The higher grain prices of the biofuels era have changed ranching. The key question for many ranchers is whether this suggests that optimal ranch production and marketing systems have changed, as well?
To identify the optimal ranch production and marketing systems in this emerging biofuels era, let's compare a set of non-traditional production/marketing systems to a set of traditional systems serving as my control numbers.
A “traditional” production/marketing system consists of running spring-calving cows produced in one or more profit centers:
Selling at weaning,
Backgrounding calves to 750-800 lbs.,
Finishing these feeders in a commercial lot, or
Growing and finishing calves in a retained ownership profit center.
Most spring-born calves are harvested in the following June-August time period, a traditional period of high cattle numbers, which means seasonally low prices.
For this exercise, remember that economic costs for both the traditional and non-traditional production/marketing systems are based on market prices (opportunity costs) and not cash costs of production. Ranch-raised feeds are priced in at local market prices.
I use three key numbers to evaluate each production and marketing system. These are:
Buy/sell margin — the price of cattle leaving a profit center minus the price of the cattle entering that profit center. The buy/sell number is used to calculate the marketing loss on the original weight of the animals that enter each profit center.
Cost of gain — a measure of the economic efficiency of the pounds added while the animals are in that profit center.
Net profit/head — this is calculated for each profit center by subtracting the marketing losses from the profit generated by the pounds added.
Figure 1 presents three performance control numbers for each of the four systems. The negative profit/head numbers suggest ranchers faced challenging economic times in marketing their 2008 calves via traditional production/marketing systems. Is it possible a non-traditional production/marketing system is projected to be more optimal?
Let's study five non-traditional systems.
Aimed at spreading market risk, this approach involves traditional spring calving with the calf crop being marketed at three different times during the year. The heaviest third of the weaned calves go immediately to a commercial feedlot for retained ownership through harvest. The middle third are backgrounded at home to 800 lbs., then sent to a commercial feedlot and harvested. And, the lightest third are wintered, grazed as short yearlings the next summer and finished off grass in a custom feedlot.
In this summer calving program, cows calve in May-June. The calves are weaned in January and wintered to grass, and long-yearlings off grass are finished and harvested in a custom feedlot.
Cows calve in the fall (August-September), with calves wintered to grass, then grazed the next summer and finished in a custom feedlot. Thus, marketing coincides with times of lower supplies and higher seasonal prices.
Cows calve in January-February, and the calves are early weaned and sent to a commercial feedlot. The target is to harvest these calves at 13-14 months of age during the typical April seasonal high prices.
A spring-calving, low-input cowherd calves in May-June, with weaning in October at 450 lbs. The calves are wintered and grazed the next summer up to 875 lbs., then finished in a custom feedlot. Target harvest date is December of the following year.
Figure 2 presents the economic indicators for these five non-traditional systems. The numbers illustrate two major economic challenges for marketing 2008 calves.
First, the large, negative buy/sell margins suggest cattlemen absorbed large marketing losses on the initial weights of 2008 calves going into the different post-weaning profit centers. Traditional backgrounding systems faced a negative $18/cwt., buy/sell margin. This generated a $99/head marketing loss ($18 × 5.5) on the initial 550 lbs. going into the backgrounding lot.
Non-traditional buy/sell margins were a minus $19 for the split-marketing option and a minus $21 for the winter-calving option. These buy/sell margins must shrink to return profits to the post-weaning profit centers.
Higher economic costs of gain (COG) are the second major economic challenge in marketing 2008 calves. The unit cost of producing (UCOP) weaned calves is $112/cwt. of calf produced in the traditional production/marketing system. In the non-traditional systems, UCOP for weaned calves averaged from $106 for the low-input lightweight calf option to $117/cwt. of calf produced in the fall 2008 calving production/marketing system.
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Meanwhile, COG in the post-weaning profit centers varied considerably due to volatility in 2009 corn prices and projections into 2010. Corn prices are projected to be considerably lower in the last half of 2009 and into 2010; therefore, COG is a function of when animals are harvested and the target average daily gain. COG in grazing profit centers tend to be lower.
The bottom-line analysis is in the reported profit/head. My analysis for selling at weaning suggests the traditional production/marketing systems averaged a minus $22/cow. On the other hand, production of low-input, lightweight calves performed the best at a positive $32/cow. Second was winter calving at a positive $21/cow profit.
Traditional post-weaning profit centers fared poorly. Post-weaning in the fall 2008 calving system fared the best, something I've found to generally be true; this is the primary advantage of the fall-calving system.
Figure 3 compares cow profit for the traditional and non-traditional systems studied. The data categories in Figure 3 are: Trad-W (selling at weaning), Trad-R (harvesting through retained ownership), Split (spit-marketing option), Lt-Wt (production of lightweight calves), Winter (winter calving), NE-May/Jun (Nebraska summer calving system) and Fall (fall calving).
Marketing 2008 calves through harvest generally hasn't been profitable. Only the production of lightweight calves and May-June calving is projected to generate a profit per cow. Clearly, the production and marketing of 2008 calves was a real economic challenge.
Figure 4 presents a similar comparison of the traditional and non-traditional systems where the ownership through harvest option was removed; i.e., all calves were marketed either as calves or as feeder cattle. Again, the May-June calving option stands out; albeit still not highly profitable in the production of 2008 calves.
Thus, no single system in 2008 clearly stood out as the absolute optimal production/marketing system, but the May-June summer calving system was the most favorable. Next month we'll look at the price/production relationships for marketing 2009 calves.
|Marketing strategy||Buy/sell margin||Cost of gain (COG)||Profit/head|
|Spring calving 2006||ND-FBM-07|
|Sell at weaning||xxxxxx||$112||-$22|
|Background high ADG||-$18||$0.77||-$68|
|Finish background steers||-$5||$0.74||$2|
|Grow and finish||-$24||$0.72||-$66|
|Marketing strategy||Buy/sell margin||Cost of gain (COG)||Profit/head|
|Sell all at weaning||xxxxxx||$1.11||-$22|
|Finish heavy calves||-$22||$0.71||-$65|
|Summer calving: January weaned|
|Sell at weaning||xxxxxx||$1.09||-$43|
|Fall 2008 calving|
|Sell at weaning||xxxxxx||$1.17||-$109|
|Sell at weaning||xxxxxx||$1.12||$21|
|Grow & finish||-$34||$0.69||-$107|
|Produce lightweight low-cost calves|
|Sell at weaning||xxxxxx||$1.06||$32|
|Finish grazed calves||-$20||$0.49||-$23|
|Projected July 31, 2009|
Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701/238-9607 or email@example.com.