Cattle prices are down and they are expected to stay low this fall. Is this the time to consider buying stocker calves? This question has been asked more than once this year by both long time and want-to-be cattle producers. But, several points need to be considered before you jump in and buy your first calf. What can I afford to pay for these calves? And, is there a profit in stockering this year? Both of these questions require producer knowledge of production costs and what the market is offering.

Let's start with estimating the cost to carry these calves through the stockering period. Clemson budgets show stockering costs ranging between $25 to $50 per cwt. These costs vary due to the cost of feed, potential weight gain per day and death loss (table 1). Today the high price of corn adds to this variation in production costs. Budget estimates increase substantially as stockering regimes change from utilizing a by product like poultry litter to a ration heavily dependent on corn. The same is true for weight gains. Small grain pasture has the best gain to cost ratio. Fescue based stockering regimes supplemented with corn or processed feeds tend to be less economical when grain prices are high. Feed regimes and the cost of gain is the key to profitability of stockering calves in the Carolinas and, forage production is one of our strong points. It becomes even more important when market prices for feeder cattle are forecasted to be low this fall. Keeping the cost of gain down is the key to stockering cattle this year.

The next step in determining the potential of stockering is to estimate an expected sale price for the finished stocker calf, i.e., the feeder calf. If we are going to buy light weight stockers in October and carry them for 150 days and sell them as feeder cattle (weighing about 700 pounds), then the March futures prices becomes a good estimator for an expected sales price for these animals. And, since local cash prices and the futures market generally move in the same direction any movement in the futures should be felt in the cash market price. This occurs because the same supply and demand factors that affect the futures market affect the cash market.

Today the March feeder cattle futures contract was trading for $64.10 per cwt. This price is for a 700-799 pound USDA graded feeder calf delivered in the Midwest. But, we need a Carolina price. How do we adjust, or localize, this price to reflect Carolina conditions? Easy--the difference between the local cash price and the futures price is called the "basis". The basis is calculated as the difference between the two markets' prices. (Feeder cattle basis numbers for various weight categories and sex are calculated in "Feeder Cattle Basis in South Carolina, 1991-1994, EER 158, Clemson University Cooperative Extension Service.)

In March, the historical basis (1989-1994) for feeder cattle in the Carolinas is $10 below the March futures market price. The basis is reflecting the transportation cost of delivery between the Carolinas and the Midwest and the local supply and demand situation in the Carolinas for feeder cattle in March. Given this historical basis, our expected local March cash price should be near $54 per cwt given a March feeder cattle futures price of $64 per cwt.

We have estimated a cost of gain and an expected price at sale time for our animals. Now an upper limit can be estimated for the price we will offer for the stocker calf. By estimating gross sales (price times weight) and subtracting out the cost of producing the calf for the 150 day feeding period, we can project an upper limit on the price we can pay for the stocker calf. This upper limit price becomes a breakeven price. This implies that the stocker calf is a residual, i.e., what is left after subtracting out the cost of production. It is a residual and the price is considered a breakeven price. If we pay more for the calf and have the same cost of gain, then we will loose money and if we pay less then our chances of making a profit are improved. This is useful information to give to our order buyer or to have in our back pocket on auction day. This is exactly the way that feedlots determine what they can afford to pay for a feeder calf that is going into the feedlot. Table 1 shows the affect on stocker calf prices at different cost of gain levels and calf weights (the calculations assume that the calves will gain on average 300 pounds over the 150 day stockering period).

These calculations provide the potential stocker operator with an upper limit on the price he can pay for a calf in the local cash market. This is a "breakeven price". If a stocker operator's estimated cost of gain was $40 per cwt, he could pay $54.84 per cwt for a 400-500 pound calf and still breakeven. At a price above $54.84 he would loose money, given his cost of production stays at $40 per cwt. If his cost of gain was $25 per cwt, he could pay up to $64.84 per cwt and still breakeven on the calf.

The next step is to look at what the local cash market is offering. This comparison tells us if the local market price is capable of providing us with a potential profit. Today at our Carolina auctions the price for 300-400 pound calves averaged $61 per cwt with a range from $53 to $69 per cwt. Four to five weight calf prices ranged from $52 to $62 per cwt with an average of $59 per cwt.

Local market prices for the lighter weight stocker calves appears to be significantly lower than our calculated breakeven prices for all cost of gain estimates. Local prices are $12 to $34 per cwt below our estimates. Heavier calves are selling at close to $59 per cwt indicating that at a cost of gain below $35 per cwt they could be profitable. Why are these light weight calves so under priced? The answer is the high price of corn. The cattle market is saying that the risk of higher prices for corn over the time period that these animals will be fed is so large that the buyer must discount these calves to offset his potential for loss. Whether the buyer is right or wrong doesn't matter. The market is adjusting for potential corn price increases.

For the stocker buyer, this could be a great opportunity. Based on our analysis, light weight calves are under priced. BEWARE: Temper this joyous note with the full knowledge that light weight calves have more health problems (many are quite stressed and might not gain as we have predicted and might even die). Our cost of gain estimates does not factor in this margin of error. Assuming a higher cost of gain does compensate for some of this risk. Regardless, if you don't intend to babysit these calves, stay out of the stocker business. A few dead calves can rapidly erode this profit margin potential.

In summary, the cost of gain has a significant impact on the price that a stocker operator can pay for a calf. In today's market, as the cost of gain increases from $25 to $50 per cwt, stocker prices fall dramatically. This could be a good year for the progressive, well-managed cattleman to try stockering some of these calves.

   Table 1.  Stocker Calf Vales Based on Selected Cost per Pound of Gain

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       Cost of Gain        Gain        Calf Price      Calf Price    
          (cwt)            (cwt)       300-400 lbs.    400-500 lbs.  
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          25               3.0          $94.11           $64.84
          30               3.0           89.83            61.15 
          35               3.0           85.54            58.18 
          40               3.0           81.26            54.84 
          45               3.0           76.97            51.51 
          50               3.0           72.69            48.18 
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1996 by Department of Agricultural and Applied Economics, Clemson University, Clemson, SC