Market Advisor

Don't market like 2008

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Many ranchers' first inclination in marketing their 2009 calves is to base it on their 2008 calf crop experiences. That could be a serious mistake.

For one thing, marketing signals are changing fast. Looking backward could easily put a marketer 180° out of synch in marketing the current calf crop. In fact, my analysis suggests last year wasn't a year to retain ownership but this year just might be.

For one thing, a projected 2009 bumper corn crop has dramatically changed marketing economics, though we're still at risk of a potential early frost in corn country. But, at press time, this year's changing costs of gain (COG) beyond the farm gate, coupled with current price projections, are expected to change the optimum ranch marketing program.

Suggested planning prices. Figure 1 shows my latest planning prices for marketing 2009 calves. I encourage ranchers to use this table to identify some key marketing prices for alternative proposed marketing programs.

For example, if a rancher wants to evaluate backgrounding his 550-lb. calves from fall 2009 weaning to 800 lbs. in Jan. 2010, he can use the $109 fall '09 suggested weaning price and the $92 suggested Jan. '10 price for 800-lb. feeders. This suggests a buy/sell margin of a -$17 ($92 - $109 = -$17), or a marketing loss of $93.50 for the initial 550 lbs. (5.5 × 17 = $93.50). This marketing loss has to be made up with the pounds gained in the backgrounding lot.

Another option is to retain 2009 calves in a commercial feedlot until harvest. Using the suggested $109 fall weaning price and the suggested spring slaughter price of $89 - $2 to adjust seasonally for a May harvest date rather than an April harvest date, this would give a buy-sell margin of -$22/cwt. ($87 - $109) of initial weight or $121 ($22 × 5.5 cwt.)/head marketing loss.

Somehow, this $121 marketing loss must be made up with the 625 lbs. or more of feedlot gain. This $121 also figures out to add $19.36 ($121 ÷ 6.25) to the COG on the 625 lbs. scheduled to be put on in the feedlot.

Let's do some back-of-the-envelope figuring. By checking with the commercial feedlot, a rancher should be able to get a good estimate of the projected COG for the 625 lbs. of feedlot gain.

(In Figure 3, I report a projected feedlot COG of $60/cwt.) By adding in the $19 marketing cost, this projects a $79 ($60 + $19) COG for the 625 lbs. of feedlot gain. An $8 profit ($87 - $79) for the 6.25 cwt. of gain added in the feedlot projects a $50/head profit from the retained ownership profit center. This certainly is different than the -$66/head calculated for retaining 2008 calves.

Let's look at a detailed analysis of “traditional” marketing alternatives. Figures 2, 3 and 4 present three calculated key economic indicators for several traditional marketing options for the 2008, 2009 and 2010 calf crops. These indicators are:

  • Buy/sell margin for each profit center.

  • COG in that profit center.

  • Projected net return per head.

The spring-born marketing alternatives include selling calves at weaning, selling backgrounded feeders, finishing backgrounded feeders, and retaining ownership through harvest.

Profit margins for selling at weaning have trended down in recent years, thanks to increasing COG at the ranch level and weaker prices for weaned calves. COG for producing weaned calves are calculated at $112, $105 and $105 for years 2008, 2009 and 2010, respectively. Feed COG for producing weaned calves are down somewhat in 2009 and 2010.

My projection indicates selling 2008 calves at weaning had the lowest profit margin of any year this decade. I project profits from selling at weaning to increase slightly for 2009 and 2010 calves but still hover at a decade-low level. Thus, some ranchers are looking to post-weaning profit centers to add value to their calves.

Exploring these post-weaning alternatives makes sense if you use proper accounting in your evaluation. The key is to price calves going into each marketing alternative at market value, not at production cost. Only this way can you properly evaluate alternative post-weaning production/marketing alternatives.

My analysis suggests 2008's large negative buy/sell margins and high COG beyond the ranch gate made it impossible to generate a profit with post-weaning marketing alternatives for 2008 calves.

