By Victoria G. Myers
Progressive Farmer Senior Editor
By the time this year's fall-born calves are being weaned, the cattle industry will be looking at prices 5% to 15% lower than they are today -- think somewhere between $100 per cwt to $120 per cwt for 500-pound feeders. It's the continuation of a downward trend not nearly as remarkable as the 40% to 50% drop producers endured during the last two years, but one that will likely plod along at a more predictable pace for the foreseeable future.
When it comes to markets, predictability at any level is a good thing. Oklahoma State University's Derrell Peel hinted the new reality will bring with it additional opportunity for those willing to take on more risk in the cattle business.
"You know, we had fun in 2014 and even in 2013 as we watched prices run up. But that is not the long-term reality of the cattle industry. We are back to doing business," the marketing specialist said.
He pointed out as revenue is under more pressure, producers will put renewed focus on managing the cost side of their businesses.
"That's not to say we ignore markets, or we don't look for opportunities to forward-contract. But you'll never know if something is an opportunity if you don't know your costs in the first place," Peel cautioned.
Costs include debt, and how much a producer is leveraged will be key to his ability to take on additional risk. The bottom line will not be as much market driven in the months to come as management driven.
"If a producer is not carrying a lot of debt and can afford to take more risks on the chance that prices will go up, that's one approach. Someone who is heavily leveraged, however, could be in a situation where one bad decision risks the viability of the operation. It's just really important to know how much risk you can stand to take as we move forward," Peel stresses.
RETAINED OWNERSHIP
One of those risks producers may soon be considering is retained ownership. On the positive side, Peel expects corn prices to stay level moving forward. While this would limit the value of stocker-based gains, it could make retained ownership at the feedlot level more attractive.
"Going to the feedlot with retained ownership is starting to look more possible than it has for most of the last couple years," Peel said. "It certainly has more potential in the next two to three years to be a good strategy for some producers."
Texas A&M Extension economist David Anderson agrees, adding: "When calf prices were at record highs, the advantage was in selling calves, pure and simple. But as they become cheaper, you always have to look at retained ownership as an option. Does it become a smart management decision again? I don't think we are there just yet, but I don't think it's too far off when we talk about strategies to maximize returns."
Retaining calves through the backgrounding, or stocking, level could be the riskier move in today's market, Peel explained. He said the value of putting on additional weight at the stocker level will be driven by the cost of gain in feedlots. Potential backgrounders will need to ask themselves if their grass is more valuable in producing another calf or in putting gains on stockers.
Anderson agreed the wild card going forward will be feed costs. "If feed costs are higher, then calf prices are going to be lower. Understand, we are in a market where the overall trend is for lower prices. You have to manage around that. If you have a lot of grass and cheap feed, you may be able to keep calves longer. It's just going to be an operation-to-operation call."
VALUE-ADDED CALVES
One area of cost always debated as calf prices slip is preconditioning. Texas' Anderson said a lower market usually means value-added programs will be more sought after by buyers.
"When we were looking at the fewest beef cattle in 60 years, anything alive and walking brought high prices. As numbers build, buyers can be more choosey. Those producers who have done more to differentiate their product will tend to see rewards," he said. That means a program including weaning, vaccinations and castration should be worth the expense.
FORWARD CONTRACTS
Of the last seven years, five have favored forward-contracting calves over spot-pricing them. Looking toward the end of 2016 and into 2017, Peel believes the industry is once again looking at a scenario where forward contracts are likely to bring the higher overall average price. He adds, however, it may be challenging to find buyers in an environment where everyone assumes prices will continue to fall. For that reason, he likes the idea of splitting calves into more than one marketing group to grab unexpected bumps in the market.
"I think we'll see little run-ups in the price. All else being equal, forward-contracting is potentially more attractive. But it's not a slam dunk by any means," he said.
Peel encourages producers to consider a forward contract on part of their calf crops looking to cover production costs. This, then, becomes a risk-management plan. On the remaining calves, look for spot-pricing opportunities throughout the year, always making sure that holding back calves isn't costing you more than you could make selling them.
CULL COW PRICES
Fall calvers who will cull cows in the spring can expect prices for that segment to be stable. Peel said this part of the market traditionally has the most dramatic seasonal price pattern of any, a trend he expects to continue.
"The fall calvers will make culling decisions in May and June, which is the seasonal peak for cull prices, typically. If cows are thin, you can turn them out on grass for 30 days to put on some additional pounds, if that is to your advantage. Typically, those prices will stay strong through the summer," he said.
GROW OR STAY
As prices trend down, will producers continue to hold back replacements and expand their herds? Peel said every operation is different, but he's reminding cattlemen that they ultimately are selling grass. It's time to ask where the grass has its greatest value in today's market.
"Is my grass worth the most if I'm selling it through a weaned calf or putting weight on stockers? Maybe it's worth more for hay production or even a hunting lease. When I'm asked if a producer should still be expanding their cattle operation, the real question is do they have the capacity to produce more, and how can they allocate that grass resource to receive the highest return in the market. The answers change over time and by circumstance."
Texas' Anderson said whether continued herd growth is in the best interest of an individual operation should be part of an overall management plan tied to production costs and future plans.
THE COST QUESTION
In light of high prices, it can be easy to focus on the income side. Costs, however, have been just a few cents behind, meaning profit levels may not have been as remarkable as it seems.
David Lalman, Oklahoma State University animal scientist, said cost per cwt of calves produced has accelerated at a rate of $5 annually, calf prices at an average rate of $5.25.
Those figures come from recent SPA (Standard Performance Analysis) data for the Southern Great Plains (Texas, Oklahoma and New Mexico). The numbers also reflected the cost to maintain beef cows increased at a rate of $22.45 per cow each year. Figures go back to 1991.
Anderson stressed, however, that averages don't tell the whole story. Variation in profitability among operations can be wide and dramatically impact profits.
A 2015 study looking at 79 Kansas cow/calf operations, for example, found one-third of the ranches averaged $415.03 more net return per cow than the lower one-third.
"When comparing the characteristics driving differences in profitability between the high-third and the low-third groups, they found that 67.8% of this difference was due to lower cost of production in the high-profit group," Lalman reported. The remaining 32.2% difference was due to gross income per cow.
The higher profitability herds had slightly higher average weaning rates, weaning weights and calf sale prices.
Texas A&M's Anderson said it's not unusual to hear that cow/calf producers don't know their true cost of production. He believes, however, that most have a big-picture number in mind, though it may not always include everything it should.
"I do think many times we underestimate our true costs of production. This is particularly true when we don't put in a cost for depreciation of equipment," Anderson said. "It's easy to forget something when you're not writing a check for it all the time. Ultimately, though, it's fair to say those producers who know their true costs do a better job of making management and marketing decisions."
He added having a profitable operation is about more than the economics; it's about knowing who you are and what you do well.
"Once you know that, then you know what your market is. Everyone has a different strength. It has to do with where they are based and their management style," Anderson said. "And there is nothing wrong with that. You have to make that decision, and then you can set your goals and improve. Target things that make sense for your operation.
"At the end of the day, cow/calf people get paid the most for having calves to sell. So whatever technology or ranch improvements may give you more calves to sell, those are probably good places to look to improve, because that's most likely where your greatest return is going to come from."
(CZ/AG)
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