Backgrounding enterprise profitability tied to feed costs

Kansas Farm Management Association (KFMA) data indicate the backgrounding enterprise has not been particularly profitable over the last ten years. Evaluation of five-year average net return, total cost per hundred (cwt), feed cost per cwt, and feeding cost of gain for backgrounding can be used by producers as a benchmark for their own backgrounding enterprises.

click image to zoom Using KFMA data, the only years that had a positive return over variable cost during the last ten years were 2003, 2004, 2005, and 2010. With relatively higher feed grain prices during the last several years, it has been difficult to control costs. Figure 1 presents average feed cost and total cost per cwt for the backgrounding enterprise from 2001 to 2010. Costs per cwt were the highest in 2007. Though lower than that experienced in 2007, cost per cwt in 2008, 2009, and 2010 was still substantially above levels experienced from 2001 to 2006. Due to unique circumstances pertaining to a particular year, it is often difficult to benchmark using just one year of data.

click image to zoom With that in mind, Table 1 presents average gross income per head, total cost per head, and net return per head for the 16 KFMA farms with continuous backgrounding enterprise data from 2006 to 2010. The average weight produced per head was 377 pounds. The average difference between purchase price and sale price was $19.14. The average ratio of purchase price to sale price was 1.20. Feed cost per head accounted for 57 percent of total cost per head. Feed cost includes purchased and raised feed. The cost of raised feed is computed using the opportunity cost of feed grains, hay, and other feedstuffs produced by the farm and utilized by the backgrounding enterprise. The average net return to management was -$56.28. Of the 16 farms, 1 farm had a positive net return to management and 11 Beef Tips farms had a positive return over variable costs.

Feed cost per cwt is not the same thing as feeding cost of gain. The later is often used when discussing cost for finishing cattle. Feed cost per cwt is computed using information pertaining to feed cost and weight produced per head. The average feed cost per cwt for the 2006 to 2010 period was $57.75. Feeding cost of gain is typically computed using all costs except interest on the feeder. Average feeding cost of gain for the 2006 to 2010 period was $91.09.

Factors impacting feeding cost of gain
Producers know that cattle performance and feed prices can impact feeding cost of gain. Data from the Focus on Feedlots newsletter provides monthly data on average daily gain, feed conversion, days on feed, in weight, out weight, feeding cost of gain, and inventory prices for corn and alfalfa. Figure 2 illustrates monthly feeding cost of gain for steers from January 2000 to October 2011. Average feeding cost of gain over this time period was $63.26 per cwt. Feeding cost of gain has been above $80 per cwt since January of this year. The only other period over the last ten years that had a feeding cost of gain above $80 was the April 2008 to May 2009 period.

Feeding cost of gain can change dramatically as cattle performance and feed price change. Regression analysis was used to examine the sensitivity of feeding cost of gain to changes in feed conversions, corn prices, and alfalfa prices. Feed conversion and feeding cost of gain data were obtained directly from the Focus on Feedlots newsletter. Corn and alfalfa prices were computed using average inventory prices for the previous four months. This procedure ensures that the feed prices are correctly matched with the closeout month associated with the feed conversion and feeding cost of gain data.

Results of the regression analysis are as follows: each 0.10 increase in feed conversion increases feeding cost of gain by $1.01 per cwt, each 0.10 per bushel increase in corn prices increases feeding cost of gain by $1.11 per cwt, and each $5 per ton increase in alfalfa prices increases feeding cost of gain by $0.34 per cwt. Of course, market forces change corn and alfalfa prices. Feed conversion changes are due to improvements in technology and feeding practices that improve feed conversion, the type of cattle being fed, and the seasonality of performance. This article illustrated the sensitivity of feeding cost of gain to changes in cattle performance and feed prices.

Further information on the backgrounding enterprise as well as the backgrounding and finishing enterprise can be found on the KFMA web site (www.agmanager.info/kfma). Cattle finishing returns are updated monthly and can be found at AgManager web site: www.agmanager.info.

Source: Michael Langemeier, agricultural economics

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