As this piece was written in late June and early July, USDA had just announced two false-positive bovine spongiform encephalopathy (BSE) fast-test cases. Both, however, turned up negative in confirmatory testing by USDA.
The cattle markets responded negatively to the initial reports of the false positives but recovered rapidly. Figure 1 reflects the cumulative change in Live Cattle Futures from June 25 to July 6. August was down $1.55/cwt.; October and December were down 57¢ and 62¢/cwt., respectively.
Feeder cattle prices responded similarly (Figure 2). The August contract retreated $2.75/cwt., October fell $1.35/cwt., and November dropped back by 30¢/cwt.
Such reaction, however, looks good in comparison to the freefall after USDA's Dec. 23 announcement of BSE being found in the U.S. It appears the market is learning how to absorb these false positive tests.
While such quick tests clearly increase the odds of market volatility, the market overall continues to be bullish, thanks to strong demand and low domestic beef supplies. Barring no positive BSE confirmations, I expect a strong cattle market for at least the next three calf crops.
2004 Grass Cattle Prospects
Grass cattle in 2003 were very lucrative. My simulations suggest a labor and management net return per head of $152, after paying for the grass. That's likely a record high.
With such great profits on 2003 grass cattle, many ranchers plan to do the same in 2004. And, indeed, the economics of running grass cattle in 2004 look profitable.
My management simulations in May of my price projections suggested grass cattle in 2004 would return $51/head to labor and management. My July simulations project a $31/head net return to labor and management by running grass yearlings (Figure 3).
Grass cattle profits are generated from two components:
The first is made from buying and selling the cattle, which, in Figure 3, is labeled as the “buy/sell gross margin.” Typically, the buy/sell gross margin is negative as the price per cwt. of feeders going on grass is usually higher than the price of feeder cattle coming off grass.
The second component is the profit from animals' weight gain on the grass.
Net profits are the sum of the marketing buy/sell gross margin, plus the profits from the pounds gained while on grass. Since the buy/sell gross margin is typically negative, positive net profit typically has to be generated from the low-cost pasture gain.
Year 2003 was an exception. My simulated cattle came off grass $9 higher than the price going on grass. This is a positive $9 buy/sell margin!
Year 2004 is projected to return to a more normal buy/sell margin for grass cattle. Higher-priced cattle going on grass than coming off grass will generate a negative buy/sell margin.
The marketing simulations summarized in Figure 3 are for summer 2004, and are based on 625-lb. feeder steers going on grass in early May at $123/cwt., and 800-lb. feeders coming off grass in late August at $110/cwt. These simulations generate a -$12.88 buy/sell price margin, and a -$81 buy/sell gross margin on the initial feeder-steer weights (Figure 3, Section II). This negative marketing margin has to somehow be made up from low-cost pasture gains.
Section IV, Figure 3, shows the costs of production used in the simulation budget for 106 days on grass. The biggest cost items are interest on feeder cattle and cost of grass for 106 days. Many ranchers don't include either in their profit calculations, but both these opportunity costs should be included in a grass-cattle budget.
In this budget, interest is figured at a 7% annual rate times the animal cost for a $15.63 interest cost. Grass is priced at $10/steer month for a total grass cost of $35.33/head. Total production cost is projected at $81/head or 47¢/lb. of gain.
The gross market value of the 175-lb. gain is projected at $193, and the cost of producing those 175 lbs. is projected at $81. That leaves a $112 return on earned labor and management from pasture gain. Subtract the -$81 marketing margin, and the projected bottom line is $31 in earned labor and management wage.
Many ranchers run grass cattle on owned pasture. Instead of paying for the grass, they include the grass as bottom-line residual claimant, along with labor and management. In this simulation, that adds up to $66/head earned returns to pasture, labor and management. (Land taxes and fencing costs haven't yet been subtracted.)
Graze Or Sell?
Should cattlemen with grass cattle retain ownership or sell them as feeders? Let's look at my planning prices and budget.
The bottom line of my budget consists of two components. The first is the profit/loss from marketing these steers. The second is the feedlot gain profit/loss from adding weight to the steers. The final consideration is the sum of the marketing component plus the feedlot gain component. Figure 4 presents my cattle feeding business plan for finishing 2004 grass cattle.
Each month, I prepare an extensive set of projected planning prices, then project the marketing implications of these planning prices for a dozen different ranching production/marketing systems. My July marketing simulations have 800-lb. steers coming off grass Aug. 24 at $110.12/cwt., then going into a rancher-owned feedlot.
The steers are projected to finish in 141 days at 1,250 lbs. with an average daily gain of 3.2 lbs. and a target market date of Jan. 12, 2005. The projected slaughter price is $89.15, which produces a buy/sell margin of -$20.97 — a marketing loss of $168/head.
Section II of Figure 4 presents my projected feedlot costs. Projected feed costs ($2.48/bu. corn), are 34¢/lb. gained. Average feedlot cost of gain comes to 56¢/lb., for a projected feedlot profit of $149/head.
Section III presents the feeding business plan summary. Gross margin per pound is the sale value of the slaughter steer ($1,114), less purchase price of the feeder ($881), divided by pounds gained (450 lbs.). This provides a gross margin of 52¢/lb. of gain.
In this simulation, the total cost of the feedlot gain is projected at 56¢/lb. Projected net returns is a -4¢/lb. gained (56¢-52¢). The projected profit from finishing these grass steers is -$19/head.
My July simulations suggest ranchers take the $31/head profit by selling steers off grass in 2004. Let others risk losing $19/head from finishing 2004 grass steers.
If you have any thoughts on these budgets, contact me at 701/238-9607 or [email protected].
Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY.
|$123 Steers on grass||$110.12 Steers off grass|
|I.||Income Projection||$/head||Your Farm|
|Income||800 lbs. @ $110.12||$881|
|II.||Buy/sell margin||1989-1993 Avg. -$5.49||-$12.88||_____|
|Buy||625 lbs @ $123.00||$769||_____|
|Sell||625 lbs. @ $110.12||$688||_____|
|Buy/sell gross margin||-$81||_____|
|III.||Gross value of gain|
|Gain||174.9 [email protected] $110.12||$193||_____|
|Salt & mineral||$0.84||_____|
|Vet & medicine||$5.00||_____|
|Cost of gain||$0.47||_____|
|Gross value of gain||$193||_____|
|Buy/sell gross margin||-$81||_____|
|Cost of gain||-$81||_____|
|Management returns to labor ($/hd)||$31||_____|
|Breakeven selling price ($/cwt.)||$106.29||_____|
|I.||Marketing plan||Per head|
|Starting weight||800 lbs.||_____|
|Ending weight||1,250 lbs.||_____|
|Buy/sell margin||-$20.97/cwt. purchased||_____|
|Feed costs||$0.34/lb. gained||_____|
|Lot costs||$0.03/lb. gained||_____|
|Vet & medicine costs||$0.02/lb. gained||_____|
|Interest cost on feeders||$0.05/lb. gained||_____|
|Death loss||$0.02/lb. gained||_____|
|Haul feeder to lot||$0.009/lb. gained||_____|
|In processing||$0.00/lb. gained||_____|
|Marketing, hauling & shrink||$0.09/lb. gained||_____|
|Total cost of gain||$0.56/lb. gained||_____|
|III.||Business plan summary|
|Gross margin||$0.52/lb. gained||_____|
|Cost of gain||$0.56/lb. gained|
|Net returns||-$0.04/lb. gained||_____|