Opportunities to Background Calves This Fall?

This could be a good year to think about backgrounding calves, especially with the cash and futures we have seen this summer. Although I think the current spike we are seeing will fade within the next couple of weeks, I think there are some really amazing opportuntiies to add value to this years' calf crop.

There are however, two key factors to consider:

1) Using price protection is a must
2) COG must be kept to an absolute minimum

Last week I talked about how the value was in the market positions and not so much in the cattle themselves. But when the calves you are feeding are out of your herd, the value is in the cattle themselves and not so much in the market positions. In this situation, the position in the market is purely protection with little to be gained on the turnaround.

Earlier this summer I wrote a piece on how the cash market was not valuing the feed that was being put into calves in the eastern part of the state. As a rule that is still true, however, the futures market is valuing that feed very nicely at this point in time. The problem is that the cash market right now also is valuing that feed, which may lead some to believe that price protection is not necessary. I respectfully disagree as I expect that will change as we move into the weaned calf run later this fall. Therefore, price protection on backgrounded calves is going to be critical to retain that value.

At this point, I think an LRP is the best option for the average rancher that doesn't regularly use market protection tools. An LRP works basically like crop insurance and functions basically the same as an Option Put without the need to buy back an opposite position in the market. With an LRP, you can protect the bottom side and let the top ride. If cash prices at market time are higher than the value of the LRP, you are simply lose out on the premium cost of the insurance, which is really peanuts in the grand scheme of things.

Short hedging and Options Puts are still great tools for those that are familiar with how they work, but for the average Joe Rancher who doesn't want to mess with buy backs or margin calls, I think LRP's will work nicely for them.

Let's look at some examples:

I'm going to use a group of 600# East River weaned calves as an example.
Calf breakeven off the cow: $550/head or $0.92/lb
If these calves are marketed off the cow November 1 at $117.00, gross revenue will be $702.00/hd less commission.
Net return on these calves will be $152/hd

Now let's say these calves are short hedged on the JAN 11 and backgrounded for 75 days:

Weight in: 600#
Short hedged at $115.67
ADG: 2.5#/day
COG: $0.65/lb
Weight out: 790#
Breakeven: $85.57
Net return: $237.02/hd less basis and commissions

So the value of backgrounding these calves was $85/hd which was about 36% more than if they were sold right off the cow.

Now let's look at a group of 600# West River weaned calves as an example.
Calf breakeven off the cow: $475/head or $0.79/lb
If these calves are marketed off the cow November 1 at $117.00, gross revenue will be $702.00/hd less commission.
Net return on these calves will be $227/hd

Now let's say these calves are short hedged on the JAN 11 and backgrounded for 75 days:

Weight in: 600#
Short hedged at $115.67
ADG: 1.5#/day
COG: $0.40/lb
Weight out: 712#
Breakeven: $72.84
Net return: $305.14/hd less basis and commissions

Don't be fooled by the larger net return on these West River calves, most of the higher net return was realized by slightly cheaper cow cost before the calf was weaned. The actual value of backgrounding these calves was $78.14/hd. This is still a very nice return on the gain and is 25.6% higher than if these calves were sold off the cow.

I used a short hedge for ease of calculation, an Option Put or an LRP will provide similar protection with some variation in implementation and payout.

The bottomline here for ranchers is that I think there is some money to be made this year with a backgrounding program, but protecting your bottom side will be the key to turning this value into cash in your pocket.

Thanks for stopping by and have a great day!!

This Week In Cattle

The big fall run on cattle coming off grass is currently underway. There are some crazy things happening in both the cash and futures markets that are creating a perfect storm for guys that are willing to jockey for positions in the futures market to protect their investments.

I'm not really going to speculate much on the reasons that this cattle market has gone out of it's mind because I really don't know why and furthermore it doesn't really matter. There are two things that I think matter right now, 1) This market is very volatile and is not really supported by fundamentals so it could tank as fast as it took off and 2) There have been millionaires made in the last week so look for the cash market to respond next week.

What does that mean? For #1, the money right now is in the futures positions, not in the cattle themselves so if you get into any cattle, short hedge them now!! Better yet, with the volatility in the market, option puts or Livestock Risk Protection (LRP) might be a good choice to protect the bottom side and let the top side ride. Avoiding margin calls could be the name of this game for awhile.

For #2, if you have cattle that are finishing up on grass, get them to town. I don't forsee this market insanity lasting much past mid-September so you've got a couple weeks to market unprotected calves. This is pretty much what we saw happen last year at this time during the grass cattle run.

If you have your grass cattle locked in on a SEP 10 contract, don't get jittery and dump your position thinking it may go higher. It may go higher, but not much so you aren't going to gain much since you've already paid the margin calls.

