This Week In Cattle

It's been awhile since we've looked at the markets and for good reason...not much has changed since the last time we looked at them.


Oh yes, the prices have moved drastically, but the profit relationships haven't changed all that much, especially on backgrounded calves. If you have ranch calves that you didn't sell in NOV and decided to put a few extra pounds on to sell after the first of the year, you scored, BIG TIME.


Good for you, but don't get greedy. Most of these calves probably have little if any price protection on them so take the profit while you can get it. The prices on feeders that we are seeing in the cash and futures market now could fall just as fast as they've climbed.


I'm not really sure why we are seeing the price levels we are seeing in the feeder market right now considering that I see little profit in the fat market, even at $112.00 on the APR 11 and $109.00 on the JUN 11.


5 wt. steers bought today to be sold on the JUN 11 are looking at breakeven to losses of $50+ on the cash and maybe +$20-$30 or so on the grid, maybe a little more if they are Verified. Heifers look breakeven to +$50 or so on the cash and +$50 and better on the grid.


So, not peanuts by any means, but not outlandish either.


But no mind...we don't make the rules, we just find the inefficiencies and capitalize on them.


Here is what I see in the backgroundign world right now...


Steers, medium 1, 565# @ $141.91
This is ridiculous, these are money losers you probably don't want right now unless you are going to finish them out.
Steers, medium 1, 666# @ $126.80
DOF 120
ADG 2#/day
COG $0.65/lb
APR 11 $124.97
Breakeven: $110.00
Profit: $78.38/hd less basis and commissions


Steers, medium 1, 783# @ $122.14 (notice the $15.11 spread between 5 and 6 and the $4.66 spread between 6 and 7).
DOF 120
ADG 2#/day
COG $0.65
Breakeven: $109.00
Profit: $112.30/hd less basis and commissions


That's better but the girls are still the better buy for the money...


Heifers, medium 1, 562# @ $125.95
DOF 120
ADG 2#/day
COG $0.65
Breakeven: $108.00
Profit: $85.45/hd less basis and commissions


Heifers, medium 1, 677# @ $117.00
DOF 120
ADG 2#/day
COG $0.65
Breakeven: $103.00
Profit: $144.49/hd less basis and commissions


Heifers, medium 1, 787# @ $110.33
DOF 120
ADG 2#/day
COG $0.65
Breakeven: $99.00
Profit: $196.58/hd less basis and commissions


So there you have it, that is about what we have seen all summer and fall and not much has changed really.


One thing to be very careful of however, is basis. As the futures market gets higher, basis tends to get wider. Right now we are seeing basis of $3.50 - $5.00/cwt. depending on where you are at. So when you see the big profits coming in on some of these cattle, it is not quite as rosy as it may seem because the basis has widened considerably compared to this summer and fall and it may widen more as we go along.

Basis is a very hard thinng to predict or even make an educated guess at. Just be aware that basis is having a much greater impact right now than it normally does and the magnitude of the impact depends somewhat on where youa re.

Thank you and have a great day!

The New Year

First of all, I must apologize for disappearing for about a month and a half. The end of November and all of December have been out of control in terms of being busy with the end of the academic semester, a larger than normal demand for speaking engagements, the holiday season, and preparing for the annual voyage to South America.

That being said, we have a lot to catch up on, namely, the trip to Argentina that casts off next week. A little bit of background on this trip: the trip is a study-tour of South American agriculture and is offered to undergraduate and graduate students at SDSU. The main objectives are to engage our South American counterparts in discussions about the development or more correctly, the re-development of agriculture in the lower half of the continent.

A brief history: around the late-1800's and early 1900's, lower South America, mostly Argentina had one of the most robust agricultural economies in the world which, summarily collapsed following WWII. It has only been since the middle 1980's that these countries have seen a resurgence in agricultural development. Flip forward to 2007 and following the collapse of the AR Peso in 2002, Argentina's ag economy is beginning to take off again and SDSU decides that a study tour of the region should be organized.

