Spring has formally arrived within the Commonwealth, which at all times brings questions on stocker profitability. Calf costs usually enhance seasonally as we transfer into spring however have elevated at a larger-than-normal price because the finish of 2022. On a state common foundation, a medium / giant body #1-2 steer in March has bought for over $40 per cwt greater than that very same steer in December. Whereas it’s probably that some stocker operators bought calves early, to get forward of the seasonal spring value enhance, most will place calves into stocker applications within the coming weeks.
On the time of this writing (March twenty first), fall 2023 CME© feeder cattle futures had been buying and selling round $220 per cwt, which is roughly a $25 per cwt premium over the April contract. It’s onerous to recollect a 12 months with this a lot keep on the feeder cattle board between spring and fall. This means that heavy feeder cattle costs ought to enhance all through 2023, which partially explains the sharp will increase being seen in calf costs. Nonetheless, excessive calf costs have many stocker operators questioning whether or not revenue alternatives will exist for 2023.
The aim of this text is to evaluate the probably profitability of summer season stocker applications for 2023 and set up goal buy costs for calves based mostly on a variety of return ranges. Whereas it’s unimaginable to foretell the place feeder cattle markets will find yourself this fall, producers must estimate this and never depend on the present value (March) for 750-850 lb feeder calves. The autumn CME© feeder cattle futures value (adjusted for foundation) is one of the best ways to estimate probably feeder cattle costs for fall. Grazing prices together with pasture prices, veterinary and well being bills, hauling, fee, and so on. are estimated and subtracted from the anticipated worth of the autumn feeders. As soon as this has been completed, a greater evaluation may be fabricated from what may be paid for stocker cattle this spring to construct in a suitable return to administration, capital, and threat.
Key assumptions for the stocker evaluation are as follows: 1) Graze steers April 1 to October 15 (197 days), 1.4 lb/day acquire (no grain feeding), 2% demise loss, and seven% curiosity on the calf. The rate of interest used on this evaluation could seem excessive for producers who’re self-financed or have very low rates of interest however is probably going fairly shut for these going by conventional lenders.
Given these assumptions, sale weights can be 775 lbs and 875 lbs for 500 lb and 600 lb bought calves, respectively. Utilizing a $220.50 CME© futures contract value for October 2023 to estimate sale value, a 775 lb steer is estimated to promote for $2.11/b and an 875 lb steer is estimated to promote for $2.08/lb. This estimate makes use of a -$10 per cwt foundation for an 800 lb steer and a $3 per cwt value slide. These sale costs are additionally based mostly on the idea that cattle are bought in a number of 40 or extra head. Stocker operators who usually promote in smaller heaps ought to regulate their anticipated sale costs downward accordingly.
Estimated prices for carrying the five hundred and 600 lb steers are proven in Desk 1.
 
Stocking charges of 1.0 acre per 500 lb steer and 1.2 acres per 600 lb steer had been assumed in arriving at these costs. Most of those are self-explanatory besides the pasture cost, which accounts for variable prices similar to bush-hogging, fertilizer, seeding clovers, and so on., and is taken into account a bare-bones situation. Sale bills (fee) are based mostly on the idea that cattle will probably be bought in bigger teams and producers can pay the decrease corresponding fee price. Nonetheless, producers who promote feeders in smaller teams can pay increased fee charges which might exceed $50 per head based mostly on the income assumptions of this evaluation. Any of those prices might be a lot increased in sure conditions, so producers ought to regulate accordingly.
Goal buy costs had been estimated for each sizes of steers and adjusted in order that gross returns over variable prices ranged from $100-$200 per head. Usually we’d use a variety of $50-$150 per head, however we really feel that given the excessive feed costs this will probably be extra consultant this 12 months. This offers an inexpensive vary of doable buy costs for every sized calf this spring. Outcomes are proven in Desk 2. For 500 lb steers, goal buy costs ranged from $2.50 to $2.69 per lb. For 600 lb steers, goal buy costs ranged from $2.35 to $2.51 per lb. When concentrating on a $150 per head gross revenue, breakeven buy costs had been $2.59/lb for 500 lb steers and $2.43/lb for 600 lb steers. 
