In the stocker pasture, more than in the feedlot, premiums paid for preconditioned calves are like insurance. How much you stand to gain by reducing risk is tied directly to how long you plan to own them.
“If I plan to own cattle for 120 days, as an example, and won't retain ownership in them, it will be difficult to recoup the cost of the preconditioning premium paid based on performance alone, says Kevin Dhuyvetter, a Kansas State University (KSU) agricultural economist. “I think I'd also have to get a premium for the cattle when I sold them in order to justify the cost.”
On the other hand, Dhuyvetter explains, “If I'm going to own them for a 120-day winter program, then another 90 days on summer pasture, there's more time to accrue the health and performance benefits of preconditioned calves. And, I may be able to justify the cost without getting a premium when I sell them as heavy feeders.”
This broad snapshot — recognizing that variables exist from operation to operation, load to load and year to year — is based on cowboy extrapolation and an economic analysis of preconditioning Dhuyvetter completed last fall (available at www.agmanager.info/livestock/budgets/production/beef). The study examines preconditioning costs and returns to cow-calf producers and feedlots. The extrapolation is necessary because there's little data documenting preconditioning returns specific to the stocker operation.
It Pays, But How Much?
There's little debate as to whether preconditioned calves — VAC 45-type calves, for example — return more gross income through the cattle-feeding phase.
As an example, Dhuyvetter's analysis includes summary data from the Texas Ranch to Rail program. In that ongoing study across nine years and 17,000 head, the difference in net income between cattle falling ill in the feedlot just once vs. remaining healthy is $91.77/head, ranging from $49.55 to $151.18 between years.
“Divide the average net income difference by the in-weight of the cattle and the healthy ones were worth an extra $15.09/cwt. coming into the feedlot,” says Dhuyvetter. That's also how much you'd have to discount the ones that got sick coming in if you wanted to break even on them.
Riding a different horse, since 100% of preconditioned calves won't necessarily get sick, nor will all non-preconditioned calves head to the hospital pen, Dhuyvetter plotted the $91.77/head relative to different levels of morbidity. Bottom line, he says, net income within this particular population is expected to change 92¢/head for every 1% difference in morbidity rate. Thus, a 10% reduction in morbidity would save $9.20/head.
And how does preconditioning impact morbidity levels? In the studies he considered in his analysis, reduction in morbidity levels ranged from 6.1% to 41.6%.
Dhuyvetter says, it appears the value of preconditioned calves is worth $40-$60/head in the feedlot. That's equivalent to a premium of $7-$11/cwt. to buy them. The gains come with less sickness and death loss, and better performance.
On the buying side, Dhuyvetter says a number of studies indicate feedlot buyers generally will pay $2-$5/cwt. for preconditioning. He believes cattle feeders don't return the full value of the premium to cow-calf producers due to the risk they still assume with preconditioned calves, and the fact the industry is still validating whether preconditioned calves from various programs are what they're billed to be.
“What continues to haunt the industry are calves sold as preconditioned that aren't,” says David Lalman, Oklahoma State University (OSU) Extension beef specialist. It's caused some buyers to shy away from what could be a faster growing business.
Time Is Money
So, in theory at least, stocker operators should be able to buy preconditioned calves and enjoy part of the same economic benefit enjoyed by cattle feeders.
“If it's true that preconditioned calves make an additional $50 in gross revenue/head in the feedyard, and the cow-calf producer, the stocker and the cattle feeder all share the same risk, then you could argue the value should be split equally among segments,” Dhuyvetter says.
Although he believes the cattle feeder currently is receiving most of the added value, he believes that as more information comes to light about cattle, more of the value will be shared among the segments.
In the meantime, stocker operators considering preconditioned calves have plenty to sort through.
First, Dhuyvetter emphasizes, “You may not have enough opportunity to get the premium back through better health and performance if you own them for too short a period.”
Likewise, while Lalman must also rely upon logic to extrapolate estimated stocker benefits from preconditioned benefits in the feedlot, he explains, “I suspect to justify it in a stocker operation, most of the benefit would need to occur in the first few weeks.”
If ownership will be for a single stocker season or less, what are the odds of receiving a health premium at time of sale?
“Historically, the stocker segment has assembled cattle from different sources and straightened them out. They haven't typically been as conducive to grid pricing because so little information is known about them,” Dhuyvetter says. Consequently, the premium potential for cattle coming out of a stocker program may be limited.
Next, Dhuyvetter says preconditioned calves must be compared to other replacement options.
“If I can buy single-source healthy calves, I might not be able to justify a premium for preconditioned calves,” he says. That's especially true depending on what you consider to be your vocation.
“If a stocker operation is expert at straightening out calves, there's likely little benefit to buying preconditioned calves. You'd be paying someone else to do your job,” Lalman says. “For someone who runs stockers on wheat pasture as a secondary enterprise, there could be great value.”
Keep in mind the numbers presented here reflect cattle weaned at least 45 days and preconditioned, vs. pre-weaning programs where calves receive specific vaccinations but are shipped at weaning.
“It's important to recognize that preconditioning represents a continuum along which different programs offer different levels of risk management for different price premiums,” Dhuyvetter says.
However stocker operators calculate the value or potential of preconditioned calves, Dhuyvetter says, “If pre-conditioning is ever worth paying a premium for, my contention is it's in high markets like we have today.”
That may run counter to some folks' perceptions, but he explains, “As cattle prices increase and buyers invest more in replacement stock, the value of reducing performance risk increases.”
For more stocker segment production information check out www.beefstockerusa.org.