So, this 5th group of students that are travelling to Argentina next week with me will get exposure to the advantages and disadvantages of globalized agriculture. Now I am sure you are thinking, why not Brazil? Well, we have gone to Brazil, Chile, Uruaguay, and Paraguay in the past but for logistical reasons, I have focused more on Argentina in the past couple of years. Furthermore, I try to mix it up a bit just to add some variety to the trip. Brazil is an incredible place to visit, but getting 20 visas at the 11th hour has not done much for the color or the amount of hair I have on my head. But Brazil will certainly be on the table for the 2012 trip.

In any event, we will be in Argentina and Uruguay for the next couple of weeks and my hope is to keep you all updated on our progress and let you know a little bit about what we have been touring. Hopefully this will dovetail into the visit I got from the CREA group in August. And yes, we will be visiting a lot of the folks that came to South Dakota.

Thank you and Have a Great Day!!

This Week In Cattle

Some strength in the futures on feeder cattle this last week has really opened up opportunities for short turns on light calves that we haven't seen in the last couple of weeks. We can talk corn futures and feedlot placements until we are blue in the face, it doesn't really matter.

The only thing that really matters is that the spreads between the cash market on lighter calves and the futures on the MAR 11 are such that there are some pretty impressive profits to be made.

Examples:

Buy steers, medium 1, 530# @ $129.53
Short hedge MAR 11 @ $114.75
Feed for 120 days
COG $0.75/lb. @ 2.5lbs/day
Weight out: 830#
Breakeven: $109.82
Profit: $40.92/head less basis and commissions

Buy steers, medium 1, 573# @ $127.30
Short hedge MAR 11 @ $114.75
Feed for 120 days
COG $0.75/lb. @ 2.5 lbs./day
Weight out: 873#
Breakeven: $109.32
Profit: $47.33/head less basis and commissions

Buy steers, medium 1, 614# @ $123.69
Short hedge MAR 11 @ $114.75
Feed for 120 days
COG $0.75/lb. @ 2.5 lbs. day
Weight out: 914#
Breakeven: $107.70
Profit: $64.35/head less basis and commissions

The profit potential on short turns of heifers looks great, as it has all summer. Heifers are still way undervalued in the market.

Buy heifers, 522# @ $120.41
Short hedge MAR 11 @ $114.75
Feed for 120 days
COG $0.75/lb. @ 2.5 lbs./day
Weight out: 822#
Breakeven: $103.83
Profit: $89.70/head less basis and commissions

Buy heifers, 571# @ $116.76
Short hedge MAR 11 @ $114.75
Feed for 120 days
COG $0.75/lb. @ 2.5 lbs./day
Weight out: 871#
Breakeven: $102.37
Profit: $107.77/head less basis and commissions

Buy heifers, 611# @ $119.50
Short hedge MAR 11 @ $114.75
Feed for 120 days
COG $0.75/lb. @ 2.5 lbs. day
Weight out: 911#
Breakeven: $104.84
Profit: $90.22/head less basis and commissions

On these heifers, I think there are also some opportunities to run a 60 day turn on the JAN 11 and another short run on the MAR 11. It's hard to tell at this point where we will be at 60 days from MAR, but I think we will be in as good of a position or better than where we are at today.

We will see....

The other thing to watch is COG, this week I bumped COG to $0.75/lb. rather than $0.65/lb. I have been using. It should be no problem for most guys to squeeze a measley 2.5lbs./day out of a 500# calf for $0.65/lb. However, the cost of everything is up a little in the last month or so, so when I model my cost of gains, it is creeping towards the $0.75 level, so that's what I used.

I have received many questions about why 2.5 lbs. day, the simple answer is that when I do the price/performance thresholds on cost of gain, it breaks at about 2.5lbs./day at $0.75/lb.

If I go to 3lbs/day of performance, my COG is going to rise to $0.92 lb. in my COG model, mostly because I am going to need more corn to maintain that level of performance and I'll have more weight to haul at the end. The $0.92/lb. is assuming $3.65/bu. corn, which is what my data shows the average guy can grow it for. If you are buying corn, forget it, it's not going to work unless you had a long hedge on corn earlier this summer.

