Should I sell or background my feeder cattle

Peter Callan (peter.callan@vt.edu), Extension Agent, Farm Business Management, Northern District and Kelly Liddington (klidding@vt.edu), Extension Agent, Animal Science, Richmond County

The recent decline in corn prices has some Virginia cattle producers feeding 600 pound weaned calves to higher weights.  Furthermore, this management decision has been supported by the strengthening of cattle prices in September with premiums on cattle futures in deferred months.  Calculation of the cost of feed for an animal to gain one pound of weight is key to determining the profitability of retaining ownership of these cattle. This article discusses the profitability of keeping 600 pound feeder calves by feeding them simple and complex rations as compared to just taking the calves of the cows and selling at the sale barn.

The Virginia Feeder Cattle Summary stated, that during September 2013 the weighted average price for a 6-7 weight medium and large #1 muscle feeder steers was~ $149/cwt. ($894/head gross value) and  8-9 weight steer in the same category was ~$137/cwt. ($1096 gross value).  Jason Carter, Executive Secretary of the Virginia Cattlemen’s Association, indicated that preconditioned cattle which are vaccinated, weaned, bunk and water trough broken have historically added value to the cattle. Preconditioned programs have generated an average $8/cwt. premium and are preferred by buyers over animals that had not been preconditioned.

Producers should note that the $8/cwt. premium is received only when the animals are sold in a preconditioned sale. The premium may increase even more when preconditioned animals are sold in trailer load lots (48,000 – 50,000 lbs.) and cattle originate from one farm or were co-mingled for more than 60 days.

Feeder calves can be fed a variety of diets for backgrounding that range from 1) simple rations of commodity pellets and pasture or 2) complex and or complete ration (Table 1) In the first scenario, a producer feeds on average five pounds of a 14% protein pellet costing ~$..68/day based on September 2013 prices for 167 days. Therefore during the fall and winter of 2013 – 2014, the remaining nutritional needs of the cattle are met from 2.5 acres of fall pastures[1] and stockpiled fescue.1  Thus the animals will be ready for sale in the spring of 2014.

A 725 lb. animal will eat ~22 lb. DM that is composed of 5 lb pellets (4.5 lb. DM) and 17.5 lb.[2] DM from pasture with an estimated rate of gain of 1.5 lb per day.2  Each animal will require 2.5 acres of pasture at rental costs of $25/acre for an annual charge of $62.50.  Adverse environmental conditions can reduce gain on pastures.  Vaccinations and fly control/lice are estimated to be $15/head.  The breakeven price for this type of  backgrounding program is $131.91/cwt (Table 1) when feed costs, pasture rental, vaccinations,  fly control/lice, hauling, marketing and interest on investment costs are included in the calculations.

The second complex ration  is composed of corn silage, barley silage, dry distillers grain, ground barley, 48% soybean meal, wheat mids plus minerals will cost $1.63 per day based on September 2013 prices. This ration is estimated to produce an average daily gain of 2.5 lbs over the 100 days on feed.   These animals will also receive vaccinations and fly control/lice at a cost of $15/head. The breakeven prices for feeding a more complex ration are $129.77/cwt (Table 1) when feed, vaccinations. fly control/lice, hauling, marketing and interest on investment costs are included in the calculations.

Table 1 provides a side-by-side summary of the assumptions spelled out above and includes the base scenario of selling calves at weaning.

Table 1: Assumption for analysis

Assumptions Calves sold off the cow at sale barn Calves fed simple ration (1) Calves fed complex ration (2)
Sale price $ / cwt. $149.00 $145.00 $145.00
Sale Weight 600 Lbs. 850 Lbs. 850 Lbs.
Gross sale price $894.00 $1,233.00 $1,233.00
Days on feed 167 days 100 days
Averaged daily gain – lb./day 1.5 2.5
Purchased feed costs $111.47 $166.15
Pasture costs (3) $62.50 0
Vaccination & fly control/lice $15.00 $15.00
Hauling costs. (4) $6.00 $8.00 $8.00
Marketing costs (5). $21.38 $28.16 28.16
Subtotal costs $27.38 $225.13 $217.31
Interest on investment (6) $29.96 $19.59
Total cost to market $27.38 $255.09 $236.90
Net value of calf $866.12 $866.12 $866.12
Total costs 1121.21 $1103.02
Net Returns $866.12 $111.80 $129.98
Breakeven costs / cwt (7) 131.91 $129.77
(1)   Average 5 lbs. 14% CP commodity pellets per day + pasture(2)    corn silage, barley silage, dry distillers grain, ground barley, soybean meal, wheat mids plus minerals(3)   2.5 acres/head (hd) at $25/acre(4)   600 lb animal/$6(hd), 850 lb animal/$8/(hd)(5)   $3.50 hd + 2% gross sale price

