimes like grazing on small grains, feeding poultry litter, overseeding bermuda pasture and feeding fescue hay and corn. The break-even price of carrying these calves from October to March is estimated in Table 1.
Table 1: Break-even Prices of Producing a Feeder Calf at Selected Costs of Gain ----------------------------------------------------------------------------- (1) (2) (3) (4) Break-even Price Cost of Gain Weight Gain Cost of Gain Calf Cost (cwt) (cwt) (cwt) (hd) (Col 3+4)/850lbs ----------------------------------------------------------------------------- $25 3.5 $87.50 $300 $45.59 $30 3.5 $105.00 $300 $47.65 $35 3.5 $122.50 $300 $49.71 $40 3.5 $140.00 $300 $51.76 $45 3.5 $157.50 $300 $53.82 $50 3.5 $175.00 $300 $55.88 -----------------------------------------------------------------------------
The comparison between selling our calves in the fall or keeping them until spring suggests that retained ownership can be a profitable decision in 1996 if we can keep the cost of gain below $45 per cwt, weight gain expectations are met and the cattle market reacts with some predictability, i.e., the risk of retained ownership are minimized. The potential profit and losses associated with this decision are show in Table 2
Table 2: Estimated Net Income from Retained Ownership in 1996 at Various Costs of Gain ------------------------------------------------------------------------------ Cost of Gain Break-even Price Estimated March Net Income Net Income (cwt) (850 lbs.) Selling Price (cwt) per cwt per head ------------------------------------------------------------------------------ $25 $45.59 $53.92 $8.33 $70.81 $30 $47.65 $53.92 $6.27 $53.30 $35 $49.71 $53.92 $4.21 $35.79 $40 $51.76 $53.92 $2.16 $18.36 $45 $53.82 $53.92 $0.10 $0.85 $50 $55.88 $53.92 $-1.96 $-16.66 ------------------------------------------------------------------------------
In summary, retained ownership can be a viable marketing alternative for cow-calf producers. The decision requires the producer to estimate his cost of gain and project market prices. It also requires the producer to evaluate how the decision influences his total farming operation, family life style and his relationship with his banker. A little "pencil pushing" this fall might just be worth your time.