I had a marketing professor when I was in college tell me that "bears make money and bulls make money, but hogs always get slaughtered". Hold your position and market cattle as planned, you locked in a profit in May and the profit is still there.

It appears as though there is some real potential in some quick turns on backgrounding some of these calves coming off grass for 60-75 days this fall. The key will be cheap cost of gain. I think this type of program will build some flexibility into your system because come January you may decide to dump your position on some of your contracts in the feeders market and get back in on the fat market and go ahead and finish them out. You'll have to pencil it for yourself, but I think that possibility exists.

Let's look at some examples:

Buy steers medium 1, 668# off grass @ $127.00
Lock 'em in the JAN 11 @ $116.60
Feed for 75 days with a COG of $0.70
Weight out: 855#
Breakeven: $114.50
Profit: $17.90/head less basis and commissions

Buy steers medium 1, 777# off grass @ $120.18
Lock 'em in the JAN 11 @ $116.60
Feed for 75 days with a COG of $0.70
Weight out: 964#
Breakeven: $110.42
Profit: $59.55/head less basis and commissions

Buy steers medium 1, 870# off grass @ $116.36
Lock 'em in the JAN 11 @ $116.60
Feed for 75 days with a COG of $0.70
Weight out: 1057#
Breakeven: $108.14
Profit: $89.46/head less basis and commissions

Buy heifers medium 1, 695# off grass @ $117.86
Lock 'em in the JAN 11 @ $116.60
Feed for 75 days with a COG of $0.70
Weight out: 867#
Breakeven: $108.34
Profit: $71.62/head less basis and commissions

Buy heifers medium 1, 780# off grass @ $115.28
Lock 'em in the JAN 11 @ $116.60
Feed for 75 days with a COG of $0.70
Weight out: 937#
Breakeven: $107.67
Profit: $83.69/head less basis and commissions

Buy heifers medium 1, 874# off grass @ $110.24
Lock 'em in the JAN 11 @ $116.60
Feed for 75 days with a COG of $0.70
Weight out: 1016#
Breakeven: $104.45
Profit: $121.99/head less basis and commissions

I would probably stay away from the light steers as demand for them is driving the price through the roof as has been the case all summer. The medium and heavies are probably the best bet right now with heifers returning a little better than steers. These breakevens are calculated on a sliding 2.5#/day ADG so I would leave them un-implanted and keep your COG to $0.70/lb or less if you can. I think selling un-implanted 10 wts. in January will keep you near the top of the market when you take them to town. It shouldn't be too much trouble to reach that COG goal with a little management. If you decide to finish some of them out, stick an implant in them and go.

Thanks for stopping by and have a great day!!

CREA Argentina

Every year, I take a group of students from SDSU down to Argentina so they can gets some international agriculture exposure before they graduate and go into the workforce. Most employers in corporate ag industry these days really frown upon students that went through four years of college and never received any international training. I'm sure this is a reflection of our global aconomic environment more than anything, but it is interesting none-the-less.

In any event, over the years, I have been fortunate enough to develop some really good relationships with ranchers, farmers, cattle feeders, etc. in Argentina. As a result of these relationships, they asked me last year if I would put together a feedlot tour of South Dakota for them if they came to the US. Of course I said I would and sure enough, Monday and Tuesday this week I hosted 22 ranchers from the province of LaPampa on a tour of SD feedlots.

Now you might ask yourself, why do a bunch of guys from LaPampa, the grass cattle capital of the world want to look at feedlots? Well, the days of endless hectares of grass and millions of grass fed cattle in the Pampas are quickly drawing to a close thanks to our friends at Monsanto, DuPont, etc. With drought resistant and RR crops, most of the eastern Pampas is being plowed under and planted to soybeans. Cattle, even in Argentina can simply not compete with soy.

As a result, much like in the US in the 60's, the Argentine beef industry is reluctantly facing the fact that cattle are going to have to be finished on corn in feedlots if they want to eat beef. Otherwise, beef cattle will simply disappear in a sea of soybeans and government incentives.

Only about 4% of cattle in the country are currently finished on corn, but when I started going to Argetnina it was about 0.05% and in the next year or so it will probably be around 8%. So the number is roughly doubling every year.

The CREA group that visited this last week is a group of the most progressive producers in the country and they want to lead the charge into developing a cattle feeding industry. CREA is an acronym for Regional Consortium of Agricultural Experimentation. This group works collectively to help each other learn how to improve their operations through information sharing between families and ultimately through other CREA groups in the country.

Over the next few days I'll tell you a little about what we did on the tour and what the reaction of the group was to their visit in South Dakota, but for now I'll just tell you they had a wonderful time, were very impressed with the people they met here in SD, and went home hoping some of their US counterparts would be willing to come visit thier operations in Argentina.

I think we can probably arrange that.

Thank you and have a great day!!