There's no minting money in the current high-cost environment of the cattle business. But steamy prices also offer more lucrative potential to adding weight outside the feedlot than ever before.
“Historically, we've used a value of gain of about 50¢/lb. on growing cattle,” says Matt Poore, North Carolina State University Extension livestock nutritionist. “With lighter weight feeder cattle now priced similarly to heavier weight feeders, it suggests value of gain in this new environment may be worth as much $1/lb., which is what the feedlot cost of gain is currently.”
A buck a pound; $100/cwt. The collapsing weight-based feeder price spreads Poore mentions are making it possible for the value of gain to double when compared to history. This assumes a common definition for value of gain: what the market is paying for each extra pound.
Cost of gain (COG) is obviously higher, too. Where he used to shoot for $35/cwt. COG in rations, Poore says $65 or so is the new benchmark. Still, the net between what was ($15-$20) and current possibilities ($35) is significant. Keep in mind, this is feed COG only; death loss and morbidity can turn potential upside down quickly.
As Ted McCollum explained a couple of years ago (BEEF, January 2006), “When producers call me, either thinking about buying calves to start a stocker enterprise, or wondering about retaining ownership in their calves through the stocker phase, I start out by asking them lots of questions about their variable costs. Do you know how much it will cost you to straighten out a set of calves? Do you have the experience and expertise to do that? What's the stocking rate and anticipated gain? Then we start attaching numbers to all those kinds of things.” McCollum is a beef cattle specialist with Texas AgriLife Extension Service.
“The COG structure has been inverted,” emphasizes Dave Latta, assistant general manager of Pratt Feeders, LLC, based at Pratt, KS. “Every pound of gain makes cattle cost more rather than being able to cheapen them up with more pounds.”
Poore and Latta were on hand to help explain current industry transition at the recent Tri-State Stocker Conference in Abingdon, VA.
This COG inversion is one reason placements of lighter weight calves into feedlots have been fewer this year (though placements are also down overall).
Latta shared an example in which 9-weight cattle placed on feed with $4 corn had a projected breakeven of $100.69 vs. $99.82 if the same steers had been placed directly on feed at 600 lbs. rather than grown first to 900 lbs. (the lighter calves projected to hit a more favorable market). At $7.25/bu. corn, though, before prices started to tumble - even improving feed efficiency by 0.3 lbs. - the projected breakeven for the 6-weight was $115.81, compared to $110.69 for the 9-weight.
Availability makes it impossible for feedlots to place only heavier weight calves, but cost of gain economics typically favor them more as feed prices increase.
Moreover, this is one of those rare times in history when the common definition of value of gain ends up being the same as the technical one. Rather than value of gain being worth market price, it's actually the difference between buying and selling price divided by the pounds of gain. With little or no price differential between weight classes, today it's basically the same thing.
In fact, Poore explains, “With costs and economics the way they are, it may make sense to put a little more feed into growing cattle to extend forage further than what we used to think.”
Though commodity prices have declined since July, it's not like feed is cheap. The bottom isn't likely to drop out of it either, given global demand.
At the same conference, Ron Plain, University of Missouri Extension economist, pointed out, “Higher oil prices lead to higher gasoline prices, which lead to higher ethanol prices, which lead to higher corn prices.”
As long as oil stays historically high, it will underpin corn prices, which in turn will support value of gain. And, it will continue to pressure calf prices, though likely at higher than historic levels because of relatively short supplies.
On one hand, Plain explains this year's calf crop will be the smallest since 1951. On the other, he says over the past two years every 10¢ increase in the price of corn has decreased the value of feeder cattle by $6-$9/head.
“These conditions will be hard on cow-calf producers, whom will undoubtedly see lower prices for weaned calves,” Poore says. “But there still will be ample opportunities for producers to profitably grow those cattle to heavier weights.”