(6)   6% interest rate  X (6 cwt. X 149/cwt calf marketing cost + subtotal costs) X (Days on Feed/365)

(7)   (total costs / 8.5 cwt).

The market outlook for fat cattle will play an important role in determining whether a producer should sell calves that have not been weaned at the local sale barn or background them. In late September 2013 the futures market offered a premium for fat cattle marketed in February and April 2014.  The September 1, 2013 USDA Cattle on Feed report showed that the number of cattle in feedlots was down 7 percent from 2012.  Furthermore, the August placement of cattle in feedlots was 11 percent lower than one year ago. Therefore it appears that the record feeder cattle prices will continue in the future. However, if demand for beef softens and/or the economy weakens; consumers will substitute lower priced chicken or pork for beef. Consequently, declining prices for fat cattle will cause feeder calf prices to decline.

Every farm is different. By using their financial and production records, a producer should be able to estimate labor, fence repairs and equipment costs (loader tractor, mixer wagon etc) and mortality rates that will be included in the calculation of breakeven costs to determine the profitability of retaining ownership of cattle.  Clearly labor and equipment costs will be higher feeding a total mixed ration (TMR) than pasturing animals and feeding commodity pellets which will impact breakeven costs.

Producers may reduce the risk of potential declines in feeder cattle prices by enrolling in the Livestock Risk Protection (LRP) Program. The LRP Program is a risk management tool that insures profits. When producers purchase LRP insurance, they are buying a policy that renders an indemnity (payment) if the Chicago Mercantile Feeder Cattle Cash Index falls below the insured coverage price.

Coverage levels will depend on the amount of risk that the producer wishes to take. Remember, the longer the length of the policy, the risk of adverse price movements increases. Consequently, premiums will increase. It is recommended that producers work with their crop insurance agents to develop a LRP program that meets their net profit objectives.

Management is the key to profitability. Producers that are able to optimize forage quality should be able to consistently have daily rates of gain 1.5 – 2.0 lb. / day using a preconditioning program feeding minimal levels of  commodity pellets and good pasture.  Likewise, producers that feed complex rations should be able to have daily rates of gain of 2.5+ lb. /day.  Do not forget that weather conditions with excess heat, cold and precipitation can have a major impact on daily rates of gain and forage quality. With the potential for volatility in the grain markets during the fall of 2013, forward contracting purchased feed ingredients is an excellent way to lock in feed costs. Likewise, the LRP program is an excellent way for producers to lock in profits in the volatile cattle markets. On the other hand, producers that are unable to grow animals at the previously mentioned rates of gain would be better off selling the unweaned calves.  Otherwise they may not generate a profit.  Consequently, they will end up with cheap exercise for their hard work!

[1] The pasture has moderate fertility, did not receive nitrogen to increase yields and produces 1,700 pounds of dry matter (DM) per acre and has a rental rate of $25/acre.  With 70% grazing efficiency, there are 1,190 lb. of DM available per acre of pasture. Dry matter intake will be three percent of body weight (BW).  The DM intake is calculated as follows: 21.75 lb. (DM) = 725 lb. average weight (600 + 850 lb. /2) X .03% (BW).  The five pounds of 14% protein pelleted feed contains 4.5 lb DM = 5 lb. (90% DM).

 [2] Total pounds of DM from pasture are calculated as follows: 167 days X 17.5 lb. DM/day = 2922 lb. 2922 lb. DM / 1190 lb. DM/acre = ~2.5 acres needed for pasture and stockpiled fescue.
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