Your calves will be worth less this fall than last year, and the year before that. But you consider yourself fortunate because you’ve been hearing about the wreck in the feeding industry for months. All told, the cattle industry has lost more than $5 billion in equity over the past 18 months, most of which was recorded on feedlot closeouts. So retaining ownership of your calves might seem foolish — but it’s worth a look this year, economists say.
“The market risk for retained ownership is reduced this year,” says John Nalivka, president of Sterling Marketing, Vale, Ore. “Prices for feeder cattle are lower, which is your opportunity cost, and the price of feed is substantially lower than the past two years.”
Iowa State University Extension economist John Lawrence sees a similar scenario that may warrant a closer examination of retaining ownership. In addition to lower grain and feed prices this year, Lawrence says cattle markets will take time to recover, and retaining ownership will help buy time for a rally to occur. He notes that the futures markets reflect that higher cash prices may materialize late this year.
Another factor, Lawrence says, is “feedlot losses will make them cautious bidders on feeder cattle this fall, and they will likely need to have a turn or two of profits before they bid up on feeder cattle.” That would suggest retaining ownership, at least through a backgrounding phase, could help calf producers buy time to sell into a stronger market.
Push a pencil
Any consideration of retaining ownership must start with the price you can get on your cattle now. Nalivka notes that even though the price of yearling steers is lower than last year, they “are still pretty healthy,” and that would have to be a major consideration.
“The sharp drop in feed costs can be deceiving,” Nalivka says. “It’s a reality that the largest share of the cost in the feedlot is the cost of the cattle. When considering retained ownership, it is even more imperative that producers receive enough value for the risk they shoulder. I don’t believe an extra $25 per head is enough! And we must not bet the ranch on overly optimistic assumptions.”
Still, holding your calves past weaning in a backgrounding phase may prove beneficial, especially if it allows you to utilize feed and other assets you already have.
“Much of the decision depends on a producer’s resource base,” Lawrence says. “Do they have the facilities, labor, feedstuffs and expertise to background their own cattle? Or are they hiring it done at a custom yard?”
The same decision process should be applied when considering whether to finish those same cattle. “For example,” Lawrence says, “you may have the feedstuffs and equipment to feed cattle to gain 2.5–3 pounds a day on a high roughage diet to 800 pounds, but not the feedstuffs, facilities or packer bids to finish them. But backgrounding them would allow you to sell feedstuffs, facilities and labor that may not otherwise generate any income.”
Regarding a backgrounding program this year, Nalivka says he is “much more optimistic about this option because the lower feed costs will have a greater impact — especially with declining feeder-cattle supplies and so much feedlot overcapacity.”
And, he says, a backgrounding program can give you that much needed flexibility. You won’t have to make a hard decision on whether or not to finish the cattle — either at home or in a custom feedlot — until the calendar says 2010.
“If the costs are right — and they seem to be stacking up that way this year — backgrounding cost of gain should be in the ball park. And next spring when we know more about the recession and its effect on our cattle markets, a guy can sort through the cattle for retained ownership or simply sell everything.”
Although historically high grain and fuel prices the past two years have made cattle feeding extremely risky, those costs have settled back into a more manageable range. That makes a historical perspective of retained ownership more meaningful.
Lawrence suggests producers who are considering retaining ownership this year examine two reports from Iowa State University. The first, “Alternative Retained Ownership Strategies for Cow Herds,” examines factors to consider in making a decision to retain ownership and evaluates the returns and risks for selected strategies over the 1983–2004 calf crops.
Summarizing his examination of various marketing strategies described in the report, Lawrence says cow herds that sold calves at weaning earned positive returns in 2000, 2001, 2003 and 2004, but lost money on the six calf crops from 1995–1999 and 2002. The 1995 calf crop losses were the largest in the series.
Cow herds that retained ownership into the feedlot suffered losses in only two years in the last 10. The early weaning strategy, on average, was most profitable among the strategies examined. In some years, 1983–1985 and 1995–1997, cow herds lost money under all strategies.
Retained ownership alternatives examined added value to the cow owner’s resources in most years. It paid market rates for the calf, feed, capital, labor and facilities and produced a profit. Compared to selling at weaning, retaining ownership until slaughter increased average profits. In individual years the return was over three times higher. Still, Lawrence says, no one strategy is most profitable every year.
Push calves hard
A second analysis of finishing fall-weaned calves suggests the most profitable program is to push the calves hard in the feedlot. “Alternative Cattle Finishing Systems to Reduce Feed Cost” was a study conducted at Iowa State by Lawrence, Dan Loy, Darrell Busby and Joe Sellers that compared four different feeding systems for calves using six different rations.
In general, Lawrence says, “our analysis indicates that feed and total costs are lower and profits are higher for shorter backgrounding periods. The program that had the lowest feed cost of gain and total cost, and highest net return did not have a backgrounding period. It had the highest net return in spite of having lower revenue per head.”