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By Lana Robinson
Field Editor
Weak corn prices combined with high prices for calves and feeders are making retained ownership an attractive option for some producers. However, Jose Pena, professor and Extension Economist-Management at Uvalde, warns that retained ownership enterprises will require careful planning and monitoring at a time when investment costs are high and skyrocketing energy prices could weaken the economy. Moreover, says Pena, forage availability may be scarce this fall/winter season as a result of a very dry spring and summer.
"Current high calf values as a result of record high prices, especially for lightweight calves, appear to indicate that it might be more preferable to market calves as they are weaned this fall," Pena said at the end of August. "The additional market risk of deferring sales, the price roll-back and the potential of increased production costs as energy costs continue to increase, will increase the risk of gaining additional revenue from a retained ownership enterprise."
On the other hand, Pena said a retained ownership enterprise, or someone buying stockers this fall, can add value to the calves through additional gain from relatively inexpensive forage and/or cost of gain through a feedlot, with careful planning and monitoring.
"If good quality forage is available at affordable prices, stocker retained ownership enterprises this winter could be profitable. The feedlot option, while probably less risky from a production viewpoint, may carry higher financial risk," the economist observed.
According to Pena, the accumulated cost of the raised calves, their current market value and the owner's financial situation should serve as the benchmark to evaluate the profit potential and risk associated with a retained ownership enterprise this coming winter.
"Keep in mind that retaining ownership will increase management and decision-making requirements. More capital will be required for the additional production expenses and annual cash flows will change because retaining ownership will delay income and add production costs," he warned.
Pena suggested that price management would be an essential part of a five-month retained ownership commitment on small grains.
A price base for the steers next spring, he noted, could be established by selling a feeder cattle-futures contract or buying a put option contract. After option costs and commissions are deducted, a price base of about 95 cents per pound (based on Aug. 30 prices) could be established with an April 2006 put options contract. Using the same basic assumptions, this alternative would erode profits to about $13/head, he said.
"Any pricing alternatives that are utilized should provide a floor price, yet keep any price improvement open," Pena added. "These alternatives include buying a put option and/or using a minimum price contract."
