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Beefs and Beliefs

Value-Of-Gain Calculations Suggest Good Profits Possible

Value-Of-Gain Calculations Suggest Good Profits Possible
Stocker operators may be holding back, but real profit potential exists in the stocker-weight markets.

 

If cattle prices hold near current levels, it appears there is plenty of profit potential for stocker operators.

I've been working for several weeks now with livestock market economist Derrell Peel from Oklahoma State University to offer a value of gain calculator and a price spread predictor for stocker operators. That's planned for the upcoming November issue of Beef Producer.

In the interim, it seems to me worthwhile to talk a little about how economics have changed for stocker operators.

We're in scary times now, with unheard-of cattle prices and large rollback, or price spread, that historically wouldn't produce a profit.

Good profits? This chart showing value of gain for steers in Oklahoma markets suggests real profits exist in the stocker complex.

Some of the old rules of thumb, like the old corn-to-stocker price ratio or the idea a 50-cent rollback is too much to make a profit, just don't appear to hold water anymore.

To that end, I've included a chart using Peel's value-of-gain calculator for stocker operators using current pricing from the seven-market Oklahoma market report.

It suggests some huge profit opportunities in the stocker complex, especially in those mid-weight cattle. I've been running these tables several weeks now and looking at Peel's numbers and talking about them with him and although these relationships and amounts change week to week, the large, per-hundredweight value of gains have remained pretty large.

There are plenty of problems with the current price structure, such as limits on credit lines from bankers, the amount of capital put at risk overall, the high cost of mortality and even of morbidity and underperformance. But as I said, it looks like there are some opportunities in the stocker complex.

One other problem, which was many weeks of unreasonably high basis as the futures markets would not bid in close to actual cash values, has decreased in recent days. This suggests to me if you can lay in stocker calves this fall at reasonable cost you may be able to protect them next spring with futures or viable forward pricing.

Basically, you look at purchase price in the left column and then follow it across to the expected finish weight at which you would market cattle, listed in the rows along the top of the chart. You'll see that a calf started at 500 pounds, which would be about the middle column along the top, intersects with a 750-pound finishing weight along the left side for a possible $1.75 per pound value of gain.

For comparison, a stocker calf started at 400 pounds and sold at 600 pounds appears to return $1.13 per pound.

These value-of-gain figures would, of course, hold true if you can get today's prices at the back side of the turn.

There also appear under current pricing to be some real variances for how the market rewards stocker calf ownership.

Of course, if this looks like market tops to you and you have no way to lock in final prices, perhaps this marketplace is just too dangerous.

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