NEWS for North Dakotans
Agriculture Communication, North Dakota
State University
7 Morrill Hall, Fargo, ND 58105-5665
May 14, 1998
Harlan Hughes, Extension Livestock Economist
NDSU Extension Service
As you finished spring calving and turned the cow/calf pairs outdoors, I bet you gave a sigh of relief and looked with pride as the baby calves frolicked in the green grass. Now it is time to start thinking about how you are going to market your 1998 calf crop.
Marketing will be better this year than last. The first thing that you must do is firmly place the cattle cycle in your mind. Just where are we in the current national cattle cycle? How is the current cattle cycle going to impact the price of 1998 calves?
The decade's national beef cow numbers peaked out in the Jan. 1, 1996, USDA All-Cattle Inventory. The Jan. 1 all-cattle numbers have trended downward in 1997 and again in 1998. Clearly, U.S. and Canadian cattle numbers are trending downward and calf prices are working upward. Our current projections are that feeder calf prices will peak in years 2000 to 2001. Feeding large numbers of heifers was the straw that broke the camel's back last year.
High cattle numbers and high corn prices in 1996 forced feeder cattle prices for 1996 calves so low that ranchers held many of their 1996 calves over to grass in 1997. Large numbers of heavy-weight grass cattle in 1997, augmented by substantially increased heifer feedings, led to record numbers of cattle fed to record slaughter weights this last year. The net result was record beef production coupled with extremely high pork production at a time when the Asian financial crisis led to reduced demand.
The good news, at least for now, is that favorable calf prices should stimulate rancher interest in expanding their beef cow herds instead of feeding 1998 heifers. I project that ranchers will decide to breed a considerable number of their 1998 heifer calves. Feeder calf prices should get stronger and stronger over the next two to three years, amplifying rancher interest in expanding cow herds.
Rancher breeding of heifer calves suggests that feeder cattle supply will be decreased even more over the next two to three years due to the lower overall cattle numbers and the diversion of heifers from feedlots to the breeding herd. The net result is that there will be excess feedlot capacity leading to aggressive feeder cattle bidding over the next two or three years.
As the beef industry goes from the high point in the current cattle cycle (1996) to the low point (2000), profitable beef cow/calf production systems will change. My Integrated Resource Management (IRM) studies suggest that big cows producing big calves will move back into the high-profit limelight. My IRM data also show that big cows, with large appetites, generated large losses during the 1994 -1996 price lows. Interestingly enough, the low-cost one-third of my producers with medium-weight calves seem to remain profitable all through the cattle cycle. The high-cost one-third of my producers have very few profitable years during a complete 10-year cattle cycle. The key to profitability is to be a low-cost producer rather than to wean heavy calves. Astute cattle producers will push the pencil, looking for production and marketing alternatives that will make them the most profit.
Grass turn-out time is a good time to start thinking "marketing." I am writing this Market Advisor to encourage my Integrated Resource Management (IRM) cooperators to use their 1997 IRM-Financial And Reproductive Management System (IRM-FARMS) analyses to plan the marketing of their 1998 calves. I will walk my IRM demonstration herd through a marketing plan analysis to illustrate how to do this.
The first principle for building a marketing plan is to divide your production system into profit centers. Then, treat each profit center as a stand-alone business with its own costs-and-returns analysis. Consider operating only those profit centers with projected profits and cutting out those profit centers with projected negative profits.
Due to space limitations, I will only consider (1) marketing my demonstration herd's calves at weaning and (2) backgrounding these calves and selling them as feeders during January 1999.
A key factor in building a marketing plan for 1998 calves is to develop a set of planning prices. Last year I published five Market Advisors describing a simplified price projection system based on the futures market. I used this simplified price projection system to prepare my latest set of feeder calf planning prices, scheduled to be published soon on my Web page http://www.ag.ndsu.nodak.edu/cow under the Weekly Market Prices button. A copy is also available from my secretary, Sandy, at 701-231-8642. I will use these planning prices to build a marketing plan for my demonstration herd's 1998 calves.
Steer calves weighing 550 pounds are currently projected to sell for $94-$95 in October 1998. This is $7-$8 higher than what Western North Dakota steer calves brought in October 1997. Heifer calves are projected to sell in October 1998 for a $5 discount to steers. Last year, the heifer discount was around $8 per hundredweight. Cull cows in the fall of 1998 are projected to sell for $42 per hundredweight, and cull bulls are projected to sell for $47. These new planning prices were fed into the 1997 IRM-FARMS model for my demonstration herd, and a 1998 projected economic and cash flow summary was generated. The actual 1997 costs of production were used to approximate my 1998 production costs.
Given my 166-cow herd with its 87 percent calf crop and its $73 unit cost of producing a hundredweight of calf, my projected 1998 earned return was $104 per cow. This compares to my 1997 actual earned return of $61 per cow. Remember, earned returns are what the ranch family is paid for their unpaid family and operator labor, management and equity capital. The projected 1998 earned return from the total 166-cow profit center was $17,264. This is up 70 percent from the $10,126 return actually earned from this herd's 1997 calves.
The backgrounding marketing alternative was evaluated with a new North Dakota IRM tool called IRM-Feeder. The beef cow profit center sold the calves to the backgrounding profit center for $92 per hundredweight and they were assumed backgrounded until 800 pounds and sold in late January 1999 for $77.20 giving a projected buy/sell margin of minus $14.80 per hundredweight purchased. This large, negative buy/sell margin implies a marketing loss of $85 ($14.80 x 5.79 hundredweights) on the original 579 pounds. Even with a projected feed cost of gain at $0.26 per pound and a total cost of gain at $0.55 per pound, I could not project enough profit from the added 250 pounds to make up the projected marketing loss brought about by the minus $14.80 buy/sell margin. Until the projected buy/sell margin decreases, I certainly am not interested in backgrounding my 1998 calves. We'll wait three months and see what the markets do this next quarter. In the meantime, my marketing plan is to sell at weaning. What's your marketing plan?
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Source: Harlan Hughes (701) 231-7380
Editor: Barry Brissman (701) 231-7866
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