A conversation from earlier this week:
Rancher: "Why is it that so many West River ranchers background their calves every year and most East River ranchers don't?"
Me: "The market won't pay for what East River ranchers are backgrounding their cattle on."
Rancher: "Well, we have all the feed here and they have little to none extra out there and ours is a lot cheaper."
Me: "It's cheaper per unit, but E. River ranchers are feeding too much of it for what they are getting on the return."
So we went on to discuss the core economic conundrum of what he was asking, which is a really good question and as he pointed out, is a little counter-intuitive until you have a full grasp of what the market will pay for and what it won't.
650# East River weaned steers off the cow goes straight to the lots and are fed a backgrounding ration for 90 days.
East River guys typically shoot for about 3 lbs. of gain per day. Why? Because that's what cattle feeders do...and here-in lies the problem. The market won't pay for what it costs them to put 3 lbs./day on those calves. Data from the 2008 SDSU Cow-Calf Business Report shows that the average gain for backgrounders East River is 2.76 lbs./day at a cost of $0.69/lb.
2.76 lbs./day x 90 days = 248 lbs. of gain
248 lbs. of gain x $0.69/lb. = $171.39
650 lb. weaned steer + 248 lbs. of gain = 898 lbs. (Today the market is paying about $103.50)
248 lbs. of gain x $103.50 = $256.68 gross return on gain/head
$256.68 gross return on gain - $171.39 total cost of gain = $85.29 net return on gain/head
Now let's look at a typical West River system:
650# weaned steer off the cow goes straight to the lots and fed a backgrounding ration for 90 days.
West River guys typically shoot for about 1.5 lbs./day gain. Why? That's all the feed they have on hand will produce and most won't buy supplements to increase gain because they have learned indirectly that the market won't pay for it anyway.
So we'll call it 1.5 lbs./day at $0.52/lb of gain ($0.35/day).
1.5 lbs./day x 90 days = 135 lbs. of gain
135 lbs. of gain x $0.52/lb of gain = $47.25
650 lb. weaned steer + 135 lbs. of gain = 785 lbs. (Today the market is paying $115.17)
135 lbs. of gain x $115.17 = $155.48 gross return on gain/head
$155.48 gross return on gain - $47.25 total cost of gain = $108.22 net return on gain/head
East River net return on gain was $82.21/head
West River net return on gain was $108.22/head
Both of the net returns on gain in this example are pretty good, but when you consider that a $0.69/lb. cost of gain is just an average and there are some who are running a COG of $0.80/lb. of gain, it's no wonder some of these calves don't get backgrounded.
So how did the West River calves have a higher net return on the gain with less total gain?
It is simply a function of how the gain put on the calves is valued in the market place compared to what it cost to put the gain on.
So the WR calves had a cheaper cost of gain and that gain was valued higher in the market place.
In fact, to get the same economic performance, the ER calves would have needed a $0.60 cost of gain to net the same return as the WR calves, eventhough they were outperforming them nearly 2:1.
The two biggest miscalculations guys make when backgrounding calves is, 1) how to value the gain they put on and 2) the difference between gross and net.
We just looked at valuing the gain in the example above, however, the common mistake is looking at gross return per head rather than net return on the value of the gain.
If you take the ER and WR calves from the example above after the 90 day backgrounding period and calculate gross return:
ER - 898 lbs. @ $103.50 = $929.43
WR - 785 lbs. @ $115.17 = $904.08
So on a gross return basis, of course the heavier cattle gross more because they are heavier. But gross says nothing about what it cost to get to that weight.
So when you think about backgrounding your calves consider how your cost of gain is going to be valued in the market place. Feeding cheaper feed and sacrificing performance can actually improve the economic efficiency in some situations. That is where the money is made in backgrounding.