A year to forget?

It is no secret that compared to recent years the 2016 calf market will be disappointing for sellers. However, producers must make decisions about their 2016 calf crop. There are options available depending on each situation. Some popular press articles have suggested that cow-calf producers should retain ownership to enhance profitability. However, producers should make sure they consider all factors before changing marketing plans to increase their chances for success.

Sell at weaning

Selling directly at weaning is one option many operations utilize. For those with limited feed, facilities, or capacity to manage calves post-weaning this may be the best choice. These producers eliminate risks associated with post-weaning performance or death losses, but they also give up any opportunity to capture the opportunity for price improvement and for adding value to home-grown feeds. Price protection options for selling directly off the cow are available in the form of Livestock Risk Protection insurance or utilizing the options market, depending on when one weans. While each of the risk management tools has some additional cost and limitations associated with it, those that implement them have a level of price protection in place others do not.

Figure 1 shows the weekly South Dakota 2016 Medium and Large #1 Steer Calf Prices, compared to 2015 prices and the 2010-2014 average price. The average price of $170 per hundredweight ($/cwt) is close to $100/cwt lower than a year ago, and $30 lower than the 2010-2014 average. As long as the prices are at or below production costs, per calf weaned, this is a profitable venture for these operations.

Figure 1. Medium and large #1 steer calf prices.
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Table 1 shows an example beef cow budget that raises a calf from breeding to weaning and results in a breakeven of $618. If the weaned calf weighs (Beef Cow Budget) 450 pounds, at $1.70 per pound the total value of the calf is $765. Producers need to assess their own budget to determine if this is a profitable decision.

Table 1. Sample Beef Cow Budget

Beef Cow Budget

Cost per Head

Feed Expenses-Grain and forage

$409.00

Average Bull Value per Cow

$50.00

Replacement Value per Cow

$70.00

Other Direct Costs

$51.00

Indirect Costs

$38.00

Total Cow Costs-Breeding to Weaning

$618.00

 

Pre-conditioning

Another common option is to pre-condition the calves for a short period following weaning. Pre-conditioning allows calves to begin eating a concentrate or other grower diet and ensures the producer has completed all vaccination protocols. Most programs call for calves to be weaned for 45 days before being sold. There may be an opportunity for price improvement for pre-conditioning calves as they should have a lower risk for sickness compared to calves that were weaned at sale-time. Similar risk management tools are available for these calves in the form of LRP or options.

Producers considering this option must evaluate the feed, labor, and management availability compared to the expected gain or improved market price received. There is an increased management requirement and additional risks of sickness and death loss during the first few weeks on feed. Unexpected problems during the weaning and starting phase can result in increased expense that may be difficult to recover at sale time.

The additional component of pre-conditioning is the change in value for a heavier calf. Figure 2 shows the weekly Average South Dakota Medium and Large #1 500 to 600 pound Steer calf prices.

Figure 2. Medium and large #1 steer calf prices.

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Backgrounding

Backgrounding is another standard option for South Dakota producers. Depending on location, the method used to background calves can be very different. The protocols, expenses, feed resources and labor requirements for each method vary, so producers should accurately assess this option before implementing it as part of your operation. Many are familiar with backgrounding calves on grass over the winter on range ground and then selling these calves in early spring, or holding them through the summer and selling them as “long yearlings.” Others will background in a feedlot system where the animals are fed a total mixed ration until they reach the goal end weight. Each of these feeding options has pros and cons to them and those need to be evaluated by the producer.

Using a budget will help determine if an opportunity truly exists, and provides a breakeven price to implement a risk management protocol to mitigate market risk. Table 2 shows a budget comparison for these backgrounding options.

Table 2. Budget comparison for backgrounding options.

Background Method

On Grass to April

On feed 100 days

Initial weight #

550#

550#

Initial value @$150/cwt

$825.00

$825.00

Feed*

$120.00

$81.70

Vet

$25.00

$25.00

Supplies

$10.00

$10.00

Marketing

$15.75

$15.75

Other Indirect Costs

$48.71

$48.71

Exit weight

550#

800#

Exit value @ $150 & $125/cwt

$825.00

$1000.00

Profit/Loss**

($219.46)

$6.16

*feed accounts for 6 months @ $20/aum and 100 days of a balanced ration.
**Each producer must evaluate his or her operational costs to create an accurate backgrounding budget.
 

Larger weight feeder cattle traditionally receive lower prices per pound, as shown in Figure 3. The timing of the sale and accurately anticipating what the animal will weigh are critical components of this backgrounding budget. As South Dakota winters have proved unpredictable in the past, producers should consider the effect of forced early sales due to unusual snowfall amounts.

Figure 3 shows the decline in the weekly average price for 700-800 pound medium and large #1 feeder steers since 2015 and compared to the 2010-2014 average prices.

Figure 3. Medium and large #1 feeder steer prices.

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Futures and projections

There is upside potential for the 2016 feeder calf market. The September 16, 2016 USDA-ERS Livestock, Dairy and Poultry Outlook projects fourth quarter feeder cattle prices at $143-149/cwt, first quarter 2017 at $149-159, and second quarter 2017 at $146-156 (Figure 4). These projections are above current feeder cattle futures prices.

Retaining ownership of the weaned calf would allow producers to capture those projections. Utilizing Livestock Risk Protection (LRP) insurance or a put option could provide bottom-side price protection.

Figure 4. Feeder cattle futures and projections.
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The bottom line

In addition to knowing feed expenses and market trends, outside factors will continue to affect the cattle markets. Producers will need to be proactive with their marketing and risk management plans to mitigate losses. Waiting for the next market shock is not a sustainable marketing plan.