Low feedlot cost of gain making an impact in stocker cattle decisions

Monday, March 6, 2017

The current feeder market appears to be fully reflecting low feedlot cost of gain, which in turn is squeezing stocker cattle margins and changing the signals for stocker production.

“While broader supply and demand forces determine what gets produced and how much is produced, the question of how to produce is particularly tricky in the cattle industry,” said Derrell Peel, Oklahoma State University Cooperative Extension livestock marketing specialist.

Basically, the ruminant biology of cattle provides tremendous flexibility in how animals are produced but also means lots of challenges to figure out how to produce cattle most competitively.

In the complex, multi-sector world of cattle production, this coordination is directed by dynamic market signals driving stocker and feedlot production adjustments in the face of changing feed resource values.

“Feed grain prices dictate feedlot cost of gain, which drives feedlot demand for feeder cattle of various weights,” Peel said. As feedlots determine whether they would rather buy lighter weight animals and add weight in the feedlot or buy livestock with more weight, the resulting feeder price relationships across weights will change and provide the corresponding signal for stocker or backgrounding producers.”

Ultimately, the market is trying to figure out which sector can add weight to feeder cattle most cost effectively. Over time and on average, feeder cattle price relationships reflect feedlot cost of gain as the value of gain for stocker cattle. However, cattle producers need to be aware that, at times, feeder markets will be out of equilibrium for a few weeks to a few months.

“Record feed grain supplies and low feed prices were not fully reflected in lightweight feeder cattle prices in the second half of 2016 and into early 2017,” Peel said. “However, feeder prices in the past month or so have increasingly adjusted to reflect the continued reduction in feedlot cost of gain.”

As recently as the third week of January, the price of 500-pound Number 1 steers in Oklahoma was about $162 per hundredweight or $810 per head while 800-pound steers were priced at $132 per hundredweight or $1,058/head. This implied a value of gain of 82 cents per pound for 300 pounds of weight gain.

In contrast, for the week ending March 3, 500-pound steers in Oklahoma were priced at $164 per hundredweight or $822 per head while 800-pound steers were priced at $125 per hundredweight or $997 per head, leading to a value of gain of 58 cents per pound for 300 pounds of gain.

“Cheap feed grain ultimately means feedlots want to put more weight on cattle in the feedlot compared to buying that weight and implies increased feedlot demand for lighter weight animals relative to heavy feeders,” Peel said. “In short, we’re talking low feedlot cost of gain. Cheap grain results in stocker production incentives to utilize lighter weight stockers and turn them over more quickly by selling at lighter feeder weights.”

This is in sharp contrast to much of the past few months when there were strong market signals to add weight in producer operations and take stockers to heavier weights before marketing.

“Stocker producers grazing out wheat or looking ahead to summer stocker grazing should carefully evaluate production and marketing plans with respect to purchase weight, enterprise length and sale weight of stocker cattle,” said Trent Milacek, OSU Cooperative Extension area agricultural economist headquartered in the state’s Northwest District.

Milacek believes low feedlot cost of gain will likely continue throughout the summer, given that large grain stocks have ensured supplies of feed grain will be present for the near future. Analysts and producers alike will get a better sense for the outlook on 2018 feed grain prices as summer weather events present themselves across the U.S. Corn Belt.

“As always, producers must focus on maximizing gains while doing their best to navigate markets,” he said. “To take advantage of increased value-of-gain, a producer must have pounds to sell. In addition, some form of price protection is required to lock-in that price to protect against market fluctuations.”

In the end, Milacek cautions, producers should focus on efficiency. If production suffers when modifying their operation to accommodate various weights of cattle, overall profitability may not increase.