NEWS for North Dakotans
Agriculture Communication, North Dakota State University
7 Morrill Hall, Fargo, ND 58105-5665

March 18, 1999

The Market Advisor: Can Grass Cattle Put You Back in The Black in 1999?

Harlan Hughes, Extension Livestock Economist
NDSU Extension Service

Two things favor ranchers looking to grass cattle as a means of putting their ranch business back in the black in 1999. First, the economic losses from running grass cattle in 1998 were severe enough that many cattlemen will not run grass cattle again in 1999. Second, on the upward phase of the 10-year beef price cycle, the longer you own cattle, the higher the sale price. This suggests that wintering the lighter half of your 1998 calves and going to grass with them in 1999 may be quite profitable.

During my Fall 1998 outlook meetings I suggested that 1999 might just be the year for grass cattle. I based this statement on the projection that we might see $80 cattle going on grass and $80 cattle coming off grass in 1999. With a buy/sell margin of zero resulting in zero marketing losses, all profit made from the pounds gained counts toward the profit per head.

The potential for a zero buy/sell margin with grass cattle typically happens during the early years of the upward phase of the 10-year beef price cycle. The probability for this is about one year out of the 10-year cattle cycle. It seems to me that 1999 could be that year.

Now, before you all go out and bid up the price of grass steers, let's remember that this projection was made in October 1998. Let's take the rest of this Market Advisor to dissect that October 1998 prediction now that we have five-plus months additional history: a hog industry price collapse; very low feed grain prices; very low interest rates; deflation in the national-prices-paid index for the national economy; consumers spending more than their income; a Dow-Jones breaking 10,000; and a record-long business cycle with the economy currently running strong and beef production projected to decrease in 1999, let's look at the economics of running $80 grass cattle during the summer of 1999 with a zero buy/sell margin.

I have observed that many cattlemen look at just the cash costs of running grass steers, and they define profitability as net cash flow. Typically, cattlemen running grass cattle do not put a charge on their equity investment capital, grass or unpaid labor. In contrast, I am going to evaluate the economics of running grass cattle based on "economic profitability," as measured by the earned net returns to the operator and his family's unpaid labor, management and equity capital.

Economic profitability implies charging an opportunity cost for the investment capital used to purchase the grass cattle and an opportunity cost for the grass consumed by the cattle, even if the manager owns the grass land. I will not, however, put an opportunity cost on the unpaid family and operator labor used to run the cattle. Unpaid family and operator labor, management and equity capital will be the bottom line's three residual claimants.

Let's prepare a profitability budget for putting $80-per-hundredweight steers on grass and selling these same steers off grass also at $80 per hundredweight. Let's budget 625-pound steers on grass, assume a 1.65-pound average daily gain while on grass, charge $10 per steer month for the grass, and charge a 10-percent interest rate on the purchase value of the animals. These animals are projected to come off grass at 853 pounds. As we review this budget, you'll see why I talked about this in my fall 1998 outlook sessions as being a one-in-ten-year opportunity.

The earned returns to unpaid labor, management, and equity capital (assuming the money to purchase the animals was borrowed) projects to $87 per head for the target 1.65 pounds of average daily gain. The projected earned returns goes from $71 per head at 1.5 pounds of average daily gain to $93 per head for a 1.75-pound average daily gain.

The zero buy/sell margin implies no profit or loss was generated in marketing the cattle—all profit came from the cost of gain. In this example, cost of gain was projected at 42 cents per pound, so each pound of gain netted 38 cents. The projected earned returns to unpaid labor, management, and equity capital was $87 per head. From a risk stand point, the projected break-even selling price was $70 per hundredweight. Not bad for today's economic climate!

Given North Dakota's early March feeder cattle markets, the first half of my $80 grass cattle scenario has already come to fruition. During the first half of March, grass-type cattle (600-625 pounds) in the Northern Plains were selling in the mid- to low-$80s per hundredweight. It appears that my October projections may have underestimated the run-up in cattle prices during the first six months of 1999.

Let's relax the assumption of going on grass at $80 by taking current prices for 550-pound feeder calves, growing them in a drylot for 60 days at 1.25-pound average daily gain with a cost of 30 cents per pound of gain, and running theses steers on grass until Sept. 30, 1999. Steer calves weighing 550 pounds purchased for $85 in mid-March, fed to gain 1.25 pounds, and put on grass May 15, project to be 625-pound steers going on grass in mid-May at $81.54 per hundredweight. If we assume the same $80 off-grass price as I used above, the projected earned returns to unpaid family and operator labor, management, and equity capital is $85 per head. Again, from a risk standpoint, the breakeven price is $70 per hundredweight.

In the 1980s the buy/sell margin for grass cattle averaged a minus $5.50 for the 10-year period. Lets apply that same buy/sell margin to 1999 grass cattle with $85.50 cattle going on grass and again coming off grass at the same $80 per hundredweight I used previously. Projected earned net returns to grass cattle in this situation is $46 per headstill quite favorable.

Let's now focus on the selling price assumed for 1999 grass steers. What about the cattle feeder who buys these 853-pound feeder steers in September 1999 for $80 per hundredweight? What is the projected break-even price that can be paid for grass steers in the spring of 1999?

Data shows that while animal performance is less in the Northern Plains (when compared to the Central and Southern Plains), cost of gain is even lower due to low-priced feed grains. Transportation costs, however, are higher to slaughter plants in the Northern Plains. We will budget the finishing of these cattle in a Northern Plains feedlot with a projected localized $1.80 corn price and localized slaughter cattle transportation costs of $1.66 per hundredweight. Target average daily gain will be 3.37 pounds per day.

Feeder steers weighing 853 pounds and costing $80 per hundredweight that go into a feedlot on Oct. 1, 1999, are fed $1.80 corn and marketed with a $1.66 transportation cost end up with a projected break-even sale price of $71 per hundredweight in January 2000. A $25 profit margin for the cattle feeder was built in.

So, will we have $70-plus slaughter cattle in early 2000? The current futures market is at $67.85 for February 2000 feeder cattle. The slaughter cattle markets would only have to work up another $3 to $4 over the next nine months to hit this target. If the U.S. economy stays strong during 1999, I think we could indeed see slaughter cattle above $70 in the first quarter of 2000. All of this suggests that this still could be the year for profitable grass cattle.

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Source: Harlan Hughes (701) 231-7380 hhughes@ndsuext.nodak.edu

Editor: Tom Jirik (701) 231-9629

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