Up until last fall, most cow/calf producers had been profitable for the previous 11-year period. This unrivaled success was due in large part to increased income from calf sales as a result of increasing calf prices.
For instance, between 1997 and 2005 the average price for a 550 lb steer calf increased 51% from $84/cwt (1997) to $128/cwt (the peak in 2005), according to Cattle-Fax. This equates to a total increase of about $44/cwt, or $242 per calf.
Unfortunately, in the past 1-2 years, costs for hay, supplement, fuel, fertilizer, and about a dozen other inputs have risen faster than calf prices did during that 8-year period. Many inputs have actually doubled in the past two years. And, calf prices declined $6/cwt, or $33/calf, compared to the year previous during both 2007 and 2008. This bad combination of increasing costs and decreasing income led to the first year of widespread unprofitability by cow/calf operations in 2008.
Calf Prices Likely to Decline Again in 2009
The projection for calf prices in 2009 isn’t good news either. The drop in 550 lb steer calf price from 2008 to 2009 may not be quite as steep as in previous years, but it will still probably drop another $3.50-5.50/cwt ($20-30/head; according to Cattle-Fax).
Even though the U.S. beef cowherd inventory will shrink again in 2009, and the 2009 U.S. calf crop will be the smallest in over 50 years, the lingering recession probably won’t allow beef prices to rebound until 2010, at the earliest.
Ultimately, a big reduction in U.S. beef production in 2009 and 2010 due to a smaller cowherd may be the force needed to reverse falling calf prices.
So, being a low-cost producer will once again be a requirement of cow/calf operators. Historically, cow/calf producers achieved profitability (or at least limited their losses) by cutting costs in several key areas, particularly when the industry was truly a commodity, or breakeven, business.
However, in recent years, as the U.S. beef industry has moved toward value-based marketing, many producers have been able to acquire premiums for cattle that were better than “commodity” cattle. It appears that the industry may be nearing the point where taking advantage of value-adding opportunities in the marketplace could be almost as important as being low-cost in order to attain profitability.
Start Marketing and Adding Value Today
For more than 100 years, cow/calf producers were “price takers” rather than “price makers”. However, in the past decade or so, over a dozen new opportunities are enabling some calves that have been deemed to be higher “quality” to sell at a higher price. Some of these options are the result of increased consumer demand for higher quality and more consistent products (or ones that they know more about), while others were driven by feedyards trying to improve the efficiency and profitability of their businesses.
Obviously, several very simple ways to improve the marketability of calves by adding value have been around for decades. Most of these are management-related, including selling steer calves that are:
1) dehorned or polled,
2) castrated at a young age,
3) uniform in age, color, and type,
Each of these options have been separately documented to return a premium from $1-5+/cwt. However, in addition to these straightforward options, there are new possibilities that require a greater investment of more time and money, but can often result in much larger paybacks.
Verification Options for Adding Value
If you can find the right market to sell your cattle into – which should be accomplished before any of these options are initiated – substantial premiums are available. Many of these options include participation in “verification” programs, where a third-party documents something that a producer does or has, including management practices or genetics. A few readily-available “formal” programs include:
- Age and source verified – recording birth dates of the first and last calves born during a calving season and verifying them via a third party makes them eligible for export to Japan if harvested at 20 months or younger. Premiums of $1-3+/cwt are available ($5-15/head)
- Natural verified – third-party documentation stating that no antibiotics or growth promotants were administered can result in a $1.50-2.00+/cwt premium ($8-11/head),
- Organic verified – third-party documentation that organic rules have been followed (“natural” plus use of organic feeds, no pesticides/herbicides, etc.),
- Non Hormone Treated Cattle (NHTC) Program – documentation that cattle have not been implanted can make them eligible for export to the European Union (EU),
- Breed-based branded programs – cattle that fit live animal specifications (either hide color or documentation of genetic background) enables them to supply numerous product lines (e.g. Certified Angus Beef). Hide color premiums of $1-3+/cwt have been documented in calves,
- Preconditioning programs – several private- and state-sponsored programs enable the documentation of vaccinations given and possible premiums of $1-6+/cwt.
Information Options for Adding Value
Beyond using “formal”, and sometimes fee-based, programs involving a third-party to verify calf crop traits (as described above), there are many “informal” opportunities to add value to calves. This primarily involves the transfer of information including background and historical information on calves.
Certain pieces of information related to probable calf performance (growth, health, and/or carcass) are of great value to feedyards since the odds that calves will perform better than average are recognized at the time of purchase. Ultimately, this information can help increase the chances that a feeder will make a profit on your calves and ideally getting them to pay more for them up-front. Some options include:
- Historical performance data – information about feedyard gain, feed efficiency, sickness rate, and carcass performance of previous years’ calves can yield substantial premiums,
- BVD PI tested – calf crops tested for the absence of any calves persistently infected (PI) with Bovine Viral Diarrhea (BVD) can help reduce losses due to sickness or death,
- Weaned – calves weaned for 30- or 45-days and trained to feed bunks and waterers are very desirable to feedyards since health problems will likely be decreased and feed intake will be strong at arrival. Premiums of $2-5+/cwt are available.
Be Creative With Your Marketing
Few of the programs or options listed above will generate a premium, unless your calves are offered for sale to buyers willing to pay premiums for having these beneficial traits. Furthermore, it is important to sell a product that is in high demand in the marketplace.
Today, beyond the traits listed above (of which some are actually niche markets), the underlying marketplace wants a few key traits that can be easily accomplished:
- Heavy calves – due to increased cost-of-gain in the feedyard, the market wants calves ready for the feedyard to be heavier than in the past. Cow/calf producers should consider modifying their operations so that they can wean and grow their calves on high-forage diets prior to selling them to a feedyard,
- Contracted calves – during almost every summer for the past 5 years, prices for calves to be delivered in the fall have been much higher if they were offered for sale during the summer (e.g. August) vs. fall (e.g. October/November). Due to severe volatility in several commodity markets (grains, fuel, beef, etc.), feedyards want to “lock-in” calf prices in advance of receiving them. This is a great opportunity to get upwards of $10/cwt more for your calves (~$50/head) by selling them during the summer on a video sale,
- Truckload lots – nearly everyone involved in the U.S. beef industry (particularly feedyards, buyers, truckers, etc.) would rather deal with truckload lots (50,000-60,000 lbs of cattle) instead of small groups. Premiums of $2-10/cwt can be acquired if several small calf crops from similar genetic and management backgrounds can be combined and sold together, possibly even via video or private treaty.
The Bottom Line
During 2009, cow/calf producers will continue to experience high costs and declining revenue, and most likely many will be unprofitable. Taking time to add-value to calves and market them for a premium will help avoid or reduce losses.
Several straightforward options exist to add-value, including selling dehorned, castrated, uniform, and healthy calves. However, producers who are creative and able to forward contract heavy weight calves in truckload lots will be paid for their efforts.
In addition to these strategies, producers should consider verifying specific aspects of their calf crop to acquire additional premiums, including age/source, natural/organic, breed, and vaccination history. But, buyers and exact premiums should be identified before effort is made to initiate these verifications.
Regardless, simply collecting and transferring valuable information on a calf crop to buyers should yield a premium and ideally single out a producer as a reputable source for high quality calves.