Prices for 500-600 lb steer calves have been close to $267/cwt in the last couple weeks in South Dakota auction markets. The highest weekly average price was $270.25/cwt for the week ending July 11, 2014. However, calf buyers are paying premiums for 500-600 lb calves for fall delivery. Last week’s Superior Livestock video auction saw prices averaging $280/cwt for 500-600 lb calves for October delivery. At these lofty price levels, it is appropriate for buyers to carefully evaluate the backgrounding and finishing margins for these calves.
At $280/cwt, a 550 lb steer calf for October 2014 delivery costs $1540/head. If that steer calf is backgrounded for 111 days and gains 2.25 lb/day, it will reach 800 lb by February 3, 2015. The March 2015 Feeder Cattle futures is currently trading at $210/cwt and basis for an 800 lb steer in early February in South Dakota averages close to -$2.00/cwt. So, a futures-based price forecast (or a price that could be hedged) for the feeder steer to be sold in February is $208/cwt, or $1664/head. Thus, there is only a gross feeding margin of $124/head. To add 250 lb to the steer calf for $124/head requires the cost of gain to be below $50/cwt. In other words, based on the prices currently offered in the cash forward and futures markets, the breakeven cost of gain is $50/cwt.
Corn prices have certainly decreased in recent weeks and prospects for lower corn prices at harvest appear good. At this point, a cash price of about $3.15/bu could be locked in for fall delivery. For a backgrounding ration that consists of 37% corn (dry matter [DM] basis), 28% wet corn gluten feed (WCGF) valued at $48/ton, 30% hay costing $140/ton, and 5% supplement priced at $200/ton, the ration would cost $128/ton (DM basis). Feed conversion is projected to average 6.7 lb of feed per lb of gain. Also included in the budget are yardage ($0.45/head/day), interest (6%), death loss (2%), and marketing expenses ($1.30/cwt). These costs total $248/head or nearly $99/cwt. Thus, based on these price projections, backgrounding these steers would result in a loss of $124/head.
Budget projections for finishing those fall-placed steer calves aren’t any better at this time. If the steer calf gained 3.5 lb per day until reaching 1,300 lb, it would reach slaughter weight around May 17, 2015. Currently, June 2015 Live Cattle futures are trading near $147.70/cwt. Fed cattle basis is typically about -$1.00/cwt in late May. So, the futures-based price projection for the slaughter steer is $146.70/cwt or $1907/head. Therefore, there is a $367/head margin to add 750 lb to the steer calves. So, the breakeven cost of gain is again about $49/cwt. Using the same input prices and expenses as in the backgrounding budget but adjusting the ration to a finishing ration (comprised of 47.5% corn, 40% WCGF, 7.5% hay, and 5% supplement) and improving feed conversion to 6.2 lb of feed per lb of gain, total feeding expenses are $497/head, or about $66/cwt. Thus, finishing the steer calves under these assumptions results in a projected loss of $130/head.
Of course, each producer will have his/her own costs and cattle performance assumptions, so cost of gain for backgrounding and finishing will differ widely from these average projections. Still, these examples provide a framework to use in evaluating backgrounding and finishing margins for fall contracted calves. Based on futures market prices for yearling or slaughter steer sales, weight would have to be added for less than $50/cwt to be profitable. For some producers, this is a real possibility. Others will not be able to feed cattle this cheaply despite declining corn prices.
Another consideration in these assumptions is the futures-based price forecasts that were used for the selling prices are based on current futures prices that have built significant “risk premium” into their prices. In other words, futures markets have not traded as high as cash markets, leading to a stronger than normal basis. This makes hedging relatively tight backgrounding and finishing margins into these markets somewhat difficult. Cash forward contracts or a combination of basis contracts and futures or option positions might be used to improve returns in backgrounding or finishing rations.
A final consideration for buyers contracting fall calves is the financial requirements and liquidity needed to background or finish calves. It has never been higher! Purchasing 550 lb steers for over $1500/head and spending another $200-500/head on feed and other inputs requires significant working capital and lines of credit. And, it presents sufficient risk for most producers that protecting the cattle sales price using some type of minimum price hedge is necessary.
Source: SDSU iGrow