Click here to read part two of the series: Managing risk.
Forget the real-estate bubble — what about the cattle-price bubble that holds the industry in awe right now? Who would have thought this time last year, when prices for 400-weight steers were reaching into the $120s, that those prices would just keep going up? Then in April this year, 400-weight steers hit the $140 mark and yearling prices reached $115.
That’s great for selling, but if you’re on the purchasing side, those high prices make for some sleepless nights. “The potential margins for profitability at the stocker and feedyard level are very thin because the initial purchase price is so high right now,” says Jeff Geider, a Texas cattle producer and assistant director of Texas Christian University’s Ranch Management Program.
For the past couple of years, analysts have pre-dicted the popping of the cattle-price bubble, but so far, they continue to be proven wrong as cattle prices continue to push higher and set records. Rodney Jones, a Kansas State University agricultural economist, admits that he’s been unable to put a stocker budget together for the past couple of years that looked like it would make money. “But this market continues to give us opportunities, and cattle prices press higher. So I’m not going to rule out that possibility it will happen again.”
Although no one can give an exact time, eventually the bubble will burst and cattle prices will decline. “We can’t continue to count on this market to bail us out,” Dr. Jones cautions. If you get caught in the middle and bought high-priced cattle and the market starts going down, then you stand to lose a lot. By preparing for that and using careful analysis and evaluation, you can still make stockers work.
Plug in the numbers
Running breakeven scenarios, whether you use a pencil and paper or computer spread-sheet, remains an essential tool in determining purchasing and selling prices on cattle, as well as evaluating risk-management options. You can run a backward breakeven using futures prices for the month you intend to sell the cattle, then determine a purchase price that will make you money or keep you from losing too much.
“Running a breakeven is a standard practice that has to be done,” says John Lawrence, a livestock economist at Iowa State University. “People say they can’t get them bought for what they need to, so why do the work? But you still need to do the work if for no other reason than to evaluate the alternatives.”
These spreadsheets also help you evaluate other marketing alternatives to find the most profitable option.
Look at alternatives
The past year or two, stocker operators have had added competition when purchasing cattle. Feedyards have been going further and further into the calf crop to get a less expensive supply of cattle into the feedyard.
“From a stocker perspective, this increases competition for the lighter animals, but it also offers opportunity to do custom grazing for someone else, like that feedyard, who can stand the risk,” Dr. Lawrence says.
Another option is grazing heifers and then developing them for the replacement-heifer market. Besides beef heifers, Dr. Lawrence points out that the dairy industry in some parts of the country is growing and in need of developed dairy replacements, and that might be another opportunity for stocker operators this year. Be sure to evaluate your management and ability to take care of replacement heifers, and do your research to identify the costs associated with this type of enterprise.
If you don’t want to get out of the stocker market completely, consider reducing the number of animals you normally run and leasing the remaining grass or wheat to others. “There are people that feel they always need to be in the market, as a form of risk management, and that can be effective,” Mr. Geider says. “But you can do that and reduce the number of animals, then lease out the land to others to help spread that risk.” Others may simply want to manage and straighten out cattle for others. You may also consider taking in cows for a grazing season.
Watch for buying opportunities
Think outside the box in terms of the type of cattle you purchase and where you purchase your cattle. For instance, consider purchasing cattle that might be in a different location or state if they can be bought cheaper and shipping and shrink remain reasonable. Dry conditions in some areas may force more cattle to market and mean lower prices in that region if there’s plentiful supply and not enough buyer demand.
Also look at the pros and cons of purchasing precon-ditioned cattle versus non-conditioned cattle that you can then add value to through vaccination and health programs.
Different classes of calves and feeders also offer different opportunities. You can gauge those opportunities by evaluating price spreads between different weights and classes of animals, such as the price spread between 400 and 600 weights or between steers and heifers.
In terms of the weight and size of animal, you might think lighter-weight animals would cost less initially. But you are exposed to the market longer, warns Kerry Cornelius, a stocker operator and assistant director at Texas Christian University. If you get the cost of gain cheap enough and the cattle bought low enough, then you can make that work. Make sure you have the facilities, however, to handle lighter-weight animals. Sometimes they present greater health risks if purchased from unknown sources.
As for heavier-weight cattle, Mr. Cornelius says that in some situations this weight class can provide opportunities because you turn them over quickly and aren’t exposed to the market as long.
No matter what size or class of cattle, keep an eye out for price dips, Dr. Jones says. “Sometimes we get a seasonal dip in cattle prices in the fall, so watch for that.” In addition, right now forward-contracted cattle are running high, so it might be better to wait. Then again, prices could move higher. To determine what scenario might be more worthwhile for you, run your breakeven scenarios to find your purchase-price window of opportunity.
Next month: Watch for information on risk management in today’s stocker market.