NEWS for North Dakotans
Agriculture Communication, North Dakota State University
7 Morrill Hall, Fargo, ND 58105-5665
October 14, 1999
Harlan Hughes, Extension Livestock Economist
NDSU Extension Service
Using price projections allows you to examine marketing alternatives for your 1999 calves. Effective marketing of those calves requires that you divide your beef business into profit centers and treat each profit center as a stand alone business. Finding the optimum marketing strategy for your calves requires that you evaluate the profit potential from each profit center. In today's tough times, you can not afford to subsidize any loss-generating profit centers.
Each week I prepare a set of price projections for marketing 1999 calves and post these projections to my web page at www.ag.ndsu.nodak.edu/cow . These projections can be found under the "weekly cattle prices" hot button. I use these price projections to generate a weekly set of value-added budgets evaluating alternative marketing strategies for 1999 calves.
I publish these weekly price projections and value-added budgets on the web to make my latest marketing evaluations available to my readers. The purpose of this column is to alert you of these price and value-added projections in hopes of stimulating your continued thinking about marketing your 1999 calves.
I often ask beef cow producers who retained their calves if they made their profits pre-weaning or post-weaning -- did they make their profit running the cow herd (pre-weaning) or did they make their profits from feeding and/or retaining their calves (post-weaning)? I think this is critical information. But without profit center analysis, few seem to really know.
Let's take a look at my projected pre-weaning profits for 1999 calves. Recognizing that the fall calf marketing runs have not yet started, I am still projecting fall 1999 steer calf prices in high $80s or low $90s. My Oct. 8 projections are for 500-600 pound steer calves to sell for $92 per hundredweight in western North Dakota. This market price projects a net income of $109 per cow for my 166 cow demonstration herd. This is up 122 percent from last year's demonstration beef cow profit center earnings of $49 for producing 1998 calves. In fact, last year's average pre-weaning profits from all IRM cooperators' beef cow profit centers was $43 per cow. As indicated by my demonstration herd, this year's pre-weaning profits are projected to be substantially higher. In fact, my demonstration herd's accrual adjusted 1999 gross income per cow is projected at $479 per cow -- up from $401 per cow in 1998.
My demonstration herd has a projected 1999 unit cost of producing a hundredweight of calf at $70 per hundredweight. The five-year average unit cost of producing a hundredweight of calf for all of my IRM Cooperators is also $70 per hundredweight. Producing calves with a unit cost of production at $70 per hundredweight and selling these calves in the $90s makes ranching almost fun again!
Now let's turn to my projections for post-weaning profits from 1999 calves. Let's consider retaining the calf crop from my demonstration herd and backgrounding these calves up to 800 pounds to be sold in mid-January 2000. These 1999 calves are to be put into a backgrounded lot valued at $92 per hundredweight and sold as 800-pound feeders at $81 per hundredweight. This generates a buy/sell margin of a minus $11 which, in turn, suggests a marketing loss of $61 on the original 565 pounds.
Given my target average daily gain of 2.6 pounds per day, these calves should be on feed for 91 days. Feeding $1.30 barley and $40 hay generates a projected feed cost of $0.22 per pound of gain. When adding in all non-feed costs, the projected total cost of gain goes to $0.47 per pound. Non-feed costs include such things as a lot charge of $0.10 per day, a 9 percent interest charge on the purchase price of the calves, vet and medicine expenses, shrink, and other marketing expenses. Given the projected $81.26 per hundredweight selling price, a feedlot profit of $81 per head is projected from the 235 pounds of gain. Combine the marketing loss of $61 with the feedlot profit of $81 and the projected net income from backgrounding is $20 per head.
Let's now assume that someone buys the backgrounded 800-pound feeder steer for $81 and finishes it to 1250 pounds by mid-June. If average daily gain is 3.3 pounds, this steer would be on-feed for 136 days. My projected mid-June 2000 selling price is $68, giving a buy/sell margin of a minus $13 again large by historical standards. This generates a marketing loss of $104 on the initial 800 pounds.
Feedlot finishing diet costs will be at or near a 10-year low this winter. Feeding $1.60 Northern Plains corn suggests a feed cost of gain at $0.21 per pound gained. After adding in non-feed costs, and the added Northern Plains marketing costs, total cost of gain is projected at $0.44 per pound. Producing the gain at $0.44 and selling it for $0.68 generates a feedlot profit of $109. Combining a marketing loss of $104 with the feedlot profit of $109 results in a projected net gain of $5 per head. If the backgrounding and finishing profit centers are combined, I project post-weaning profit of $25 per head. If you are feeding 20,000 head, not so bad. If you are feeding a 100 head, not so good.
A third marketing alternative is to market these 1999 calves as calf-feds where they are immediately put in a finishing lot and fed to market weight as fast as possible. I assumed an overall gain of 2.9 pounds for the 210 day feeding period. Calves going into the lot at $92 and coming out of the lot weighing 1175 pounds at $70 generates a buy/sell margin of minus $22. The higher projected selling price for calf-feds is due to marketing in May rather than in June as assumed in the previous backgrounding/finishing scenario. This negative $22 buy/sell margin for calf-feds generates a projected marketing loss of $124 on the initial 565 pounds.
Feeding $1.60 corn and $40 hay projects to $0.22 feed cost per pound of gain. After adding in non-feed costs, and a $1.66 per hundredweight Northern Plains trucking cost, total cost of gain is projected at $0.40 per pound. Feedlot profits for the 610 pounds of gain are projected to be $181 per head. Adding together the feeding profits of $181 and the marketing losses of $124 suggests a projected net return of $57 per head for the calf-feds.
Earned net returns from calf-feds is projected to be double the earned returns from the backgrounding/finishing scenario. Here in lies the problem with backgrounding calves in the Northern Plains. Backgrounding is part of a high-cost production system.
In summary, it appears that the profit potential from 1999 calves identified by this week's price projections will go mostly into pre-weaning profits allocated to the cow-calf producer. My current conclusion from all of this is that today's calf prices are rapidly approaching the point where is makes economic sense for ranchers to just sell their calves at weaning and take the money to the bank. My current thinking is that it makes economic sense to sell $90 and above calves this fall. On the other hand, it makes economic sense to retain calves selling under $90. Competition for the reduced number of feeder cattle, in today's expanded feedlot sector, may well limit the profit potential for retained ownership over the next several years. Clearly, the cow calf producer is moving into the drivers seat.
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Source: Harlan Hughes (701) 231-7380
Editor: Tom Jirik (701) 231-9629
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