Playing the hand we're dealt

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Looking at the year ahead, we know a few things about factors beyond control of the rancher. Cow herds are smaller and calf supplies will be tight. Calf and yearling prices likely will climb to new heights while production costs will challenge profit margins.

So given this mixed hand of a market outlook, what can cow-calf producers do to beat the averages? More than ever, ranchers with the best control of production costs have an “ace in the hole,” but investments in adding value also can provide a winning hand at sale time.

Over the next few years, marketing won’t be the main concern for most producers, says Oklahoma State University Extension livestock marketing specialist Derrell Peel, PhD. The biggest questions for ranchers are whether they will have any cattle to market and whether they can manage their production costs.

When calf prices and production costs are high, Peel notes, there is some tendency for producers to back away from some “value-added” practices. But due to their large investment in cattle and inputs, any death loss hits feeder or stocker margins harder than ever. That high level of investment provides incentives for buyers to manage risk by paying premiums for some assurance calves will stay healthy.

Know your customer
Research has consistently shown documentation of attributes such as health practices, age, origin, breeding and other details can add value to calves (see sidebar). Securing those premiums, however, requires some planning.

Sometimes we tend to “put the tail ahead of the horse” in pursuing value-added premiums, says Chris Reinhardt, PhD, Kansas State University feedyard specialist. Producers hear that if they do certain things, they will add value to their calves. So they do them, take their calves to their local auction and they sell for the same price as all the other calves.

Reinhardt encourages producers to identify their market first, then select the management systems and documentation that fit that market. Some feedyards or order buyers will pay for attributes such as verified preconditioning; age, source or process verification; natural production; or others. Some auction facilities hold special value-added sales that attract buyers who are willing to pay extra for calves that meet their specifications, especially if they can put together load lots of similar cattle. Ranchers, Reinhardt says, should seek out these market channels, confirm what they want and what they will pay for it, then produce calves with those specifications, assuming the premiums justify any added production costs.

John Patterson, director of producer education at NCBA, agrees, saying ranchers often are very good at production but not as good at marketing. “The first thing I ask producers in discussing marketing is ‘who is your customer?’” He recommends identifying a market before initiating value-added processes, and takes it a step further, suggesting ranchers follow up with their buyers. If your calves went to a feedyard or a stocker operation, give the manager a call a few months later to ask how they did. If there were health problems, identify what can be done to prevent them next time. These steps can help develop a reputation for a rancher’s calves and a long-term relationship with a buyer that can pay off over time.

Add weight
As feeder cattle prices continue upward, one of the best ways to add value is to add pounds, assuming you can keep costs below the value of gain.

This spring’s calves potentially will have record-high value, and some early planning can help optimize that value and boost ranch returns at sale time. Peel says the high cost of gain in feedyards helps drive the value of gain in backgrounding or stocker operations, and we’ll continue to see strong incentives for forage-based gains. Market prices have reflected demand for heavier feeder cattle, and Peel expects that trend to continue. Calf prices per hundredweight this year have tended to follow the typical slide, up until about a 550-pound weaning weight. From there, prices have declined less than usual for heavier weight classes. This means the value of gains beyond weaning are increasing, and Peel expects to see incentives for adding forage gains out to the heavy end of the yearling market.

Peel says developing a backgrounding or stocker enterprise could be a good option for cow-calf producers as their forage conditions improve. Many ranches currently are understocked, meaning they could have enough forage to retain their calves beyond weaning, targeting a yearling market or a replacement-heifer market instead. Some might be able to bring in additional calves on a seasonal basis, as they gradually rebuild their cow herds. Reinhardt also believes demand for heavier feeder cattle will grow. Feedyards want efficiency, he says, but they also want cattle that will get up on feed and stay healthy. Yearlings give up some feed efficiency relative to calf-feds, but they compensate with better health and less labor. There is a growing opinion in the consulting community that each animal pulled for treatment in the feedyard adds at least $50 in total costs.

Ranchers, Reinhardt says, are getting creative in finding ways to keep their calves longer, using alternative feeds to supplement hay and forage to grow them to heavier sale weights. “I don’t even say low-cost anymore,” in reference to feeds, he says. Instead, he focuses on the value of gain versus the cost of gain. Look at the feeder cattle futures board for February or March and calculate how much the gain will be worth compared to the cost.

Cattle feeders generally are not concerned with calf implants, Reinhardt adds, unless they are looking for calves to fit natural programs, and ranchers can benefit more than ever from implanting. If an implant added 20 pounds to weaning weights when calves were $100 per hundredweight, it still adds 20 pounds with calves worth $160. But the extra gain is worth $32 instead of $20.