Same set of 530# steers at 3 lbs./day performance and a $0.92 COG

Buy 530# steers @ $129.53
Hedge MAR 11 @ $114.75
Feed for 120 days
COG $0.92 @ 3 lbs./day
Weight out: 890#
Breakeven: $115.15
Loss: -$3.63/head less basis and commissions.

Not every weight class is going to be a money loser of course, but the point is that overall the market isn't willing to pay for the additional corn...at least not yet.

Keep the rations simple and cheap.

Thank You and Have a Great Day!!

Economics of Protein Supplementation

One of the principal costs associated with wintering cows is protein supplementation. Winter range, harvested forages, and crop residues for the most part, contain plenty of energy to meet the needs of gestating cows during the winter.

The protein content of these energy sources however, tends to be fairly low which will ultimately reduce intake and digestibility of these types of forages.

The feed products typically used to supplement ruminant livestock can be broken down into two major categories:

1) natural vs. non-natural protein sources
2) Low labor vs. high labor delivery methods

These two classifications cover the majority of feed supplements on the market and largely determine how they are priced.

Natural proteins consist of things like alfalfa, oil seed meals (soybean, cottonseed, sunflower), corn by-product distillers grains, and the like. Non-natural protein are largely formulated to include urea.

Typically, natural proteins used in supplementing beef cows are more efficient and usually lower cost than urea-based supplements. However, natural protein source typically require more labor and equipment to deliver than urea-based products.

In essence, you are paying for the convenience factor with certain types of protein supplements.

The other thing you have to watch out for with protein supplements is sticker shock. Some supplements can seem very expensive on a per ton basis, but actually are relatively cheap on a per pound of crude protein (CP) basis because you don't have to feed very much of the bulk material to meet dietary requirements.

Therefore, it is essential that a manager knows how to calculate the cost of protein on a per pound basis so you can assess the convenience factor.

Example:

To calculate cost per pound of crude protein for a feed supplement use the following formulas:

A) Conversion from one ton of bulk product to pounds of protein in that ton

Pounds of CP in bulk product = 2000lbs. x % crude protein

If we take soybean meal (SBM) as an example, SBM contains about 46% CP and costs about $300 per ton on average over the last year-and-a-half or so.

2000 lbs. of SBM x .46 (% CP) = 920 lbs. of protein

B) Then we convert cost per ton to cost per pound of CP by dividing cost per ton by pounds of CP:

$300 per ton = $0.32 per lb. of protein
920 lbs. of protein

That's it!! You can make this calculation with any type of protein supplement.

Now you can compare the cost of different supplements based on a common denominator so you are comparing apples to apples.

Of course, prices change frequently on a per ton basis, which is going to change cost per pound of CP, so a person needs to recalculate these everytime they go to buy bulk product.

When you calculate the cost per pound of CP for a variety of supplements, then you have to assess how much you are willing to pay for convenience.

As an example, alfalfa is a tremendously cheap source of protein for livestock on a per pound of CP basis, however, after you figure in the cost of delivering the product to livestock, it may or may not look all that cheap anymore. On the other hand, lick tubs are really easy to deliver, but does the convenience justify the cost? You have to decide.

Table 1 shows the cost comparison of common protein supplements on a cost of CP basis using average per ton prices.

Product Cost per lb. of CP
Corn by-product distillers grains $0.25

Alfalfa $0.30

Soybean meal $0.32

Cottonseed meal $0.27

Sunflower meal $0.44

Commercial range cake $0.68

Lick Tubs $1.87

Now, you make the call on what works for you and what doesn't.

Thank You and Have a Great Day!!

This Week In Cattle

There is a lot of feed in the country this year with record levels of precipitation and pretty good growing conditions throughout the summer. With abundant feed and really decent cattle prices, I have received a lot inquiries from ranchers about bringing in calves to feed on a short turnaround to burn some extra feed and make a little cash on the side.

It's a pretty good idea, although getting them bought right is going to be a pretty tall order right now. The cash market is still pretty hot and it doesn't look like it is going to cool off anytime soon. Furthermore, the feeder futures are taking a beating from the big gains corn has made in the past month or so.

