It might not be the easiest money, but adding weight to cull cows may be the surest money stocker operators and backgrounders can make.
According to Cattle-Fax analyst Mike Murphy, members of that organization have averaged $64/head profit every year for the last 23 years by purchasing cull cows in November, putting 1.5 lbs. average daily gain on them for 95 days, then marketing them in February.
Besides the profit predictability, Murphy says the enterprise bears consideration by stockers because the timing of it means there's still time to purchase cattle for spring and summer grass programs. Moreover, it illustrates the type of diversity stocker operators and backgrounders may need to consider as operating costs and price volatility increase.
“We've just come though the best three years of stocker profitability in our history,” Murphy told the recent Mid-South Stocker Conference, hosted jointly by the University of Tennessee and the University of Kentucky. As cyclical beef herd expansion takes place, though, profits will be tougher to come by.
The risk this time around could be higher because prices are at historic highs, as are the price spreads between feeders and feds, and between feeder cattle and calves. That's before considering the growing range of prices paid for same-weight, same-class cattle.
Money left on the table
While cow-calf operators continue to be the most positively positioned of all industry segments, Murphy's advice serves as a timely reminder for them, too.
Year in and year out, cull cows represent about 15-20% of a cow-calf operation's annual revenue. Sell those open cows at preg-checking time, like most folks do, and you're usually leaving money on the table, even with the higher slaughter cow prices that have prevailed.
However, keep the healthy, sound culls that are in thin or moderate condition; put the kind of weight on them Murphy is talking about, during the time frame that exploits typical seasonal highs and lows in the slaughter cow market; and total cull-cow returns can be increased significantly.
As an example, in an Iowa State University Iowa Beef Center (IBC) study in 2002-2003, profit from feeding beef cull cows — aiming for premium white fat prices — ranged from $52 to $89/head.
Obviously, this strategy isn't for everyone. And, it can go awry if cost of gain is too expensive, health costs are too high, or you plain miss the seasonal buy-and-sell opportunity.
IBC researchers say before cow-calf producers decide to feed cull cows, they should:
Ask: What is the potential buy-sell margin? Think about market seasonality.
Consider the prospective cows for the feeding program. Make sure they're structurally sound, healthy and in thin-to-moderate body condition.
Make sure you have the end marketplace in mind before you begin.
Plan to use effective management practices to make gains as fast and efficient as possible. Aggressively implant and use feed additives that improve feed efficiency.
Trends impact everyone
Speaking to stockers and backgrounders specifically, Murphy says current management strategies should include: focusing on equity protection, managing inventories through average buying, looking for opportunities to manage risk through the futures market, and evaluating potential for retaining ownership beyond the stocker enterprise.
But he also cites industry trends that will impact every segment of the business:
Continued, significant structural change within all beef-industry segments.
Continued shift to fewer, larger and better-capitalized operations.
Continued market volatility.
Continued evolution toward more fed cattle being marketed on a beef-value basis than in the cash market.
Increased product branding, product differentiation and price variation.
A higher percentage of consumer beef sales will take place through food service rather than food retail within five years.
Animal ID and source verification will be required to compete in the global, post-BSE marketplace.
Whatever the enterprise and whichever the segment, Murphy emphasizes, “Return on equity is how we should be measuring our business.”
When you do that, it's amazing just how lucrative the cattle business can be (Table 1).
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