For instance of precisely how this works for a 500 lb steer concentrating on a $150 gross revenue:
775 lbs steer x $2.11 (anticipated sale value)Â Â Â Â Â Â Â $1,635
Whole Variable Prices                                          – $188
Revenue Goal                                          – $150
Goal Buy Price                          $1297
Goal Buy Worth = $1297 / 500 lbs = $2.59 / lb
For heifers, sale value for heavy feeders will probably be decrease than comparably sized steers and they won’t usually acquire as effectively. On this evaluation, we assumed the worth low cost for these heifers is $12 per hundredweight decrease than the identical weight steers and we assumed heifers would acquire 10% slower than steers. With these assumptions, buy costs must be $0.26/lb decrease for 500 lb heifers and $0.24 decrease for 600 lb heifers in comparison with the steer costs present in Desk 2. Thus, when concentrating on a $150 per head gross revenue, breakeven buy costs had been $2.33/lb for 500 lb heifers and $2.19/lb for 600 lb heifers.
Your value construction could also be completely different from that introduced in Desk 1, and in that case, merely shift the focused gross revenue up or all the way down to account for this. In case your prices are $25 increased per calf, then you definitely would shift every focused revenue down by one row: For instance, you’d use the $175 gross revenue to estimate a $150 gross revenue in case your prices had been $25 increased. One other option to consider that is {that a} $1 enhance in prices would lower the focused buy value by $0.20 per cwt for 500 lb steers and $0.17 per cwt for 600 lb steers.
You will need to notice that the gross income in Desk 2 don’t account for labor or investments in land, tools, fencing, and different amenities (fastened prices). Thus, in the long term, these goal income should be excessive sufficient to justify labor and funding, in addition to a administration return. Usually, by the point this text is written in late-March, calf costs are approaching ranges that may place returns on the higher finish of the revenue vary analyzed. Whereas there’s a whole lot of variation within the value of calves throughout Kentucky proper now, a whole lot of calves are promoting effectively under lots of the goal buy costs estimated on this evaluation. That is all of the extra motive that stocker operators ought to rigorously suppose by their budgets and make rational buying choices.
There’s a tendency for calf costs to succeed in their seasonal value peak when grass actually begins rising in early spring. There’s little motive to suppose this received’t occur in 2023, which is able to end in tighter anticipated margins for stocker cattle positioned within the upcoming weeks as these calf costs enhance. Two different elements are price dialogue which will impression how robust the calf market will get this spring. First, CME© feeder cattle futures are suggesting that heavy feeder cattle costs will probably be a lot increased this fall than what we’re seeing immediately.
So, a stocker operator that was utilizing the present market, moderately than the futures-based method taken on this article, would bid a lot much less aggressively on calves this spring. Secondly, feed costs are so excessive that feedlots probably have nearly no real interest in buying these gentle calves this spring. That might imply much less competitors for calves within the market and will forestall calf costs from getting as excessive as they’d in a extra regular feed value setting. Whereas there isn’t a option to know for positive what the following few weeks will deliver, there might be vital alternatives for stocker operators to position calves at a good margin this spring.
Lastly, the location of calves into stocker applications represents a major value and there’s at all times an excessive amount of uncertainty about fall sale value. For that reason, stocker operators must also contemplate threat administration to guard their potential returns. Ahead contracts, futures and choices have lengthy been utilized for value threat administration and stay viable methods immediately.
Nonetheless, there was a substantial enhance in the usage of Livestock Danger Safety (LRP) insurance coverage over the previous couple of years. LRP works much like a put possibility in that it offers draw back value safety (for a premium), but additionally permits the producer to capitalize on rising costs. Nonetheless, it may be bought in most any amount, so producers should not tied to 50,000 lb contract sizes as they’d be with futures and choices methods. Some latest modifications to LRP insurance coverage have made it extra engaging, together with will increase in subsidy ranges and not requiring premiums to be paid up entrance. No matter what threat administration technique is utilized, time spent contemplating value threat administration is probably going time effectively spent in these unstable markets. The easiest way to make sure profitability is to finances rigorously and to handle draw back value threat.
