Cattle marketing opportunities when production is difficult

News
Aug 3, 2012
by WLJ

It is often the case in the cattle business that “when production is easy; marketing is hard” and “when production is hard; marketing is easy.” This makes sense because when production is easy and everyone can do it, prices often drop and marketing profitably is a challenge. And when production is a challenge, there are often good market opportunities. Certainly the widespread drought is making production a challenge at this time for a great many producers. Many cattle producers are on the defensive trying to figure how to best use rapidly dwindling feed resources, what to sell and when to sell it, and ultimately how to survive the drought with minimal negative impacts.

However, current cattle prices reflect underlying market signals as well as the direct impacts of the drought. Most attention has been focused on how much cattle prices have decreased in the past two months. For feeder cattle, it is always important to consider changes in the price relationships across weights as well as the overall price levels. Recently, prices for lightweight feeder cattle, i.e., calves and stockers, have decreased more than prices for heavy feeder cattle. The decrease in heavy feeder prices reflects primarily the impact of high corn prices on feedlot demand for cattle combined with the general demand weakness reflected in boxed beef prices. Calf and stocker prices reflect all of those factors plus the lack of forage and limited opportunities for stocker-based cattle production. As a result, the current price pattern is one in which feeder prices drop rapidly up to about 600 pounds (for steers) and then are relatively flat up to about 850 pounds. In fact, for the past two weeks in Oklahoma, the cheapest steer under 800 pounds is a 575-pound animal with higher prices for weights from 600 to 800 pounds. This type of “inverted” feeder price structure occurs rarely and reflects the combined impacts of high corn prices and a relative excess of animals at the current time due to the drought.

Notwithstanding current production difficulties, the market is providing strong signals to add weight to feeder cattle before feedlot placement. For example, 525-pound steers have averaged about $140/cwt. the past two weeks in Oklahoma. Adding 225 pounds at 1.5-2 pounds per day would produce a 750-pound steer by November. Using a November Feeder Futures price of $144.90/cwt and zero basis results in a gross margin of roughly $350/head or a value of gain of $1.56/lb. The extent to which this is a good market opportunity will depend on the cost of production but even with relatively expensive feed costs, a cost of production well under this value of gain is likely. While many producers are unable to take advantage of this situation, there are undoubtedly some producers with the ability to implement a stocker or backgrounding program to take advantage of this very high value of gain.

 

While producers are forced to produce and market defensively through the drought, it is important to keep in mind that market opportunities will exist during and after the drought. The reality of high grain prices for at least the next crop year will continue to be reflected in feeder cattle markets as market signals to add weight to cattle prior to feedlot placement. Producers should manage, not only to get through the drought, but also to be positioned as well as possible to take advantage of opportunities once production becomes easier. — Derrell S. Peel, Oklahoma State University Extension Livestock Marketing Specialist

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