Analysis of Stocker Cattle Profit
It is the time of year (early May) when most winter pasture stockers have been, or soon will be, sold. It (1998-99) was a good year. Pasture and cattle performance (ADG or average daily gain) across much of our service area was the best in several years. Gains have been as high as 2.75 lbs. per day with 2.33 lbs. per day being fairly common. Profits may be another matter. I am continually amazed by the wide range of purchase prices paid for similar weight cattle. Time of purchase, both month and time of day, enters into the equation. Those who purchased stockers late last summer and early last fall benefited from drought stressed markets. Prices generally increased through the fall and early winter for lightweight stockers. The exception was late at night and early in the morning at local auction barns during the fall runs of just weaned calves. Having buyer with the fortitude to work through the night can result in significant savings over mid-afternoon purchases!
How and when cattle are sold/priced also impacts profits. Like many previous years, 1999 saw optimism in January. There was talk of $70 fed cattle and $80 feeders. May feeder cattle futures traded at $75 several days in February. This morning (May 6) they are trading under $70! Likewise, June fed cattle traded above $66 in February and early March. Today (May 6), June fed futures are trading at $61.40. The point is, cattle that were hedged or forward cash contracted in February 1999 will make more money than similar cattle sold today.
The sale weight of cattle plays a significant role in the price received per pound. The weight range/price per pound relationships change with the relative price of feed grains (primarily corn). In times of relatively cheap grain, the price received for heavier feeder cattle often means the cattleman receives very little for the last 100 pounds of gain. The table below points this out for the early May 1999 market in Oklahoma City.
Now for the test - how are profits assessed? If one purchased 550lb. steers December 10, 1998 for $68.50 delivered, sold them May 3, 1999 weighing 875lbs. for $63.15 net of sales/delivery expense, and had a $0.36 per pound of gain total cost of production, then the profit analysis might be like the example.
Did this enterprise make a $58.81 per head profit? If it was a one-time deal, maybe it did. But if it only represents a 140-day interval in an ongoing operation the above analysis does not account for replacing inventory.
Today, similar quality 550 lb. steers cost $82 per cwt. or $451 per head. This is $74.25 per head more than the initial cost of the cattle that were just sold. It will take the $58.81 per head profit plus an additional $15.44 per head added to the original cattle outlay just to replace inventory!
What are the implications of this analysis? The first thing that should be evident is that the costs included in the 36 cents per pound of gain better reflect returns to all inputs or this enterprise probably lost money. The second thing that is readily evident to anyone who operates within a borrowed line of credit is that it will take more money to run the same number of cattle the next time around. More equity dollars will be required, and/or the loan limit will have to be increased.
If one or a combination of these does not occur, then the operation will be downsized or cattle will have to be taken in on the gain. If the cattle in this example had been hedged in February, an additional $4 or $5 per cwt., or roughly $40 per head, might have been realized. The extra $40 per head would allow for inventory replacement with over $20 per head remaining as true profit!
Does the following thought for the month have implications for value based marketing of beef?
"He that speaks ill of the mare will buy her." Benjamin Franklin, Poor Richard's Almanac