Over the short-term, I think there is some money to be made in some short turnarounds on some lightweight feeder calves. The big thing right now is to stay away from the real lightweight steers. High 4 wts. are running nearly $140.00 and I just can't make that pencil for most situations. Even mid-5 wts. are a little nip-and-tuck, so a person is really going to have to get them bought right to make them work. I think 6 wt steers and most classes of heifers are going to work pretty well.

A really good option for some guys wil be to find some mid-weight 7-8's. There aren't a lot of them around as most of them were placed in September and October, but there are a few stragglers out there if you can find them.

Buy steers, medium 1, 566# @ $128.00
Protect JAN 11 @ $110.80
Feed for 75 days
COG: $0.65 @ 2.5#/day
Weight out: 753#
Breakeven: $113.02
Loss: -$16.74/head less basis and commissions

Buy steers, medium 1, 606# @ $122.40
Protect JAN 11 @ $110.80
Feed for 75 days
COG: $0.65 @ 2.5#/day
Weight out: 793#
Breakeven: $1.08.83
Profit: $15.57/head less basis and commissions

Like I said, it's nip-and-tuck on the steers, getting them bought right is going to be the difference.

Heifers look a little better:

Buy heifers, medium 1, 558# @ $118.51
Protect JAN 11 @ $110.80
Feed for 75 days
COG: $0.65 @ 2.5#/day
Weight out: 745#
Breakeven: $105.05
Profit: $42.85/head less basis and commissions

Buy heifers, medium 1, 631# @ $112.00
Protect JAN 11 @ $110.80
Feed for 75 days
COG: $0.65 @ 2.5#/day
Weight out: 818#
Breakeven: $101.12
Profit: $78.30/head less basis and commissions

The alternative is to try to snag some heavier cattle that will look like this:

Buy heifers, medium 1, 753# @ $107.21
Protect JAN 11 @ $110.80
Feed for 75 days
COG: $0.75 @ 2.5#/day
Weight out: 940#
Breakeven: $100.78
Profit: $94.15/head less basis and commissions

These cattle are going to have a little higher cost of gain to get the performance out of them but you can see that pencil pretty nicely...if you can find them in large enough quantities to make them work.

The other thing to watch for is to hang on to some of these light to mid-weights for a little longer and cash in on the price slide:

Buy steers, medium 1, 566# @ $128.00
Protect MAR 11 @ $111.60
Feed for 150 days
COG: $0.65 @ 2.5#/day
Weight out: 941#
Breakeven: $103.45
Profit: $76.66/head less basis and commissions

So on that same set of 566# steers, we improved from a $16/head loss to a $76.66/head profit, just by hanging on to them a little longer. By using moderate performance goals at a pretty reasonable COG, we can catch the price slide advantage on the MAR 11.

Heifers look even better:

Buy heifers, medium 1, 558# @ $118.51
Protect MAR 11 @ $111.60
Feed for 150 days
COG: $0.65 @ 2.5#/day
Weight out: 933#
Breakeven: $97.00
Profit: $136.19/head less basis and commissions

So we jumped these heifers from a $42.85/head profit to a $136.19/head profit by holding down performance, keeping COG reasonable and catching the MAR 11.

If this strategy looks good, you might consider an LRP or option put rather than a short hedge so you can protect your bottom side and let the top side ride. It will probably save you a lot of margin calls we get closer to MAR.

Thank You and Have a Great Day!!

This Week In Cattle

The cash market is heating up with the fall run of calves starting to filter into the marketplace. Although the cash market has remained pretty strong, especially on the lightweights, the fall calf run is putting a lot of pressure on the futures market. this is going to create some opportunities for guys that want to add some weight to these calves before they go to town. However, the key thing in this market will be to look at how much feed is the market willing to pay for?

