In my last BEEF magazine Market Adviser, I suggested that selling backgrounded calves was more profitable over the complete beef price cycle than selling at weaning. My study rancher raised this question: Is this true both up the price cycle and down the price cycle?
Let me try to answer my study rancher’s question. Figure 1 presents the summary table I generated to compare my study rancher’s marketing alternatives over the rising years of the price cycle versus the downward years of the price cycle.
The top two lines in Figure 1 present the 10-year data for 2009 through 2018. This was presented in my last Market Adviser.
The middle section is new and presents a similar three-line market analysis of the upward price years 2009 through 2014. The bottom three lines present analysis of the downward years, 2015 through 2018.
The last two columns — sell backgrounded calves and retain ownership — include the profit from the beef cows when selling calves at weaning.
Marketing “up” the price cycle. My conclusion from this expanded analysis is that my study rancher should sell backgrounded calves during the upward years of the beef price cycle.
Over those six years (2009-14), my data suggest a six-year average profit of $256 per cow per year. This compares to a six-year profit of $189 average per cow per year by selling at weaning. Selling backgrounded calves added another 20% profit per cow.
On the upward side of the price cycle, selling backgrounded calves even exceeded retained ownership.
Marketing “down” the price cycle. The combined average profit per cow per year for the four years (2015-18) for selling backgrounded calves was 18% less than just selling at weaning.
My conclusion is that my study manager should background his calves on the upward portion of the beef price cycle and should not background on the downward portion of the beef price cycle.
Another conclusion from this data analysis: Retained ownership of calves targeted toward a May harvest date — not an easy target — is the most profitable marketing program in the downward portion of the beef price cycle.
During the downward phase (2015-18), profit per cow per year was increased 92% via early weaning, retaining ownership and selling in May, over selling at weaning.
In the upward part of the beef price cycle, my analysis suggests that retained ownership only raised profit 5% over selling at weaning. Probably not worth the risk.
Other side of the price cycle
What did my study rancher say after my review discussion of this with him? “Wow! That is food for thought. OK, I traditionally have not backgrounded my calves. So, what should be my target backgrounded weight on the upward portion of the cattle price cycle?”
Using value added as a marketing tool. I hope my readers have been reading Doug Ferguson’s articles on the webpage of Beef Producer, BEEF’s sister publication. He puts a lot of emphasis on the value of added weight.
Value of added weight is a very important marketing factor. You should put on added weight only as long as the cost of gain for each weight increment is less than the market value of that incremental weight.
Value of added weight. Each midmonth I do a price analysis of eastern Wyoming-western Nebraska sale barn prices. My week of mid-August 2019 price table is presented in Figure 2.
The value of the last pound, the column on the right, is the statistical slope of the price line. It is expressed in dollars per cwt. I calculate this value of last pound table monthly for my study rancher. This is the value of added weight that Ferguson refers to in his articles.
Let’s assume my study rancher is backgrounding a 577-pound weaned steer calf to 800 pounds. At 600 pounds in mid-August, the value of the last pound was $1.13 per pound.
At 700 pounds, the value of the last pound was 96 cents per pound. And at 800 pounds, the value of last pound was 79 cents per pound. Clearly, the value of the last pound went down as the weight went up.
Cost of gain. The other side of the coin is that the cost per pound of gain goes up as the animal gets heavier. This is primarily due to the maintenance cost of the current weight of the animal as it grows.
In summary, as the animal gets heavier, the cost of gain goes up and the value of gain goes down.
Economic theory tells us that profits are maximized at that weight where “cost of last pound of gain equals the value of that added weight.” Sounds reasonable to me, but easier said than calculated.
Over the years, I have been working on a computerized model that identifies the backgrounding weight that maximizes backgrounding profit. I have a prototype of that model operational now. Remember, profit is maximized at that weight where “cost of gain equals the value of added weight.”
I used this model to predict the optimum selling weight, and the results are summarized in Figure 3.
The gold line in Figure 3 is my model’s calculated value of added weight in mid-May 2019, and the maroon line is my model’s calculated cost of gain at the various animal weights.
Economic theory says that where the increasing marginal cost line crosses the decreasing value of the last pound line is the maximum profit weight.
The two lines cross at 721 pounds, suggesting that profits should be maximized at 721 pounds rather than the 800 pounds that I had previously been budgeting. Of course, there is no guarantee that this is positive profit — only that is the highest profit possible.
The optimum backgrounding weight is going to vary from year to year depending on that year’s cost of gain and that year’s market prices.
What do you think my study rancher’s reaction to this is going to be? Stay tuned.
Hughes is a North Dakota State University professor emeritus. Reach him at 701-238-9607 or email@example.com.