Extension by John RittenWritten by Saige
By John Ritten, UW Extension Production Economist
After the recent drought, the southern plains have seen some much needed relief in terms of both rain and temperatures, and the result has been an almost unexpected response of their winter wheat crop. Not only has the wheat crop outperformed expectations, it appears as though there will be ample growth to allow grazing this winter, especially across the majority of Oklahoma.
This grazing capacity has increased demand for stocker animals in the southern plains. This is in stark contrast to the sell-off that occurred over the summer as many producers weaned calves early and culled deeper than usual. As expected, the result of a joint decrease in supply and increase in demand for stockers in the area has resulted in an increase in stocker prices in the range of eight to 12 dollars per hundredweight since Thanksgiving.
A major reason producers are willing to pay higher prices for stockers to graze this winter is due to continued high grain costs. While corn is hovering around six dollars as I write this, which is lower than the prices seen a few months ago, I do not think it is likely to drop much more. This implies feeders will continue to be willing to prefer to place heavier animals to lower finishing costs.
The reversal in cost of gain from forage and grains requires a brief comparison of technical versus economic efficiency. While many producers think of efficiency in terms of unit of output produced per unit of input added, economic efficiency adds a layer of costs and revenues to the equation.
While there have not been any changes in the technical efficiency of feedlot production systems in terms of adding gains from grain, the relative costs of forage and grains have changed this year. While feedlots are still able to produce desired physical responses from grain based diets, gains can be added through forages more economically efficiently this year as compared to more expensive grains. However, often feedlots do not have access to enough of these cheaper forage sources in their production process, so are relying on other parts of the supply chain to provide heavier animals into the feedlot. This is exactly the reason producers are putting stockers back on wheat in the southern plains, and why Wyoming producers should take advantage of any forages they have access to, whether it be winter pasture or crop residues this winter.
This year also offers some unique opportunities in deciding which animals to bulk up. Historically, the price slide has continued across the relevant range of feeder animals. However, due to the large number of lightweight placements from the drought stricken southern plains earlier this year, feeders are looking for heavier animals now in an effort to reduce feeding costs. The result is a price slide that, while still steep in the lighter weights, is much flatter than usual for animals over 600 pounds.
In fact, recent work at Oklahoma State University has determined that it can be more profitable to add weight to heavier animals this winter. Their example shows that if you were able to add 200 pounds to a 423-pound steer, you would get $0.81 per pound of gain, or $162 per animal, while you could add 200 pounds to a 623-pound steer at a value of $1.06 per pound, or an increased value of $212 per animal.
OSU’s analysis suggests that if you only have limited access to alternative forages, it would be more profitable to graze heavier animals. Whereas, if you have access to forage through the spring, lightweight animals would be preferred if you have time to get them to the 800- to 900-pound range by summer.
This leads into a brief discussion of price risk. While it currently is profitable to add gain to heavier animals, there is no guarantee that the current price slide will hold, and that heavier animals will maintain their value until you are able to sell them. However, as grain price remain elevated, feeders are expected to continue to demand heavier placements.
Again, corn prices are down from the highs experience a few months back, but I do not expect them to return to “normal” ranges anytime soon. Currently June 2012 corn futures are still at $612. Likewise, August feeder cattle futures have been hovering around $150 for quite a few weeks. The current market situation does not seem to suggest any drastic changes to current prices. However, if you are planning to graze animals over winter, you may want to explore some sort of price risk management strategy. Whether you prefer the more flexible futures market, or the fixed prices of forward contracts, there are profits available, as long as you have access to relatively cheap forage this winter.