A tale of two feeder cattle markets
By: Derrell S. Peel, Oklahoma State University Extension Livestock Marketing Specialist
Very unusual feeder cattle markets have developed this fall. The calf and stocker market has been sharply divided from the market for heavy feeder cattle. The attached summary in Table 1 shows prices, values and value of gain for steer prices in Oklahoma in the past five weeks.
Table 1 shows a marked contrast in calf prices from 400-550 and for feeders 600 pounds and up. For the lightweight calves, the price drop from 400 to 550 pounds (column 3) is a fairly typical price rollback, about 9-10 percent. In contrast, from 600 to 850 pounds, there is virtually no change in price…no rollback. In fact, the price of 600 pound steers is slightly less than heavier animals up to 850 pounds. A lack of feedlot and stocker demand for the middle weights is leaving prices for 550 to 750 pound steers low relative to the lighter and heavier animals on either side. As a result, the incremental value of additional weight is significantly higher at weights over 600 pounds (column 5) resulting in sharply higher value of gain at heavier weights (column 6). The general signal in this market is for cattle to remain in the country for additional weight gain before entering feedlots at heavy weights.
Table 1. Average Steer Price, Total Value and Value of Gain
(Med/Large, No. 1, Oklahoma Combined Auctions, October 7-November 4, 2016)
|Weight||Price||Price Change||Total Value||Marginal Increase in Value||Marginal Value of Gain||Total Increase in Value||Cumulative Value of Gain|
Source: KO-LS794, USDA-AMS; Calculations by Derrell Peel
The current two-part feeder market has implications for cow-calf and stocker producers. Retained ownership may be attractive for cow-calf producers depending on calf weaning weights and management flexibility. At 450 pounds, the value of the first 100 or 150 pounds is relatively low because of the price rollback. Thus the initial value of gain is less than $1.00/lb. up to 600 pounds (column 6). However, additional weight beyond 600 pounds captures the higher value of gain and brings up the average or cumulative value of gain for weights up to 850 pounds (column 8). Thus, the retained decision may depend on how much additional weight can be added to the calves. For heavier weaning weights…say 600 pounds…the value of gain is high immediately for weights up to 850 pounds (column 9).
Not only does the current market suggest stocker opportunities in general but also that the best buying opportunities are for animals somewhat heavier than typically purchased for winter grazing. The sharp price rollback (low initial value of gain) for 450 pound stockers is less attractive than buying animals at 550 pounds or heavier. For example, Table 1 shows that a 550 pound steer can be bought for less than $35/head more than a 500 pound steer (column 5). Buying those pounds results in immediately higher value of gain compared to starting at lighter weights. Of course, it depends on how long the animals will be owned and how much total weight gain is desired or possible. The lightweight steers eventually generate value of gain over $1.00/pound if enough weight is added (column 8). Of the total increase in value for 400 pounds of gain starting at 450 pounds, 43 percent occurs in the first 200 pounds of gain while 57 percent of the increased value occurs in the second 200 pounds of gain (column 5). Stocker producers should actively evaluate the best buy for stockers relative to planned production and avoid buying the same weight as usual out of habit.
The price patterns in Table 1 are unusual but have been very persistent this fall. Nevertheless, the current feeder price pattern is an anomaly that will likely be corrected as arbitrage opportunities are exploited. By itself, that realignment of feeder prices will only help the value of retained calves or stockers because the value of the middle weight animals will rise relative to the light and heavy weight feeders. Of course that takes time and overall market risk is a different issue that must be considered as well.