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Livestock and Forages News Articles
Arkansas Beef Improvement Program - An Integrated Resource Management Program
October 2008
Hold Them or Sell Them?
In October, the Department of Animal Science and the Livestock and Forestry
Branch Station at Batesville hosted Dr. Harlan Hughes, a national recognized
livestock economist. Dr. Hughes presented his current and future assessment of
the cattle industry. One point he made was those producers with good forage and
grazing management systems that can add 250 to 350 pounds of gain on calves will
be winners. Arkansas with its natural resources, forges, weather, markets, and
location should be one of the best states in the country to take advantage of
this system. In addition, Dr. Hughes sees the selling prices of 500 lb, 750 lb
and fed steers coming closer and closer together until they are all selling at
the same price. If this occurs it would be to the advantage of Arkansas
producers to keep raised calves for a grazing or background phase.
Backgrounding calves is the growing of steers and heifers from weaning for a
certain period of time or until they enter the feedlot. It is a beef cattle
production system that uses pasture and other forages. Calves generally gain
from 100 to 400 pounds, depending on the available forages, ration fed and
length of time involved. The weight gain comes primarily from muscle and frame
development, with little fattening. In Arkansas these gains are accomplished as
economically as possible by making maximum use of forages such as pasture or
hay. Little, if any, grain is used in most backgrounding programs.
From 1980 to 2003, CattleFax reported selling a 475-pound spring-born
steer in October was profitable 63% of the time, with an overall average return
of $26.96 per head. If this spring-born calf was retained at weaning,
back-grounded to gain 325 pounds and sold in March, overall return was $58.23
and was profitable78% of the time. Backgrounding a 575-pound spring-born steer
was even more profitable when retained ($80.72 sold in February). With the
increased cost of feedlot gain, the value of gain on forages becomes more
valuable. Therefore, backgrounding home-raised calves represents a relatively
simple means of adding value to calves; however, it is a value-adding
opportunity that many producers may not view as attractive for a number of
reasons. Cash flow obligations may compel some producers to sell calves at
weaning. Producers may not have the cattle working facilities needed to process
calves, and if loan payments are due, can they be deferred until the calves are
sold?
The buy/sell margin or rollback is the price difference between the purchased
price of the lightweight calf and the selling price of the heavier calf.
Generally speaking, large buy/sell margins favor selling at weaning and smaller
buy/sell margins favor the selected post-weaning production/marketing
alternative. The buy/sell margins can be adjusted in three ways: 1) calf cattle
prices can be reduced, 2) feeder calf prices can increase or 3) a combination of
calf prices adjusting downward and feeder calf prices adjusting upward.
The buy/sell margin is important because it can be used to calculate the
breakeven cost of gain. For example, at the time this article was written the
purchase price of a 500-pound steer calf in October was $99 per cwt with a total
value of $495 ($99 times 5.0). The April’s futures price for a 750 pound steer
calf was $100 per cwt with a total value of $750. In this case there wasn’t a
“roll back” at all. In order to determine the value of the gain, subtract the
two values ($750 - $495 = $255). Divide the value of the gain ($255) by the
pounds gained (250) and the result is $1.02 per pound of gain. Therefore, the
breakeven cost of gain, or the point where returns equal costs, is $1.02. If the
cost of gain is calculated to be $0.52 per pound, then $0.50 per pound times 250
pounds is the profit ($125) gained by retaining ownership through the winter.
Dr. Hughes made two more important points. Today’s cattle producer has no
experience managing cattle in today’s financial environment. His reasoning -
never in our lifetime have we experienced a financial environment as we are
experiencing today. Never before have we seen the volatility of the markets
(futures market, stock market, oil, etc.), the high cost of corn due to
increased demand, tightness of credit, and the impact on the American’s
household budget. The second point Dr. Hughes made was to wait until the very
last minute to make the decision to hold them or sell them. Once again his
reasoning was because of the volatility of the markets. From August 1, 2008 to
October 10, 2008 corn futures dropped 18%, feeder cattle futures dropped 17%,
live cattle futures dropped 12%, crude oil dropped 33%, Dow index dropped 30%
500 lb steers prices dropped 12%, 750 lb steers prices dropped 14% and fed steer
prices dropped 6%. Even with the dropping of 500 and 750 lb steer prices, the
roll back between the prices have continued to narrow.
Over the past 20 years, the cow/calf producer made a profit 18 of those
years. That is the longest period of profitability at the cow/calf level in
history. Things are about to change. Will you change?
By: Dr. Tom R. Troxel, Professor
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