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Value of Gain is Worth Knowing

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Posted Aug. 31, 2002

The United States Department of Agriculture's July 1 total cattle inventory declined by 0.6 percent while the beef cow inventory (42.9 million head) was down by 150,000 head (-0.4 percent). This is good news for the cow-calf producer. The news is even better when we learn that the volume of beef replacements is unchanged at 4.6 million head. Assuming beef demand remains constant or improves, we should have another two to three years of good calf prices. The two factors that could negatively impact calf prices are rising corn prices and fierce competition from other protein sources. This inventory information is useful for stocker operators looking to buy stockers to place on winter pasture this fall. One of the important economic factors stocker operators should consider before purchasing stockers is the value of each pound of gain. Table 1 is the value of gain for steers in June and July 2002, from the eight reporting cattle auctions (Oklahoma City, Ada, Apache, El Reno, McAlester, Tulsa, Woodward and Guymon) in Oklahoma.

The information in Table 1 is determined by inserting actual market price data into a price estimation model so we can estimate the value of gain in 50 pound increments from 300 to 900 pounds. For example, the average value of each pound of gain between 300 and 350 pounds was $0.6710 for cattle sold during the week of July 26 for the eight reporting markets in Oklahoma. The average value for each pound of gain between 700 and 750 pounds was $0.4030. The value of gain has changed significantly during June and July. For instance, the value of gain on June 7 was $0.4933 per pound of gain between 700 and 750 pounds, and on July 25 the value of each pound of gain had fallen to $0.4030. The value of gain is one of the important figures needed to complete a "stocker enterprise budget" the other value is the cost for producing a pound of gain. The difference between these two values is net returns per pound of gain. If the value per pound of gain is $0.40 and the cost per pound of gain is $0.30 for 200 pounds of gain, the net returns would be $0.10/lb. or $20 per head. The business strategy is to maximize the value of gain while minimizing the cost of gain. I recommend preparing a stocker enterprise budget so you can estimate your net returns. Many producers bring other people's stockers in and charge a fee for each pound gained, while others choose to purchase their own stockers. Either program requires an economic analysis to determine which is the best for you. There is, however, a significant difference in the level of risk between these two programs. Figures 1 and 2 show the seasonality of prices for 500- to 600-pound calves and 700- to 800-pound feeders for price data sets for one, three and 10 years. This information can assist you in determining when is the best time to buy and sell stockers.

The best time to buy 500- to 600-pound steers is October since the three- and 10-year seasonal prices have been 95 percent of the average annual price. March is the best time to sell, given the three- and 10-year seasonal average prices for 500- to 600-pound steers since they have been near 105 percent of the average annual prices. The seasonal low prices for 700- to 800-pound steers are in April and May, while the better prices are in July and near the end of the year. These charts provide insight into historical price patterns.

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