Agricultural News
The Value of Forage-Based Stocker Gains
Thu, 02 Sep 2010 2:40:02 CDT
Efficient markets allocate production resources to their highest and best use. As a practical matter, that means that industries, and the individual producers within the industry, must bid resources away from other alternative uses. Because cattle are ruminants, the beef industry can utilize a wide variety of forage and feed resources to produce the end product of the industry, a slaughter ready animal with a carcass of acceptable quality.
The U.S. cattle industry has fundamentally changed since 2007. Growing and probably permanently higher demand for corn for industrial use has successfully bid away some of the available feed supply of this country and raised corn prices to a higher base level, about $1.50/bu. higher in recent years compared to many years prior. Permanently higher corn prices implies a series of short and long run adjustments in the cattle industry. Among those adjustments, higher input (i.e., corn) prices will cause a decrease in beef production. This also means that market signals will emerge to encourage the beef industry to switch away from the more expensive grains and utilize more forage to the extent possible.
These market signals are best seen in the form of the marginal value of weight gain for stocker cattle. The gross profit potential for stocker production is reflected in the value of gain, which is calculated as the ending value (sale weight times sale price) minus the beginning value (beginning weight times beginning price) divided by the total weight gain. For example, using Oklahoma combined auction prices averaged over the last four weeks, the price of a 500 pound steer was $125.71/cwt. or $629/head. The price of a 750 pound steer was $115.06/cwt. or $863/head. The gross margin is $234/head or $0.94/lb of gain.
In general, the value of gain depends on the beginning weight of the animal, the amount of weight gain, the time of year and the average level of feeder prices. Sometimes the value of gain varies sharply over different beginning weights and/or amounts of weight gain. However, in the current market the value of stocker gain is high over a wide range of weight. The average value of gain is mostly in a range of $0.85-0.95/lb. for beginning weights ranging from 400 to 650 pounds and for gain of 150 to 400 pounds. These values are based on current price only and do not reflect time of year in which seasonal price patterns between the time of purchase and time of sale can make the value of gain either higher or lower.
The overall message for the cattle industry is clear and likely will not change over the long run. Higher feedgrain prices, supported by decreased cattle inventories that raises average cattle price levels, makes forage-based stocker gains more valuable. Short run market volatility is a fact of life and means that generally better stoker margins should not be taken for granted. Nevertheless, despite the need for risk management, the market is providing incentives for more forage based-stocker gains.
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