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Angus Productions Inc.
Copyright © 2009
Angus Productions Inc.

Rediscovering the Stocker Segment


PHOENIX, Ariz. (Jan. 28, 2009) — According to cattle market analyst Troy Applehans, a role in which stocker operators collectively serve is that of the cattle industry’s inventory shock absorber. That’s certainly been the case in recent months, as finishing yards backed away from purchases of calves due to high feedgrain prices and the associated rise in cost of feedlot gain. Consequently more calves were sold to stocker operators planning to winter the cattle on less-costly forage-based rations and add 250 pounds (lb.) to each animal’s weight.

Troy ApplehansTroy Applehans The re-emergence of the stocker operator’s role was the topic of discussion at a Cattlemen’s College session Wednesday during the 2009 Cattle Industry Convention. Applehans and fellow Cattle-Fax analyst Mike Murphy said this industry segment has become more important to managing the flow of cattle into finishing operations.

Applehans said Cattle-Fax data shows “typical” winter stocker operators growing calves from November to February (95 days) and achieving an average daily gain (ADG) of 1.5 lb. were profitable for 24 of the last 29 years. On average, summer grazing programs were profitable in 19 of 28 years. Of course, like finishing yards, stocker-growers are margin operators and must focus on opportunities to buy and sell cattle to their best advantage.

“And as the old saying goes, bought right is half sold,” said Applehans, noting that purchase cost represents more than 80% of the stocker operator’s total costs. Just a 10% difference in calf cost can alter the breakeven price by as much as $8 per hundredweight. In other words, buying calves at 10% lower cost is worth about $65 per head on the other end.

Mike Murphy said purchase price is important but so is sale price. He urged stocker operators to remember the key drivers of feeder-cattle value. One driver is Mike MurphyMike Murphy the correlation between prices, corn futures and live (fed) cattle futures. In recent years they have been more closely correlated.

Murphy said another significant factor influencing feeder-cattle value is the basis relationship between fed-cattle cash price and fed-cattle futures price. When the futures price is above that of cash, cattle feeders are willing to pay more for feeder cattle. Take that premium out of the market, said Murphy, and the value of feeder cattle goes lower.

Murphy reminded the audience of how feeder cattle prices declined when corn dropped from $8 per bushel to about $3. Normally, he said, you would expect feeder cattle prices to go through the roof.

“They didn’t because the premium was gone from the live cattle futures market,” he explained. “It’s a different environment. The real driver of feeder cattle price is the back-end of the fed cattle market.”

 
Editor’s Note: This article was written under contract or by staff of Angus Productions Inc. (API), which claims copyright to this article. It may not be published or distributed without the express permission of Angus Productions Inc. To request reprint permission and guidelines, contact Shauna Rose Hermel, editor, at (816) 383-5270.