Given all that's transpired in the past eight months, should a rancher market his 2001 calves differently than other years?
There's no easy answer. This month and next, however, I will provide an economic evaluation of alternative marketing strategies for ranchers. I will utilize the projected planning prices I update each month.
This month, I'll identify five traditional, multiple-year marketing strategies, and apply them to the marketing of a study herd's 1999, 2000 and 2001 calf crops. In my July column, I'll discuss the April 2002 price wreck and evaluate several post-April 2002 (Plan B) marketing strategies.
Market Strategy Evaluator
Over the last several years, I've developed an extensive simulation model for studying the profit potential of several marketing strategies for Northern Plains ranchers. The study herd I use is a typical Northern Plains, 153-cow herd with a 92% spring-born calf crop and a 565-lb. average weaning weight.
The capital investment is $2,100/cow with a $330/cow debt, most of which is a long-term pasture loan. This herd's unit cost of producing a cwt. of calf is $70.
The earned net returns to unpaid family and operator labor, as well as management and equity capital generated by the beef cow profit center, serve as the measure of the profits generated by each marketing strategy. Since farm-raised feeds are charged to the beef cowherd at local market prices, farming costs for raising the feeds aren't taken into account but are charged to another profit center.
The five traditional marketing strategies applied to this study herd include:
Selling calves at weaning,
Backgrounding calves at a high rate of gain with a 2.5-lb. average daily gain (ADG),
Backgrounding calves at a medium rate of gain with a 1.5-lb. ADG,
Backgrounding and finishing in different lots, and
Growing and finishing calves with a 2.9-lb. ADG from weaning to harvest.
These five strategies were used to market the 1999, 2000 and 2001 calf crops. I used actual prices for the 1999 and 2000 calf crops, and my late April 2002 projected prices for the 2001 calf crop.
Figure 1 summarizes the annual earned net returns for the five strategies applied to the three calf crops. There was considerable year-to-year variation in earned net returns.
For example, earned net returns from selling at weaning went up in year 2000 compared to 1999, and then they fell in 2001, though remaining above year 1999. Growing and finishing, on the other hand, peaked in 1999 and is projected to be the lowest in 2001. The other four strategies peaked in earned net returns with the 2000 calf crop.
No single marketing strategy appeared to work best in all three years. Growing and finishing was the highest with the 1999 calf crop. Backgrounding and finishing in two different lots was tops for the 2000 calf crop. Meanwhile, backgrounding at a high rate of gain is projected to generate the highest earned net returns for the 2001 calves based on prices for the week of April 26, 2002.
Figure 2 summarizes the accumulated three-year, earned net returns for each strategy.
The highest accumulated three-year, earned net returns strategy for this 153-cow herd was generated by the growing and finishing strategy, in which the calves were weaned directly into the feedlot and fed to grow at a maximum growth rate until slaughter. It earned $66,089 over the three years, or $144/cow/year.
Second highest was backgrounding at a high ADG. It generated $135/cow/year.
Third was backgrounding at a medium ADG of 1.5-lbs. ($122/cow/year).
Backgrounding and finishing in different lots was fourth ($119/cow/year).
Selling at weaning fared the poorest. Its three-year average was $113/cow/year in earned net returns. See Table 1.
|Market strategy||1999 Calf crop||2000 Calf crop||2001* Calf crop||Accumulated||% of maximum||Per cow||Variability|
|Sell at weaning||$15,606||$18,972||$17,221||$51,799||78%||$113||$3,366|
|Background plus finish||$20,560||$25,134||$9,164||$54,858||83%||$120||$15,970|
|Grow and finish||$27,421||$23,837||$14,831||$66,089||100%||$144||$12,500|
|*Used projected prices in analysis.|
Consider The Risk
Just identifying the highest three-year average marketing strategy isn't the complete picture, though. The risk of a low-profit year also must be considered.
A formal measure of risk isn't possible with just three years of data, but we can generate a proxy for risk. Column 8 (lighter tint) in Table 1 presents the variability data through a risk proxy, which is the earned net returns generated in the low-profit year subtracted from those generated in the high-profit year.
The smallest year-to-year variability came by selling calves at weaning. Backgrounding-high was a close second.
Meanwhile, backgrounding and finishing had the greatest year-to-year variability. Growing and finishing was the second highest.
This analysis suggests that a growing-and-finishing marketing strategy (retained ownership) offered the highest average earned net income for Northern Plains herds at this stage of the cattle cycle. This strategy, however, also had the highest risk.
For a more risk-averse rancher, the study suggests that backgrounding at a high ADG is a good alternative. Earned net returns may be smaller, but so should the variability. Meanwhile, selling at weaning had the lowest earned net returns and the lowest risk factor.
Obviously, with risk comes profit potential. Reducing the risk reduces the profit potential. Your marketing strategy must match your willingness and financial ability to take risk. No one strategy fits all.
Harlan Hughes is a North Dakota State University professor emeritus. Retired last spring, he lives in Laramie, WY. Contact him at 701/238-9607 or firstname.lastname@example.org.
Download livestock marketing tools and information — including Hughes' suggested planning prices and traditional marketing alternatives for 2001 calves — at his new Market Advisor Web site at www.beef-mag.com. Just look for the “Market Advisor Online” button with Hughes' picture.