Stocker Margins Squeezed As Feedlots Use Cheap Feed To Increase Demand For Light Weight Cattle

By Dr. Derrell Peel,

Oklahoma State University Extension Livestock Marketing Specialist

Dr. Derrell Peel, Oklahoma State University Extension Livestock Marketing Specialist, offers his economic analysis of the beef cattle industry. This analysis is a part of the weekly series known as the "Cow Calf Corner" published electronically by Dr. Peel and Dr. Glenn Selk. Today, Dr. Peel examines the impact cheap grain is having on stocker cattle prospects.



"The primary function of markets is to figure out what gets produced and what resources are used to accomplish that 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. The ruminant biology of cattle provides tremendous flexibility in how cattle 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. As feedlots determine whether they would rather buy lighter weight animals and add weight in the feedlot or buy more weight from the country, 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, 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. 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/cwt. or $810 per head while 800 pound steers were priced at $132/cwt. or $1058/head. This implied a value of gain of $0.82/pound for 300 pounds of weight gain. In contrast, for the week ending March 3, 500 pound steers in Oklahoma were priced at $164/cwt or $822/head while 800 pound steers were priced at $125/cwt. or $997/head, leading to a value of gain of $0.58/pound for 300 pounds of gain. The current feeder market appears to be fully reflecting low feedlot cost of gain.