Opportunities in stocker cattle for ranchers destocking their cows
December 31, 2012
As the drought continues its hold on much of the United States, and feed costs continue to climb, many ranchers are considering destocking their cow/calf operations. While cow numbers are at their lowest level in the United States, they may reach their highest cost when the drought is over, which leaves many ranchers wondering how they will afford to buy back in. According to University of Wyoming extension specialists and a nationally-known ranch consultant, who all spoke during a cattlemen's conference during the Wyoming State Fair in Douglas recently, the answer may be purchasing stocker-feeder cattle.
According to Dallas Mount, producers who decide to destock their ranch of cow/calf pairs to save what grass they have left and avoid paying high winter feed costs, may want to consider yearlings until they can reenter the cow/calf business. In the meantime, Mount encourages producers to keep good records, determine where they want to be in 10 years, and develop a plan of how they will get there.
"I'm not telling everyone to go out and buy yearlings," the extension specialist said. "What I am saying is that if you have to destock the ranch, when you look at what to restock it with, how the markets are going to change, and what the driving force is, there could be some real opportunities to put some gains on yearlings, and have that be a profitable part of the ranch for the next several years," he said.
Burke Teichert, who works as a ranch consultant, agreed. "If you have some cows and calves right now and maintaining these animals is going to cause hardship, I would recommend you consider weaning the calves right away, and selling the cows. If you have the feed capabilities, I would winter the calves. You could cash in on the value of the gain, and you could retain some of the heifer calves to maintain your genetic base," he said.
“The costs of gain in feedlot cattle has skyrocketed, but when you look at the cost of gain, and the value of gain, which is what the market will pay you to put gain on cattle, there is opportunity there.”
~ John Ritten, a University of Wyoming extension specialist
Both men maintained ranchers should do some research before deciding on yearlings. Economists are predicting corn to be expensive through 2014. Some expect it to reach $7 to $8, which makes the cost of gain expensive, but increases the value of gain, too. If corn stays expensive, it will directly correlate to the prices paid for feedlot cattle, according to John Ritten, a University of Wyoming extension specialist. "The costs of gain in feedlot cattle has skyrocketed, but when you look at the cost of gain, and the value of gain, which is what the market will pay you to put gain on cattle, there is opportunity there," he explained.
Ritten said if the value of gain is worth more than a dollar over the next few years, people with grass will be in the driver's seat. "Based on the value of gain, you will want to have grass next year," he said. "There is a tremendous opportunity there."
"It may be a good idea to look at your ranch as a combined cow/calf, stocker operation, or converting to a stocker operation," Mount continued. "Even if you don't like stockers much, it could be a bridge to cow/calf prices until you can buy back in when those female prices start to drop. It can also be a lucrative opportunity," he added.
In an example, Mount said a 300 cow/calf ranch that is marginally profitable depopulated 70 percent of their cows because of the drought. During the year, they netted $83 a cow after paying the opportunity costs for their grass. Looking ahead to the next year, they didn't know if they could get back into cows at the price they depopulated at, so they are looking at running stockers instead.
Because they have fewer cows to support with the same overhead costs, they figure the profitability of the cow/operation will decrease to about $53 a head. Next year, they plan to restock the ranch with two yearlings for every cow that left the ranch. They also plan to buy in the spring when prices are traditionally higher, and sell in the fall when prices are usually lower. They plan to invest in some price insurance for these cattle, and are aiming for a 250 pound gain. They determined they would net about $97 a head from the yearlings.
Mount said ranchers are faced with a dilemma. "If you think the market is going to decline, it doesn't make much sense to put high value feed into a cow, who will produce a lower value calf," he said. Research has shown that ideally, ranches should be stocked with no more than 60 percent cow/calf; leaving about 40 percent stockers. "It is always a good idea to have some type of flexible stock on the ranch that can easily be liquidated if you have to," Mount told producers. Producers need to watch the timing and variability of the stocker business to find the best time to buy and sell. "Stockers may not make money every year, but most years they will," he said.
With the benefits also comes the faults, and producers at the conference we quick to share their concerns about stocker cattle. In addition to more death loss, they are harder to keep in a pasture, one producer said. Teichert said in many cases, ranchers he has worked with have utilized electric fence around the exterior of the property, which has seemed to help keep the cattle inside.
Mount said producers are also concerned they will make an already bad situation worse by losing money running stocker cattle since the market is more unpredictable. "There is some price risk, and during some years, it doesn't pay," Mount agreed. "But, what I would encourage everyone to do is utilize a price risk management strategy like LRP, which is a subsidized put option. It is buying insurance for a certain price for a future point in time. The government is interested in more ranchers having insurance, and will even pay 13 percent of the premium," he said. "I would encourage everyone to look into it. It is a great way to manage risk." ❖