Value of Gain: Projections and available decision tools

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Source: Glynn T. Tonsor, Associate Professor, Department of Agricultural Economics, Kansas State University

This is the time of year many cattle producers examine the return for additional weight gain.  Cow-calf producers interested in retaining ownership as well as stocker and backgrounding operators who possess or may procure necessary resources for adding weight to calves need value of gain projections to guide their decisions.  Perhaps the most common approach is to take prices for two different weight classes of cattle in the current cash market place, derive the increased total value implied by today’s cash prices, and divide by the total weight gain.  This approach may be referred to as a naïve approach.  While this naïve approach is simple to understand it assumes what we are observing today will hold for some point in the future.  Alternative approaches may utilize information from the feeder cattle futures market combined with basis forecasts.  These “forward looking” approaches are more consistent conceptually with the inherent change in market timings associated with the biological process of adding weight and selling an animal at a future date.

To examine the accuracy of these different approaches, I recently worked with Dr. Kevin Dhuyvetter to compare them in the context of a common situation in Kansas.[1]  We examined the case of buying a 550 lb steer in the current month and selling it at 750 lbs three months later using the Salina, KS market for appraisal.  Using an evaluation period of January 2007 to July 2012, we found the naïve approach to perform worse (be less accurate) than forward-looking approaches.  The main implication of this for cattle producers is to not simply use information solely from the current cash marketplace as a projection for value of gain in the future.  This suggestion is further supported by recognition of futures market and basis information being readily available online enabling replications of this exercise for alternative markets and situations.  Producers may also find useful the value of gain projections (which are derived using a forward-looking approach) for the Salina, KS market which are updated daily (in collaboration with Custom Ag Solutions using BeefBasis.com information) and readily available at http://www.agmanager.info.[2] 

Producers need to appreciate that all efforts to forecast are subject to prediction error.  That is, no approach is perfect and no "crystal ball" exists no matter how much we desire one.  Accordingly, analysts and producers alike need to step back periodically to assess the relative accuracy of different projection approaches.  Producers would be well served to recognize when alternative approaches are found superior to those more commonly applied and to seriously consider utilizing this information.  This recognition and willingness to adjust, coupled with use of information noted here and corresponding decision tools available online will guide improved decision making. 

The Markets

Cattle prices in several markets and weight classes were up last week.  Fed cattle prices were higher trading at over $123/cwt on a live weight basis and nearly $191/cwt on a dressed basis.  Nebraska yearlings traded higher at over $150/cwt while Nebraska calves were up over $5 and traded at nearly $169 for the week.  Corn prices were down about $0.27/bu for the week.

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[1] Interested readers are encouraged to view the corresponding fact sheet available at http://www.agmanager.info/livestock/budgets/production/beef/KSU_FactSheet_ValueOfGainForecastingApproaches.pdf.

[2] The specific webpage is: http://www.agmanager.info/livestock/marketing/graphs/Cattle/Prices/VOG.asp



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