A year to retain ownership

I've lost so much money retaining ownership the last two years that I'm not going to retain my 2002 calves! That's how a rancher began his phone call to me last fall. The problem with his statement is that he was looking backward for his market signals. Looking backward only works in the expansion phase of the cattle cycle. In today's drought-extended, roller coaster, turnaround phase of the cattle

“I've lost so much money retaining ownership the last two years that I'm not going to retain my 2002 calves!” That's how a rancher began his phone call to me last fall.

The problem with his statement is that he was looking backward for his market signals. Looking backward only works in the expansion phase of the cattle cycle. In today's drought-extended, roller coaster, turnaround phase of the cattle cycle, ranchers shouldn't look backward for market signals. Doing so could easily put them 180∞ out of sync with the market.

Pre- And Post-Weaning Profits

Ranchers typically look only at total profit from conception to harvest. In actuality, profits should be broken down into pre-weaning and post-weaning profit. Pre-weaning profits are those generated by the beef cow herd. Post-weaning profits are generated from financial ownership of the calves after weaning.

To calculate pre-weaning profits, a rancher needs to price his calves at weaning — even if he doesn't sell them. In closing out their books for 2002, every rancher needs to know if the money that was made in 2002 was made in pre-weaning or post-weaning. This is important because the marketing signals sent by each are different.

For instance, a review of my Northern Plains numbers for 2000 and 2001 calves suggests a \$113 pre-weaning profit from year 2001 calves. Meanwhile, the post-weaning phase, which consists of backgrounding these same calves and then finishing them off-ranch, generated a \$100 post-weaning loss. Thus, combining the pre- and post-weaning profits from Northern Plains 2001 calves was about a breakeven.

Northern Plains ranchers fared much better with their 2000 calves, however. I calculated a \$124 pre-weaning profit and a post-weaning breakeven (+\$4/head) by backgrounding and then going off-ranch to a finishing lot. That totaled up to a \$128 profit, all of which was made pre-weaning.

Hindsight tells us that profits were optimized in the Northern Plains by selling both 2000 and 2001 calves at weaning, which basically confirms my rancher's opening statement. But these results don't mean that selling 2002 calves at weaning is the way to go.

Forward Marketing Signals

To look forward for marketing signals means that some form of a price projection system is needed. A relatively simple price projection system can be constructed using current sale barn prices and Futures prices.

Use the local sale barn prices to calculate statistical price slides. These, in turn, can be used to generate a market price line for all weights of feeder cattle.

These statistical price lines can be shifted upward or downward for specific months depending on feeder cattle Futures prices for that specific month. By adding in a local basis adjustment, these short-run and intermediate-run planning prices can be easily tailored to any geographical region in the United States and Canada.

Futures corn prices can be generated from the corn Futures market, again adjusted by the local basis. Table 1 on page 6 presents my late-December 2002 current short-run and intermediate-run planning prices. Long-run planning prices were published in my August 2002 column (see p. 11, August 2002, BEEF).

I entered these short-, intermediate- and long-term planning prices into my Marketing Alternatives Simulator to generate profit projections for six alternative marketing programs for 2002 calves described below.

Six Production/Marketing Systems

Let's take a look at the potential offered for 2002 calves by each of six production systems. Graph 1 [2] on page 6 summarizes my profit projections for each.

• Traditional, spring-born calves. Winter-feed costs, which have increased due to drought, pulled my calculated pre-weaning profits for weaned 2002 calves down to \$55/cow. That's down significantly from 2001's profit of \$113/cow).

Meanwhile, post-weaning profits with 2002 calves could be high — in the \$119/calf range, which would generate \$163 total profit/cow. That's if a rancher can push his calves to harvest in the more profitable March/April markets. Very few ranchers, however, can push spring-born calves to hit the March/April market.

• Ranchers who slow down their genetically fast-track calves by backgrounding them so that their spring-born calves are harvested as fed cattle in June are projected to earn considerably less post-weaning profit. My backgrounding and finishing simulations indicate an additional \$51 post-weaning profit for 2002 calves, which totals to \$102/cow for this marketing alternative. This is an 85% increase in projected profits over selling at weaning.

• Split marketing spring-born 2002 calves. Split marketing is a strategy where the top third of the calves go into a grow-and-retain profit center, while the middle third is used as a backgrounding profit center with calves being sold after the first of the year. The bottom third is wintered and grazed in a yearlings-on-grass profit center with the calves sold at summer's end.

Projections are for a +\$141 return from the top third, a +\$78/head from the backgrounded middle third, and a breakeven situation for the winter and graze bottom third. This split marketing alternative is projected to generate a \$127 profit/cow for a 130% increase over selling at weaning.

• Winter (January/February) calving and early weaning into a retained ownership marketing program with a mid-April target harvest date. The calculated +\$14 pre-weaning profits were reduced from traditional spring calving profits due to higher feed requirements and amplified by the drought's impact on feed costs. Based on an aggressive marketing program, post-weaning profits are projected to be quite favorable. Retained ownership targeting an April harvest date is projected to earn \$155/calf and also \$155/cow. (Calf death loss just happens to make both numbers \$155.)

Backgrounding and finishing in mid-May, another marketing alternative with winter calving, is projected to generate \$86/calf for a total of \$92/cow. The main advantage of winter calving in 2002 comes with the ability to early wean and then hit the mid-April harvest-time prices.

• Summer calving (May/June) with traditional fall weaning in October. My projections are for a pre-weaning loss of \$28/cow. Post-weaning consists of wintering and then going to grass, selling yearlings off grass at summer's end. Post-weaning profits are projected at \$28/calf for a projected breakeven situation when both pre- and post-weaning profits are added together.

• Summer calving (May/June) with a January weaning date. This production/marketing strategy has been developed and studied by University of Nebraska researchers. Post-weaning consists of wintering the calves on grass and selling long yearlings off grass at summer's end.

My projections are for a \$129 profit/cow if calves are sold at weaning. If the calves are wintered and grazed the following summer, the projected post-weaning outcome is a loss of \$11/calf, which means a \$118 total combined profit/cow.

My conclusion: This is the year to retain ownership of your 2002 calves.