Feeder cattle are wrestling with an on-again, off-again grain market and the inevitable conclusion that cow numbers should begin to fall.
What does this mean for our stocker producers heading to wheat pasture? A volatile market is a stocker producer’s enemy and that might be exactly what this fall will offer.
Fortunately, markets already have experienced the bulk of their decline for the year and have entered a period of weak recovery. This recent rally has wallowed between $143/cwt. and $138/cwt. It will be difficult for prices to test this upper limit unless grain prices retreat further. Support has been set at $132/cwt., but is not a firm level.
The values of feeder cattle from the Oklahoma Combined Weekly Auction Summary KO_LS794 for Aug. 2, are used to calculate value of gain. For a 520-pound steer, the first 250 pounds are worth 96 cents per pound. This calculation uses the current value for 520-pound steers and a forecasted basis for 770-pound steers sold in March. Assuming a five-bushel reduction from grazing and topdress nitrogen at 30 pounds, it will cost 24 cents per pound to grow calves on wheat pasture. This is the marginal cost of grazing and does not include labor, equipment or marketing costs. It is clear that feeder cattle budgets could be profitable if prices, but more importantly basis, do not fall before March.
Producers must decide how much risk they can absorb. Support in feeder cattle markets exists at $132/cwt. so a $5/cwt. reduction in prices is not out of the question in the short run. Trade opportunities and concerns continue to drive futures markets and uncertainty from grains will fuel the volatility in cattle markets.
If the risk of lower prices is a concern to producers, they should contact a broker to determine the best price protection strategy for their operation. For example, a March put option contract at $136/cwt. will cost about $7/cwt. This would establish a floor price of $129/cwt. since a put option is the right but not the obligation to sell a futures contract. In the event that prices fall below $136/cwt. a producer may exercise the right to sell a futures contract for $136/cwt.
Fundamentals for cattle are not particularly strong. Prices in early June were comparable to current prices and took less than a month to set the contract low. Seasonality suggests that feeder cattle will experience a mild increase in value through November, so cow-calf producers must wrestle with the decision to market calves early.
Be strategic and price protect any stocker calf purchases you make heading into fall. Dry conditions, low hay supplies and possibly higher grain prices have the cumulative effect of decreasing stocker prices and the profitability of the stocker enterprise in the next few months.
Milacek is Oklahoma Cooperative Extension Service northwest area ag economics specialist.