MMM 368

August 7, 1998

Fall marketing time is not that far away for many Carolina cattle producers. Feeder calf prices are substantially below last year. The feedlots are slap full of heavy slaughter steers and near term live cattle and calf prices are not projected to improve. Is retained ownership of my calves through this winter a viable alternative under these market conditions?

Retained ownership is generally considered a viable market alternative when calf prices are low. Producers feed their calves until spring, generally on small grain forages or other low cost feeds, in anticipation of market prices improving---or at least staying the same. This year might be the time for the cow-calf man to carry his calves through the winter for a spring sale. (This scenario assumes that a winter forage crop can be successfully planted and grown or alternative feed sources, i.e., chicken litter can be obtained.

The question to ask this year is which is going to be more profitable: selling in the fall or retaining ownership of the calves through the spring? What factors are necessary to evaluate this decision?

Many factors might lead a producer to consider retained ownership other than a drought scenario. Producers may elect to hold calves over because they have an inexpensive supply of feed and a good source of inexpensive pasture on hand. The producer may have an under used supply of farm labor or they need to roll the tax liability of a calf sale into the next year.

Additional inputs might also be required to successfully hold calve over. Feed purchases or capital expenditures for facilities or increased labor requirements may be more than producers can handle. Someone also needs to feed and care for these calves during the winter. This decision needs to consider all aspects of stockering calves not just the fact that prices are low.

Does retained ownership always work out the way you expect? Because it is difficult to second-guess livestock markets and Mother Nature's influence on production, the retained ownership decision does have some inherent risk. Market prices might decline further and weather conditions can worsen affecting forage growth and weight gains. Consequently, retained ownership is not always a sure bet.

This alternative can significantly affect your farm's cashflow. If your calves are typically sold in the fall but are now sold in the spring, your ability to meet loan payments or other family commitments may be significantly altered. Your lender and your family need to be partners in this management decision.

Regardless of your reason, the underlying question "still is", will the returns from retained ownership be larger than the returns from selling the calves in the fall? This is especially true this year if you need to consider buying addition hay or feed to carry these calves through the winter. The following analysis will clearly point out that the cost of gain on these calves is a critical factor in the retained ownership decision. The potential shortage of feed this year in Carolina makes this factor even more critical.

Even if you think that you have ample feed on hand consider these other factors. If they create problems sell your calves. You and everyone around you will be happier.

The late-July local cash market in the Carolina is quoting 400-500 pound steers calves at $70 per cwt. ($315 per head). Clemson's cow-calf budget projects total out-of-pocket production costs in the Piedmont to be between $300 and $325 per head. Hence, producers can expect to average between -$10 to +$15 per head on the sale of this calf in July. October feeder cattle futures are currently trading at $69.95 per cwt. suggesting that a price for Carolina calves, including our positive basis of $5 to $6 per cwt. in October, would be about $75 per cwt. this fall. So the market is telling us that $337.50 per head is possible in the fall of 1998 (This is a $22.50 to $47.50 improvement over the income from the July sale). It appears that holding the calves into the fall, if you have access to the necessary feed, would be profitable. Now, would holding these calves into the spring be profitable?

Remember the evaluation process for retained ownership starts with the producer comparing the potential returns between a fall and spring sale. The analysis also requires the determination of the cost of gain on the calves over the retention period. Let's try to analyze the potential of retained ownership for the 1998-99 season. Keep in mind that your situation is probably quite different than my example; so do your own calculations and don't rely on mine for any decision that you might make.

As stated, the futures market estimate for an October local market price is about $75 per cwt. This says that a 450-pound calf should be worth $337.50 per head in the fall of 1998. Based on my cost estimates the return to the cattleman's labor and fixed resources would be between $37.50 and $9.50 per head. This level of return is not generally going to please the average cattle producer.

Given this mid summer outlook let's also project a spring 1999 feeder calf price. The March 1998 feeder cattle futures contract is saying that prices for 750-pound feeder cattle in the Carolinas will be near $63 per cwt. in March of 1999. (March feeder cattle futures at $73 per cwt. less a Carolina historical average basis of negative $10 per head for 750-pound calves in March) Hence, if we keep a 450-pound steer calf over the winter (150 day feeding period) at a rate of gain of 2.25 pounds per day (total weight = 787.50 pounds) we can anticipate selling this calf for $496.13 per head in March of 1999, Table 1. If the cost of gain is $40 per cwt., the overwintering bill would be $135 per head (150 days x 2.25 lbs./day x $.40/lb). Returns less stockering charges are near $11.14 per head. This is about $11.14 more than if we had sold the calf in the fall of 1998 ($496.13 spring sale value minus - $349.99, fall sale value plus 5 months of interest - $135.00 cost of gain for 150 days).

Retained ownership in this example works. The returns from retained ownership are larger than the returns from selling the calf in the fall local cash market. Look at the table carefully. When the cost of gain exceeds $40 per cwt. this decision becomes quite marginal. It is very important that you understand what the cost of gain can do to the retained ownership decision. Underestimation of the cost of gain is the biggest problem producer's face in this evaluation process.

This concept of the cow-calf operator retaining his calves or buying calves and stockering them through the winter is not just a drought scenario. The practice of retained ownership is becoming more widespread in the Carolinas. Cattlemen are capitalizing on the South's "generally good growing conditions" and inexpensive gains. These profits were once shipped out-of-state when calves were simply weaned and sold in the fall.

THE CLEMSON UNIVERSITY COOPERATIVE EXTENSION SERVICE OFFERS ITS PROGRAMS TO PEOPLE OF ALL AGES, REGARDLESS OF RACE, COLOR, SEX, RELIGION, NATIONAL ORIGIN, OR HANDICAP AND IS AN EQUAL OPPORTUNITY EMPLOYER.
COOPERATIVE EXTENSION WORK IN AGRICULTURE AND HOME ECONOMICS--STATE OF SOUTH CAROLINA, CLEMSON UNIVERSITY, U.S. DEPARTMENT OF AGRICULTURE, AND SOUTH CAROLINA COUNTIES COOPERATING.

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updated 8/7/98