If you look at the buy/sell margins for backgrounding 2008, 2009 and 2010 calves, they are -$18, -$17 and -$10, respectively. My numbers suggest we'll have to go into the 2010 calf crop to significantly reduce the buy/sell margins for backgrounding calves.

Projected profits for backgrounding are -$69, -$23 and $28/head for 2008, 2009 and 2010 calf crops, respectively, though your costs may vary greatly from mine depending on the type of feeds fed in your backgrounding program. Be sure to price ranch-raised feeds at fair market value and not at production cost.

Let's look at the economics of finishing backgrounded calves. The calculated buy/sell margins are -$5, -$7 and -$12 for the 2008, 2009 and 2010 calves, respectively. The pattern is in the wrong direction, as COG — following projected grain prices — is projected at $77, $62 and $66 for 2008, 2009 and 2010 calves, respectively. Profit projections are $3, $27 and -$34/head for finishing 2008, 2009 and 2010 backgrounded calves, respectively.

The marketing loss on retaining 2008 calves was calculated at $24/cwt. of initial weaning weight. Corn prices for growing and finishing 2008 calves were so high that COG for retained ownership is calculated at $72/cwt. of gain. These two numbers ensured a calculated loss for retaining 2008 calves.

With corn prices projected lower in 2009/2010, COG in retained ownership is projected at $60/cwt. with 2009 calves. My projected increased corn prices for 2010/2011 suggests COG at $66 for 2010 retained calves.

Notice that the projected buy/sell margins are shrinking slightly as years progress. I've written extensively about how the buy/sell margin must decrease in order to return a profit to the cattle-feeding sector. The projected profits from retained ownership are calculated at -$66, $40 and $40 for retaining 2008, 2009 and 2010 calves, respectively. Indeed, I am projecting profits returning to retained ownership as corn prices work lower.

Producers were forced to market their 2008 calves in a falling economy; now, they're trying to market 2009 calves in a very uncertain but slightly stronger economy. All this leads me to strongly recommend that producers not use last year's experiences to make this year's marketing decisions.

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 .

Figure 1. Suggested planning prices for marketing 2009 calves

2009 Western Nebraska Projected 2010 planning prices
Lbs.

Current



Oct.'10
425 $120 $116 $120 $112 $120 $117 $115 $117
500 $114 $112 $116 $108 $115 $111 $113 $112
550 - $109 $113 - - - - $110
600 $109 $106 $110 $102 $110 $105 $108 $107
700 $104 $101 $105 $97 $105 $100 $102 $102
800 $99 $96 $100 $92 $100 $95 $98 $97
900 $94 $92 $96 $88 $95 $91 $93 $93

$84 $87 $85 $87 $88 $89 $87 $89
Figure 2. Traditional marketing programs for 2008 calves
Marketing strategy Buy/sell margin Cost of gain (COG) Profit/head
Spring calving ND-FBM-07*

Sell at weaning xxxxxx $112 -$22
Background high ADG -$18 $0.77 -$69
Finish background steers -$5 $0.74 $3
Grow and finish -$24 $0.72 -$66
*North Dakota Farm Business Management (2007)
Figure 3. Traditional marketing alternatives for 2009 calves (Projected 9/11/09)
Marketing strategy Buy/sell margin Cost of gain (COG) Profit/head
Spring calving ND-FBM-07*

Sell at weaning xxxxxx $105 $27
Background high ADG -$17 $0.62 -$23
Finish background steers -$7 $0.67 $27
Grow and finish -$22 $0.60 $40
*North Dakota Farm Business Management (2007)
Figure 4. Traditional marketing alternatives for 2010 calves (Projected 9/11/09)
Marketing strategy Buy/sell margin Cost of gain (COG) Profit/head
Spring calving ND-FBM-07*

Sell at weaning xxxxxx $105 $27
Background high ADG -$10 $0.66 $28
Finish background steers -$12 $0.73 -$34
Grow and finish -$19 $0.66 $40
*North Dakota Farm Business Management (2007)

Read more of Harlan Hughes' columns at www.beefmagazine.com

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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