For the past few years, most producers faced easy decisions regarding when to sell their calves. High market prices assured good profits for calves sold at weaning or soon after, and ranchers saw little need to take on the risk of owning cattle through growing or finishing programs.
Markets and economies eventually change, and this year they certainly have. Grain prices and other factors have driven feedyard cost of gain through the roof, and as their losses escalate, cattle feeders will prefer to place heavier cattle.
These conditions will encourage some cow-calf producers to evaluate their options for owning their calves longer, adding value through a post-weaning growing period or through finishing. But the answers are not clear-cut, and individual producers will need to work the numbers based on their own resources and production environments.
University of Nebraska Agricultural Economist Darrell Mark, PhD, notes that as a rule of thumb, each 10-cent increase in the price of a bushel of corn results in a $1 per hundredweight decline in feeder-cattle prices. Actual pricing data from 1980 through 2005 follow that rule, with each $1 per bushel increase in corn price driving feeder-cattle prices down by $9 per hundredweight.
But through 2006 and 2007 a different trend emerged. Not only were feeder-cattle prices higher than in past years, their response to rising corn prices was significantly less. During those years, a $1 increase in corn price only led to a $3 per hundredweight decline in feeder-cattle values.
The reasons behind this shift — tighter calf supplies, excess feeding capacity and availability of byproduct feeds — could play a role in decisions regarding retaining ownership.
Agricultural Economist Dillon Feuz, PhD, at Utah State University, says feedyards have lost money for most of the past two years, and as the losses become more severe, they will bid lower on feeder cattle. But their desire to fill pens, and perhaps some optimism regarding a big corn crop and a strong fed-cattle market, could limit the downward pressure on calf and feeder prices.
With calf prices at least somewhat lower than past years, Feuz says there could be an opportunity for ranchers to increase returns by putting 200 to 300 additional pounds on their calves, if they can do it economically. Cost of gain in the feedyard is running about $85 per hundredweight, he says, so producers need to determine whether they can put gains on their calves for less than that. If you have access to winter grass, corn stalks or other forage and inexpensive supplements, and can grow calves at $10 to $15 per hundredweight less than the feedyard, you could improve returns about $30 to $40 per head, he says.
Mark agrees that production costs are key and provides this example. Think of a 550-pound calf weaned in October. Based on current futures prices and historical basis for Nebraska, the sale price at weaning would be about $123 per hundredweight or $675 per head.
If you keep that same calf for another 150 days, growing it to 750 pounds and selling it in March, futures and historical basis suggest a price of $113 per hundredweight or $850 per head. So, the additional 200 pounds of gain are worth about $175, meaning cost of gain needs to be below $85 per hundredweight for the program to pay.
Feuz says producers also should watch their marketing windows. Last year, there was a period early in the fall when the value of five-weight calves dropped lower relative to six- and seven-weights. Later in the season, the value of the heavier calves declined, so depending on when calves were weaned and their weights coming into the fall, there was a window in which the heavier calves could have done well.
Historically, when calf and feeder prices move lower, retaining ownership through finishing becomes a viable option. But today, Feuz says, market volatility and tight feeding margins bring considerable risk to the cattle-feeding enterprise.
Mark provides a finishing scenario based on that same five-weight calf weaned in October, placed in a finishing program and fed for 210 days to 1,200 pounds for marketing in June. Based on current futures prices you could hedge a selling price of $100 per hundredweight or $1,200 per head. The 650 pounds of gain is worth $525. With yardage and other expenses, cost of gain needs to be about $70 or less per hundredweight to improve returns over selling the calf at weaning. Actual cost of gain is likely to average closer to $90 per hundredweight.
There are exceptions, and some ranchers will have opportunities to profitably retain ownership through finishing, particularly if their feedyard has access to low-cost byproducts or other non-traditional feed ingredients. Producers who have performance history on their calves, know they can gain weight efficiently, produce a high value to the packer, and perhaps fit a premium, value-based grid could project good returns, Feuz says. They can beat the average in feedyard performance and sale prices, as opposed to selling their calves or yearlings at the market average price.
Pencil it out
Mark stresses that corn prices are not the only variable affecting the economics of retaining ownership. Prices for byproduct feeds, hay and other roughage also are high and volatile, as are land rents. A recent Nebraska survey shows pasture rents, either on a per-acre or per cow-calf pair rate, increasing 7 to 23 percent over the past year. So even in forage-based growing systems, cost of gain can vary widely.
Mark cites an example of a graduate-level economics class he teaches. He assigned teams of students, with combined experience in agricultural economics and animal nutrition, to develop models for retaining ownership of calves beyond weaning. Each team could choose production systems, feed ingredients and marketing programs based on current prices. Half of the programs were profitable, and the other half lost money. It depended on variables affecting production costs, such as forage availability, pasture rents and whether they were able to forward contract feed ingredients at low prices.
He concludes that, depending on the production environment and local access to feed ingredients, some producers will be able to make growing or even finishing programs profitable this year. They might, however, need to be more creative than ever in finding ways to control production costs.