Market Advisor

Marketing 2009 calves: Part II

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These are unprecedented economic times that call for unprecedented management actions by ranchers. Previous columns have focused on the cost side of running a beef cowherd producing 2009 calves. This month, we'll look at the marketing side and profit potential for those 2009 calves.

In my June issue column, I discussed the three price series ranchers must watch and study on a regular basis — slaughter prices, feeder-cattle prices and corn prices. These determine the profit or loss from alternative marketing options.

Corn prices determine a feedlot's cost of gain (COG), which, in turn, determines feeder-cattle prices. All indications are that COG for those finishing 2009 calves will be in the upper $70 to low $80/cwt. of gain. With the exception of last year, this is an unprecedented COG, which will serve to hold down feeder-calf prices.

Here's my recommended process for assessing the profitability of traditional post-weaning marketing alternatives. Table I presents the critical numbers I used to evaluate a set of traditional marketing alternatives for 2009 calves.

Let's first look at the “selling at weaning” marketing option. From my cost of production budgets, I project a cost of producing a cwt. of calf at $105/cwt. This is based on the market value of ranch-raised feeds fed, including the going rate for pasture rental. Winter alfalfa hay is valued at $100/ton laid into the ranch. Replacement heifers are projected to cost $147 for each cow in the breeding herd.

Fortunately, market prices for calves are projected up from 2008, while feed costs are projected down from 2008. If I insert my latest 2009 wean steer calf price projections of $117 for 567-lb. steer calves into my eastern Wyoming/western Nebraska beef cow budgets, I end up with a projected $70/cow earned return to unpaid operator and family labor, management and equity capital. The projected earned return of $70/cow is better than the negative $23 earned with 2008 calves but far below that earned with 2005 calves.

Marketing 2009 calves beyond the ranch gate isn't projected to be very favorable. For example, backgrounding 567-lb. calves to 800 lbs. at a high 2.5-lb. average daily gain (to be sold shortly after the first of the year) is projected to generate a substantial loss with 2009 calves. The projected buy/sell margin is very large — $117 calves going into the backgrounding lot and $88 feeders coming out of the backgrounding lot. This is a minus $29 buy/sell margin costing $164/head on the initial 567 lbs.

Given my projected 71¢ COG in the backgrounding lot, the combined negative buy/sell margin and the positive $39 profit from the pounds gained leads to projected negative $118 earned net return per head from backgrounding. The projected breakeven selling price for the backgrounded feeder is $103/cwt., while backgrounding corn prices are projected at $3.81/bu.

The person buying these backgrounded 2009 calves and finishing them is projected to generate a $48 profit. (Note the unusual positive buy/sell margin.) This is based on $88 feeders going on feed with a slaughter selling price of $89 in June 2010. Total feedlot COG is projected at 80¢/lb., leading to a breakeven slaughter price of $85/cwt. Again, corn prices are projected to average $3.95/bu.

For the rancher who retains ownership of his 2009 calves and hits the May 2010 market, I project a loss of $76/head. Feedlot COG is projected at 71¢/lb. Again, the buy/sell margin is projected to eat up any possible profits generated from the pounds gained in the feedlot. Corn prices are projected at $3.85/bu.

These slaughter price projections don't include any quality premiums. For example, a quality premium of $3.40 on the retained marketing option would make it a breakeven situation. While the finishing of backgrounded calf is projected to make a $3.87/cwt profit, if the backgrounding loss is taken into account, a $5.60/cwt premium on the finished animal is needed to breakeven with backgrounding AND finishing these calves.

It appears market premiums will be absolutely necessary to make any money in the post marketing of 2009 calves. Will your calves generate the needed quality premiums to make money in the post-weaning marketing alternatives? Only you can answer that based on previous feeding experiences associated with your calves.

Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701/238-9607 or harlan.hughes@gte.net.

Table 1. Suggested numbers for evaluating marketing alternatives for 2009 calves
Marketing strategy Buy/sell margin Cost of gain (COG) Profit/head
Spring calving 2006 ND-FBM-07
Sell at weaning xxxxxx $105 $70
Background high ADG -$29 $0.71 -$118
Finish background steers $1 $0.80 $48
Grow & finish -$27 $0.72 -$40
Table 2. Harlan's traditional marketing alternatives for 2009 steer calves
Items (01-Jan-08) 2009 Beef cow-calf Background calves Finish background calf Grow & finish steer calves
Marketing alternatives 1 2 3 4
ND-FBM-07 ADG=2.5 ADG=3.3 ADG=2.9
Average birth date 31-Mar-09
Starting date XXXXX 20-Oct-09 24-Jan-10 20-Oct-09
Bull turnout date 17-Jun-08
Beginning weight (lbs.) xxxxx 557 800 565
Sale weight (pay wt. in lbs.) 557 800 1,250 1,175
Projected ADG (lbs./day) 2.31 2.54 3.3 2.9
Days on feed 202 96 136 210
Weight/day of age (ADG=2.3 lbs.) 2.76 8 June 10 May 10
Sale date 19-Oct-09 23-Jan-10 10-Jun-10 18-May-10
Projected sale price $117 $88 $89 $90
Total income $719 $705 $1,113 $1,060
Cwt. of steer equivalents 6.16
Beginning values
Projected purchase price $117 $88 $117
Value ($/HD) $650 $705 $659
Gross margin $55 $408 $400
(Buy/sell margins) -$28.61 $0.92 -$26.52
Feed costs1 $336 $113 $235 $297
Feed cost/lb. of gain $0.54 $0.47 $0.52 $0.49
Returns over feed costs $383 -$58 $173 $104
Returns/$100 feed fed $214 $48 $173 $135
Interest on beg. value $12 $18 $27
Vet & medical costs $17 $7 $7 $9
Lot cost $10 $35 $55
Hauling, marketing & shrink $24 $55 $45
Death loss (1%) $7 $8 $8
Non-feed costs (minus vet & med) $149
Heifer replacement costs/non-feed costs $147 $59 $124 $144
Total cost of gain ($/lb.) $1.05 $0.71 $0.80 $0.72
Total cost (inc. beg. value) $649 $822 $1,064 $1,099
Breakeven selling price $105 $103 $1 $94
Corn price $3.85 $3.81 $3.95 $3.85
Returns to labor, mgmt. and facilities $70 -$118 $48 -$40
Price premium needed to break even xxxxx xxxxx -$3.87 $3.40
Lot charges/day $0.10 $0.26
1Market prices: Alfalfa hay=100.00, Barley=$3.33 and Corn Avg.=$3.81 Finish lot charge $0.26
What's Market Advisor?

Harlan Hughes has spent a professional lifetime helping U.S. beef producers better manage the business end of their beef cow operations.

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Harlan Hughes

Harlan Hughes is a North Dakota State University professor emeritus and author of the monthly "Market Advisor" column that appears in BEEF magazine. He also consults and lectures widely,...

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