Clearly, price volatility is at an all-time high. Consider this: We had a run-up in cattle prices in the last half of 2003, but then bovine spongiform encephalopathy (BSE) induced a 15% price drop in late December. Still, strong slaughter prices returned in April.
To help ranchers better cope with this volatility, my last two monthly columns laid out a rancher-based, market-price-tracking system to help facilitate post-BSE market planning. In April and May, we discussed tracking slaughter and feeder cattle prices, respectively. This month, we look at the implications for marketing 2004 calves.
Let's review the profit simulations generated from alternative marketing programs for 2002 and 2003 calves. First, let's evaluate the selected 2002 marketing programs for a 600-head demonstration herd summarized in Figure 1.
This herd's cost structure is indicative of the low-cost ⅓ of my current IRM Cooperator Herds, and has a 92% calf crop. In fall 2002, weaned 550-lb. steers sold for $85, bringing a $55/cow profit and totaling $33,000 for this 600-head cow herd. Year 2002 calves, backgrounded at a high daily gain, sold as 800-lb. feeders for $80/cwt. after the first of the year, bringing an extra $34/calf, or a total of $18,768. Finishing these backgrounded calves in summer 2003 and selling them at $80/cwt. generated another $116/calf, totaling $63,336 for the herd.
Meanwhile, these calves — finished as calf-feds in the same grow-and-finish feedlots — would have brought $78/cwt. and generated $82,992 for the ranch. Thus, retained ownership was the optimum marketing alternative with 2002 calves.
Figures 2 and 3 summarize six alternative marketing programs for 2003 calves. The six alternatives summarized in Figure 3 are:
Trad-W — Traditional marketing at weaning.
Trad-R — Traditional retained ownership as calf-feds.
Split — Largest ⅓ of calves marketed as calf-feds, middle ⅓ as backgrounders, while smallest ⅓ wintered and grazed.
Lt-Wt. — Producing lightweight calves at weaning (350-400 lbs.), wintered and sold the next year off grass as 800-lb. feeders.
May — Summer calving in May-June, weaned after Jan. 1, wintered and marketed as 800-lb. feeders off grass at the end of the next grazing season.
Winter — Calving in January-February, early weaned and grown and finished as calf-feds for the April market.
A detailed summary of the first two alternatives is in Figure 2. Each bar in Figure 3 depicts the simulated earned net returns for each alternative. My conclusion is that, when all 2003 calf marketing is concluded, the optimum strategy will prove to be to sell at weaning.
What's Optimal For 2004?
Figure 4 depicts my rancher-based market-tracking system for weaned 2004 calf prices. These planning prices are determined by adjusting each month's futures price by that month's basis. The Central Plains Planning Price column in Figure 4's right-hand column is based on the April 23 futures market price adjusted by the projected 2004 Central Plains basis value, also shown in Figure 4.
Figure 5 presents these same feeder-calf planning prices in chart form to make the seasonal price pattern more evident. These prices suggest a potential price drop of $15-$20 from the first quarter to the fourth quarter of 2004.
Given current volatility, ranchers should routinely recalculate the planning prices in Figure 4 each Wednesday as we progress through this marketing year. Twenty minutes tracking slaughter cattle, feeder-cattle and feeder calf prices weekly will develop an astute awareness of this projected price drop as it materializes. For now, I recommend ranchers prepare their marketing plans for selling 2004 feeder calves with prices in the mid to high $90s.
What About Alternatives?
Figure 6 summarizes my projected traditional marketing alternatives for 2004 calves. Buy/sell margins (selling price minus purchase price) are projected alone with costs of gain. These two numbers, coupled with weights, can calculate profits generated by each production/marketing alternative.
Selling at weaning is the projected marketing alternative for 2004 calves. All others are projected to generate a loss. My conclusion is that marketing at weaning will be the optimal marketing plan for 2004 calves.
The optimum marketing program varies by the point in the cattle cycle. In the low-price phase, cow profits are low, making retained ownership optimal. During the high-price phase, cow profits tend to be high and selling at weaning tends to be optimal. My analysis suggests that's the case for 2003-2006, and maybe even 2007.
Ranchers should reevaluate marketing programs twice during each 10- to 12-year cattle cycle — once when prices are turning upward and again when prices are turning downward. Now is one of those times.
Harlan Hughes is a North Dakota State University professor emeritus living in Laramie, WY. Reach him at 701/238-9607 or [email protected].