Market genetics
Cattle-Fax analysts note a trend toward wider gaps between the value of USDA Choice versus Select cattle. Restaurant demand for Choice steaks, and supplies of those middle-meat cuts, drive seasonal fluctuations in the Choice/Select spread. Declining slaughter numbers means shorter supplies of Choice middle meats. Management practices in response to high feed prices, such as shorter feeding periods and more aggressive implant programs, also could reduce the percentage of cattle grading Choice. These factors are likely to result in wider Choice/Select spreads and opportunities for ranchers who market calves with high marbling potential. As of mid-December, the spread between the value of Choice and Select boxed beef stood at about $20 per hundredweight, compared with about $12 for the five-year average for the same time period. Reinhardt encourages producers to pay attention to EPDs for a variety of maternal and performance traits. Buyers typically don’t want to know the full pedigree of feeder calves, but they value assurances the calves will perform through later production stages. Producers who have feedyard performance data from previous calf crops have a marketing advantage with buyers.

Think in the long term
Calf implants can increase weaning weights, and this year more than ever, more weight means more cash. Even with the best weather conditions, the rebuilding process will be long and slow, bringing multiple years of strong prices for all classes of cattle. Herd numbers are down across North America, Peel says. Mexican producers have liquidated herds over the past three years and have not begun rebuilding. Canada’s numbers are down, although producers there are beginning to rebuild. Peel adds that some drought-damaged rangeland could take several years to return to full productivity even if moisture conditions improve. He projects it will take at least until 2016 to bring U.S. beef cow numbers to the level they were at the beginning of 2011.

Once forage supplies recover, female prices are going to be “out of this world” as producers work to rebuild herds, Peel says. Any heifer with potential to produce a calf will have tremendous value.

In some parts of the country, ranch owners are sitting on piles of oil money, just waiting for better conditions to restock their land with cows. They will create demand for females, but for most producers, rebuilding will be a slow process due to the investment required. These producers will face a dilemma in deciding whether to cash in on heifer calves or rebuild their own breeding herds. But once weather allows rebuilding to begin in earnest, supplies of feeder calves will shrink even further as more heifers stay on the ranch, driving prices even higher over several years. Ranchers who can add females to their herds, or perhaps incorporate a yearling program while slowly rebuilding their breeding herds, will be in position to benefit over the long term.

Meanwhile, consumers will continue to drive demand for more information on the background of the beef they buy. Patterson notes the 2011 national Beef Quality Audit clearly shows that retailers, foodservice operators and consumers increasingly want to know where their beef comes from and how cattle were raised. It is likely that more marketing channels will reward producers who provide information that gives value to consumers. Overall, the industry just needs to become more transparent, Patterson says, so consumers are not getting all their information (or misinformation) about beef production from activist groups.

NCBA and the Beef Board have developed a Cow-Calf Assessment tool, a simple checklist to help ranchers identify areas for potential improvement and change practices that could create a negative public image. “Do you have a ranch you would be proud to show to urban visitors who know nothing about ranching?” Patterson asks. “If not, let us help you.”

 

Sidebar: The value of ‘value-added’
Specialists believe good management, such as adhering to BQA practices, preconditioning and weaning calves, is simply the right thing to do. Research has also shown that specific programs, attributes or verifications can generate premiums, but some offer greater or more consistent value to buyers.

During his time on the faculty at Montana State University, John Patterson analyzed data on over 60,000 calves marketed through Superior Livestock auctions in Montana. He found four key traits that correlated with premium prices at auction — black hide, groups of at least five calves, verified preconditioned with a seven-way blackleg vaccine, four-way respiratory plus pasteurella vaccines, and verification of age and source.

Premiums for age verification might drop off if Japan agrees to change its age restriction from 20 months to 30 months for U.S. beef, but the other three continue to be in demand, he says.

A recent research project at Kansas State University tracked more than 30,000 lots of calves sold through Superior Livestock video auctions between 2004 and 2010. The results show that higher levels of preconditioning and weaning on the ranch generally add more value. Calves with one non-certified round of respiratory vaccination earned premiums in three of seven years, with the premiums ranging from $1.15 to $2.13 per undredweight. In contrast, a certified VAC 45 program, which specifies two rounds of vaccinations and 45 days of weaning on the ranch, generated premiums in all seven years ranging from $6 to $7.90 per hundredweight.

Calves eligible for natural programs earned premiums in just three of seven years, ranging from 49 cents to $1.17 per hundredweight. Calves qualifying for the NHTC program, which began in 2008, earned premiums in two of three years, with the premiums ranging from $1.77 to $2.70 per hundredweight. Age and source verification added to calf value in all six years since the program began in 2005, but those premiums ranged from just 92 cents to $2 per hundredweight.


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