The combination of shrinking cattle inventories, cheaper grain prices and recent rains provide the perfect precursors for those considering retained ownership enterprises this fall and winter, according to one Texas AgriLife Extension economist.

“Current cattle market prices suggest that retained ownership enterprises the fall and winter may be profitable,” says Jose G. Pena, professor and Extension economist in Uvalde. “The recent rain made small grains planting possible. Early estimates indicate a potential for abundant forage supplies this fall and winter season.”

The steep decline in small grain prices from last year’s highs will also have wheat farmers preferring to graze their fields, Pena says, meaning abundant supplies of small grains pastures are likely this winter.

Together with lower corn prices, it may also mean lower prices for gain contracts on small grain pastures. Pena says the going rate of cattle gain contracts on small grains last fall was about 45-55 cents per pound of gain. He estimates prices between 30-50 cents per pound of gain this fall, depending on the forage quality and services provided.

Combine those elements with declining cattle inventories, and prospects for profit only improve, he adds.

The U.S. cattle inventory on July 1 decreased some 1.5 million head from a year ago, according to National Agricultural Statistics Service data. The 2009 calf crop is estimated at 35.6 million head, down more than a half million from 36.1 million calves in 2008 and another 1.76 million from a calf crop of 37.4 million head in 2007.

“Feeder supplies will remain in short supply unless feeder cattle imports from Mexico increase,” Pena says. “Scarce supplies of cattle will keep a base support for price, especially for feeder cattle ready to enter feedlots as feedlots are operating below capacity.”

Supplies of competitive meats are also down, Pena notes. While the Agriculture Department’s Sept. 11 estimate of overall red meat production (beef, pork, veal, lamb and mutton) was at 49.1 billion pounds—down 2.2 percent from last year’s numbers—poultry production was also experiencing a decline of roughly 4.1 percent in 2009.

But for all the positive indicators, there are some drawbacks, Pena warns. “While recent rain in parts of Texas may improve the native forage situation, more rain will be needed to sustain the growth, especially after the severe drought in a large portion of Texas during the last 12 months,” he says. “Retained ownership enterprises this year will carry high forage production risk. High production and market vulnerability risks indicate that retained ownership enterprises will require careful planning, monitoring and review of alternatives.”

If, however, forages can be secured, prospects are promising, Pena says. “With four to five weight No. 1 and No. 2 grade calves trading in the $1.03 to $1.10 per pound range compared to cattle-feeder futures contracts for January 2010 through August 2010 delivery trading at about 97-99 cents per pound on the Chicago Mercantile Exchange (as of Sept. 30), price rollbacks will continue to play an important roll in a retained ownership enterprise.”

Based on numbers available in late September 2009, Pena estimates potential profits to average about $93 per head for a 450-pound steer with a current value of $1.04 per pound, if the rancher can hold his cost of gain averages to around 43 cents per pound per day for 150 days and the steers were sold at the current futures price of 99 cents per pound for April 2010 delivery.

To manage price risk, Pena suggests ranchers establish a base price for spring steers, either by using a minimum price contract or buying a put option contract, which offers cattlemen the option to sell a futures contract.

“Any pricing alternatives that are utilized should provide a floor price yet keep any price improvement open,” Pena stresses. “If good quality forage is available at affordable prices, stocker retained ownership enterprises this winter could be profitable if properly planned, managed and monitored.”