by Dr. Dillon Feuz, Utah State University
I was in Casper, Wyoming the first week of December speaking at the Range Beef Cow Symposium. This bi-annual event is well attended and considered by many to be the premier conference for cow-calf producers. While it is hosted by the four states of Colorado, Nebraska, South Dakota and Wyoming, there are almost always producers and speakers from outside this area. I consider it to be an honor to be invited to speak at the conference.
I was asked to speak on the economics of different production systems. I took that to mean an evaluation of a cow-calf only operation compared to a cow-calf yearling operation. There are numerous different types of yearling or backgrounding operations. Ranchers may hold weaned calves for about 100 days and put anywhere from 100 to 250 pounds on the calf and then sell it in February. At the other end of the retained ownership spectrum, ranchers may “rough” the calves through the winter and then graze them on grass all summer and even into early fall. These calves may be over 18 months of age and weigh more than 1,000 lbs when sold. Between these two types of programs are a myriad of other alternatives: short season and graze out wheat pasture programs, corn stalks grazing, dry lot with hay, range grazing with supplements. The calves may be sold at the end of any of these programs or they may be retained for another 90 to 180 days on grass.
There is a challenge to evaluating the economics of each of these systems. I looked at several alternatives including just looking at the historical returns from each of these, predicting the futures returns from each of them and simulating the past and future returns when several factors are allowed to vary, such as market price or average daily gain. Each of these methods of analysis tells a different story and provides insight, but each also suffers from one major weakness: I assume a certain type of program. By that, I mean I have to pick an average daily gain, the number of days on feed, a starting weight of the calf and several other factors. When my analysis is done it makes for a nice presentation, everyone tells me it is interesting, but almost all producers leave not knowing exactly how their operation compares because they have a different calf starting weight, or they target a higher rate of gain, or they remain in the program for a shorter or longer period of time and thus sell in a slightly different market with a different yearling weight.
In searching for how to make my presentation more useful to all, I realized that there are two key factors that determine the profitability of all retained ownership alternatives. The first is the direction of the market during the retained ownership program. If the overall market level moves higher, then producers are almost sure to make money and conversely if the market level moves lower, producers almost sure to lose money. Now don’t expect me to be very good at telling you which is going to occur. The other key factor is the overall cost per pound of gain in the program compared to the overall feedlot cost per pound of gain. If you can add weight cheaper outside of the feedlot, you can frequently see a positive return to do so.
The reason this relative cost of gain is so important, is that feeder cattle prices are determined primarily by the expected cost of gain in the feedlot and the expected fed cattle price. Consider the following example: for the week ending Nov 28, 2009 the following prices were observed at Nebraska auction markets (750 lb steers $99/cwt, $743/hd and 550 lb steers $109/cwt, $600/hd). The added value for 200 pounds was $143/hd or about $.715/lb ($143/200). Data Transmission Network (DTN) estimated the total cost of gain to be about $.71/lb for the same time period.
Here is another approach that results in the same type of conclusion. In the middle of November, June Live Cattle futures were trading at $85 per cwt. For a 1,300 lbs fed steer that would be an expected gross return of $1,105 per head ($.85 * 1300 lbs). If the cost of gain in the feedlot was expected to be $.69/lb, than adding 700 pounds to a 600 lb steer would cost $483 per head. To make any money (expected money) feedlots would have to buy a 600 lb steer for less than $622 per head ($1,105 – $483). The market price would have to be less than $1.04 per lb ($622/600 lb). For the week ending November 14, the price for 600 pound steers in Nebraska auctions averaged $1.03 per pound.
The markets are fairly rational. They usually contain more information in them then most people realize. Therefore, my analysis of alternative retained ownership programs became simpler. You the producer simply need to evaluate your expected cost of gain and then compare it to the expected cost of gain in a feedlot and you can project your expected return. For example, suppose you plan to retain a 500 pound calf through the winter and the keep it on grass next summer. You expect to sell a 900 pound yearling at the end of the program. You are therefore putting on 400 pounds of gain. Now suppose that you estimate you can add that gain for $.50 per pound and that the feedlot cost of gain is expected to be $.70 per pound. Your expected return to the retained ownership program would be $80 per head ($.70 – $.50 = $.20 * 400 = $80). I say your expected return, because if the overall market trends lower over the time period you will earn less and if the overall market trends higher you will earn more.
But, the key to the long term success of a retained ownership program outside of a feedlot is to be able to add weigh cheaper than the feedlot. And you can take that rule of thumb to the bank.
Dillon has a good website called Feuz Cattle and Beef Market Analysis which you can view by clicking HERE.