| MMM 374 | August 7, 1998 |
Cattle prices are down and they are not expected to improve significantly this fall. Is this the time to consider buying stocker calves? This question has been asked of me more than once this year. My response has been that if the drought continues there is a strong chance that you could make some money in stockering calves this year. But several points need to be considered before you jump in and buy calves.
Let's start with estimating the cost to carry calves through
the stockering period. Clemson budgets show stockering costs ranging
between $25 and $50 per cwt. These expenses vary due to the cost
of feed, potential weight gain per day and death loss (Table 1).
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 especially when grain prices are high. Feed
regimes and the cost of gain are the keys to stocker profitability
in the Carolinas and, forage production is generally the region's
strong point. This point becomes even more important when market
prices are depressed. Keeping the cost of gain down needs to be
a management focal point this year.
The next step in determining the potential for stockering is to estimate an expected sale price for the finished stocker calf, i.e., the feeder calf. If we are going to buy lightweight stockers in October and carry them for 150 days then the April futures futures market price becomes a good estimator for an expected April sales price. And, since local cash prices and the futures market generally move in the same direction any movement in the futures price should be matched in the cash market. This occurs because the same supply and demand factors that affect the futures market affect the cash market.
Today, 8/7/98, the April feeder cattle futures contract was trading for $72 per cwt. This price is for a 750 pound 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 April, the historical basis for feeder cattle in the Carolina is $8.80 below the April $72 per cwt. futures market price. The basis reflects transportation cost to the Midwest, and the local supply and demand situation in the Carolinas for feeder cattle in April. Given this historical basis, our expected local April cash price should be near $63.20 per cwt. given an April feeder cattle futures price.
We have estimated a cost of gain and an expected sales price. Now an upper limit can be estimated for the October buying price. 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 in effect a break-even price, implying that the stocker calf is a residual, i.e., what is left over after subtracting out the cost of production. If we pay more for the calf and have the same cost of gain, then we will lose money; 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 the feedlots determine what they can afford to pay for a feeder calf. Table 1 shows the effect on stocker calf prices of different costs of gain (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 afford to pay for a calf in the local cash market. If a stocker operator's estimated cost of gain is $40 per cwt., he could pay $92 per cwt. for a 400-500 pound calf and still break-even. At a price above $92 per cwt. he would lose money, assuming that his cost of production remains at $40 per cwt. If his cost of gain fell to $25 per cwt., he could pay up to $102 per cwt. and still break-even on the calf.
Today, 8/7/98, at our Carolina auctions the price for 300-400 pound calves averaged $74.50 per cwt. Four to five weight calf prices averaged $67.25. The price differential between No.1 and No. 2 grade feeder calves is between $10 and $13 per cwt.
The local market prices for the lighter weight stocker calves appear to be significantly lower than our calculated break-even prices for all cost of gain estimates. Local prices are over $20 per cwt. below our estimates. This disparity is even larger if you consider the difference between feeder calf grades.
For the stocker buyer this could be a great opportunity. Based on our analysis, lightweight calves are definitely under priced. BEWARE: Temper this joyous note with the full knowledge that light weight calves have more health problems (many are stressed and might not gain as much as we have predicted and some might even die). Our cost estimates do not factor in death loss. Assuming a higher cost of gain does compensate for some of this risk. Regardless, if you don't intend to baby-sit these calves, stay out of the stocker business. A few dead calves can rapidly erode any profit potential.
In summary, the drought has provided some cattle producers with a unique opportunity. If inexpensive feed sources are available, the depressed calf prices occurring in our markets today should provide an imaginative cattleman with a potential to make a profit.
| COST ($/CWT) |
GAIN (LBS) |
TOTAL COST |
CALF PRICE 300-400 LBS. |
CALF PRICE 400-500 LBS. |
| $25.00 | 300 | $ 75.00 | $110.39 | $102.00 |
| $30.00 | 300 | $ 90.00 | $106.11 | $ 98.67 |
| $35.00 | 300 | $105.00 | $101.82 | $ 95.33 |
| $40.00 | 300 | $120.00 | $ 97.53 | $ 92.00 |
| $45.00 | 300 | $135.00 | $ 93.25 | $ 88.67 |
| $50.00 | 300 | $150.00 | $ 88.96 | $ 85.33 |
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