Ranching's economics are changing. Preliminary data suggest the cost of running a beef cowherd has increased 15-20% in the last two years.
Altered production costs and rising feed and livestock prices are generating a different set of ranch-level, cost-and-return (C&R) relationships. And it's imperative that ranchers have a good handle on their herd's annual costs and returns in this emerging biofuels era. Ranchers must ask themselves: “Does the emerging biofuels era favor a different ranch-level production/marketing system?” If so, what is optimum for you?
Let's use my latest set of suggested planning prices (see Table 1) to study the implications of today's changing feed and livestock markets. Last month, I detailed how I use local and regional salebarn price summaries, coupled with the futures market prices, to generate a set of suggested planning prices for 12-18 months into the future. The process allows me to localize my price projections to any region in the U.S. I update these planning prices monthly.
Because the individual detailed price tables are too large to present here, Table 1 summarizes my December 2007 suggested planning prices.
The three most visible factors in the price analysis are:
The futures market had dropped considerably from mid-December, starting with the January 2008 contract. A plot of weekly nearby feeder-cattle prices illustrates a downward trend in futures prices since September 2007.
Feeder-cattle basis (cash-futures) widened by $3 from mid-November to mid-December.
Evaluating traditional systems
December basis went negative at just over 700 lbs. (Figure 1). Expect this wider negative basis as long as feedlots' negative returns persist, which is likely due to cattle feeders' attempts to bid down feeder cattle.
I used these suggested planning prices, along with my monthly corn-price projections, to build an extensive set of production/marketing budgets. Each projects a C&R analysis for each individual production/marketing alternative evaluated. The results are summarized in a series of simple tables like in Table 2. The budgets are too large to present here, but there's a detailed budget behind each production/marketing evaluation.
Table 2 presents my “traditional” production/marketing alternatives:
Selling 553-lb. calves at weaning,
Backgrounding calves to 800 lbs. at a high average daily gain (ADG),
Backgrounding at a lower ADG
Finishing these backgrounded calves to 1,250 lbs. in a custom lot, and
Growing and finishing as calf-feds marketed at 1,175 lbs. in a custom lot.
The first production/marketing line in Table 2 evaluates “pre-weaning” economics; the next three lines evaluate “post-weaning” economics. Each production/marketing line also contains two key economic indicators — the “buy/sell-margin” and “cost-of-gain” (COG) based on projected corn prices. Feed costs were based on traditional corn-based diets common before the biofuels era, but at projected biofuels-era prices.
The buy/sell-margin represents the marketing loss per cwt. of initial weight going into the feedlot. The COG can be used to calculate feedlot profit made from weight gained while in the feedlot. A profit occurs when the feedlot profit exceeds the marketing loss. The right-most column presents the “projected profit per head.”
Profits in the first three marketing alternatives are cumulative, totaling $35/head. Profits in the first and fourth alternatives are also cumulative, totaling $60/head. While the two post-weaning alternatives project positive profits, neither exceeds the projected profits from selling at weaning. It makes no economic sense to subsidize the post-weaning marketing alternatives with pre-weaning profits, but it's a common practice in the industry.
Economics of 2008 calves
Northern Plains Farm Business Management Record Summaries indicate many calves are traditionally backgrounded at relatively low ADGs. Let's look at the economics of lower ADGs.
Table 3 focuses on the economics of backgrounding at three different ADGs — low (1.25 lbs.), medium (2 lbs.) and high (2.54 lbs.).
Two things stand out with respect to Table 3:
First, contrary to my projections for the emerging biofuels era, the buy/sell margins are still very wide. Thus, I expect some serious marketing losses on the initial weight going into these post-weaning profit centers, and the market-price adjustments to return profits to the cattle-feeding sector could become brutal.
Second, as ADG goes down, a pound of gain costs more. At low ADGs, maintenance costs eat you alive.
If a rancher is going to drylot backgrounded calves in this emerging biofuels era, he needs to target a high ADG. December's changing livestock markets and the resulting projected buy/sell margins, however, are still preventing any projected profits from backgrounding 2007 calves — even at high ADGs.
Most ranchers are now focused on the production of 2008 calves. Table 4 summarizes my projections for traditional marketing of 2008 calves.
Four things stand out in Table 4:
The profits for selling at weaning are projected down from 2007. Thus, ranchers need to explore post-weaning production/marketing options more thoroughly.
The buy/sell margins are smaller than those for 2007 calves. Smaller buy/sell margins favor the selected post-weaning production/marketing alternatives.
A narrowing buy/sell margin
Gain costs are generally higher, reflecting the projected increase in corn prices.
Profit from the first, second and third alternatives are $22/head, and the accumulative first and fourth production/marketing alternatives is $62. The optimum traditional marketing program in 2008 is projected to be the calf-fed production/marketing alternative.
By the first half of 2009, expect buy/sell margins to adjust to the point where profits will return to the cattle-feeding sector. By going to calf-feds with 2008 calves, ranchers should be able to generate the same net income as generated with their 2007 calves, but the optimum production/marketing system has changed.
So, is the optimum production/marketing program going to change for your ranch?
Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701-238-9607 or firstname.lastname@example.org.
My preliminary analysis suggests that, in this biofuels era of high feedlot costs of gain, the buy/sell margin needs to narrow to the -$6 to -$8 range to return profitability to the cattle-feeding sector. This applies to both backgrounded calves and finished yearlings. With $100 slaughter cattle, this implies $106-$108 feeder cattle and $112-$116 feeder calves.
I project $100 slaughter cattle for spring 2008 and spring 2009. With 2007's annual slaughter-cattle prices around $94, it's possible that continued increases in beef exports could drive us to a $100 annual average slaughter-cattle price by the end of the decade.