Alternatively, stocker producers will make calf purchases, and a small percentage of cow-calf producers will precondition home-raised calves in an effort to add value to the animals. Thus, what is the profit outlook for the decision to grow calves this fall and winter?
Fall 2016 market
First off, 2016 will not be a repeat of the 2015 market, nor will it be a repeat of 2013 or 2014. Many stocker producers experienced record profits on calves purchased in the fall of 2013 and 2014 as many of those animals were sold for a higher price than the purchase price. Thus, in 2013 and 2014 producers benefited from the added weight and higher prices. Alternatively, fall calf purchases in 2015 resulted in record losses as cattle prices declined more quickly than they increased.
The results of 2015 and the first three-quarters of 2016 have many producers on edge and hesitant to purchase calves or precondition calves this fall and winter. However, 2016 is shaping up to be a more seasonal pattern, which should bode well for margin operators moving forward. Another positive for margin operators is that lower prices reduce overall financial risk since fewer dollars are invested per head.
Calf prices in 2016 have declined 28 percent from their spring high through the middle of summer, which is a larger break in prices from spring high to fall lows than normal. However, calf prices are likely to soften as the fall run of calves comes to market.
Based on feeder cattle futures and basis values, the breakeven cost of gain for a fall purchase of a 550-pound steer and the marketing of a 790-pound steer four months later with a load lot premium ranges from $1.01 to $1.13 per pound with no death loss cost. With a 2 percent death loss, the breakeven cost of gain declines to a range of 95 cents to $1.07 per pound. This would suggest that any producer who can put on a pound of gain for less than 95 cents should be able to have a positive return to land, labor and management in the stocker business this fall. Health and veterinary costs were omitted from this calculation, but the analysis provides a baseline for producers to start making purchase decisions.
A high-risk business
The stocker business is a high-risk business, and it is not for everyone. There are several tradeoffs when playing the stocker cattle game. One of those has to do with high-risk versus low-risk cattle. High-risk cattle generally have higher death loss and higher health costs but a lower initial purchase price. Health problems negatively impact rates of gain and efficiency.
Alternatively, low-risk cattle generally have a higher purchase price but lower death loss, lower health costs and better overall gains. A wise man once said, “A calf bought right is half sold.” This is a true statement for the margin operator, who has more control over price paid for an animal than price received at sale.
The take-home message for producers is to first evaluate fall purchase prices on several classes and weight classes of animals before pulling the trigger on purchases. Secondly, producers should have a close estimate for expected cost of gain and health costs prior to purchase. It is always better to overestimate these costs than underestimate them.
Next, if a profit can be hedged using forward contracts, feeder cattle futures or livestock risk protection insurance, then producers should consider these strategies to protect against a market collapse. Lastly, if the market does not look favorable for profits, then remain patient and continue putting pencil to paper. There is no reason to move from a neutral or bad situation to a worse situation. 
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Andrew Griffith
- Assistant Professor
- University of Tennessee
- Email Andrew Griffith
PHOTO: The stocker business is a high-risk business. Photo provided by Tina Johnson, an information specialist at the University of Tennessee.