We had a discussion earlier this summer about the disparity between feed value and market value of that feed converted to liveweight. I think that discussion needs to be monitored in this market right now. Let's look at some examples of backgrounding scenarios in this market:

Wean 474# steers; today's value $130.51 = gross return of $618.61/head

$618.61/head - $500 cost per calf = net return of $118.61/head

Now let's feed those steers for 90 days, 2.5#/day of gain @ $0.65/lb of gain
We'll protect them on the JAN 11 @ $112.10
Sale weight 699#
Breakeven $92.80/head
Profit $134.88/head less basis and commissions

Difference between selling off the cow and backgrounding $16.27/head

On these lighter steers, we gained a little by hanging on to them and feeding them.

Now let's back that ration off a bit and look at lower performance and cost of gain

Feed those steers for 90 days, 1.5#/day of gain @ $0.35/lb of gain
We'll protect them on the JAN 11 @ $112.10
Sale weight 609#
Breakeven $90.26/head
Profit $132.99/head less basis and commissions

Difference between selling off the cow and backgrounding $14.38/head

Difference between backgrounding on higher performance and lower performance rations $1.89/head

So we didn't gain a heck of a lot on these lighter steers by adjusting performance and cost of gain

Now let's look at some heavier steers

Wean 575# steers; today's value $126.24 = gross return of $725.88/head

$725.88/head - $500 cost per calf = net return of $225.88/head

Now let's feed those steers for 90 days, 2.5#/day of gain @ $0.65/lb of gain
We'll protect them on the JAN 11 @ $112.10
Sale weight 800#
Breakeven $80.81/head
Profit $250.30/head less basis and commissions

Difference between selling off the cow and backgrounding $24.42/head

On these heavier steers, we gained almost $25/head by hanging on to them and feeding them.

Now let's back that ration off a bit and look at lower performance and cost of gain

Feed those steers for 90 days, 1.5#/day of gain @ $0.35/lb of gain
We'll protect them on the JAN 11 @ $112.10
Sale weight 710#
Breakeven $77.11/head
Profit $248.41/head less basis and commissions

Difference between selling off the cow and backgrounding $22.53/head

Difference between backgrounding on higher performance and lower performance rations $1.89/head

So you can see that right now the market is paying for the feed either way for steers however, the game gets a little more interesting when you look at heifers.

Wean 479# heifers; today's value $115.95 = gross return of $555.40/head

$555.40/head - $500 cost per calf = net return of $55.40/head

Now let's feed those heifers for 90 days, 2.5#/day of gain @ $0.65/lb of gain
We'll protect them on the JAN 11 @ $112.10
Sale weight 789#
Breakeven $92.21/head
Profit $139.98/head less basis and commissions

Difference between selling off the cow and backgrounding $84.58/head

On these lighter heifers, we gained quite a bit by hanging on to them and feeding them. Partially because of feed value and partially because of the price slide we gained by protecting them on the board.

There isn't much difference in net profit right now by feeding them to lower performance and cost of gain. Either way will net about the same.

Let's look at some heavier heifers:

Wean 567# heifers; today's value $112.54 = gross return of $638.10/head
$638.10/head - $500 cost per calf = net return of $138.10/head

Now let's feed those heifers for 90 days, 2.5#/day of gain @ $0.65/lb of gain
We'll protect them on the JAN 11 @ $112.10
Sale weight 792#
Breakeven $82.18/head
Profit $236.95/head less basis and commissions

Difference between selling off the cow and backgrounding $98.85/head

This is why I think there will be some good opportunities for backgrounders this fall, especially in the heifers. These of course are just examples and values are going to change over time, but most folks are still a month or so out from weaning calves so there is some time to watch what the markets are doing and respond accordingly.

Thank You and Have a Great Day!!

Cull Cows Today

Building upon the earlier discussion, it might be useful for guys to update their analysis of cull cow calue as they get closer to making marketing decisions.

The same principles apply today as they did the first time I talked about this. Of course as we get closer to the fall calf run and subsequent glut of cull cows at salebarns across the land this fall, prices have dropped from earlier this summer and the thin/fleshy spread is beginning to tighten. Right now the spread is about $7.00/cwt., which is pretty good, but I expect it to tighten considerably into JAN before loosening a little in late-FEB and MAR.

So as guys think about how to add value to market culls, think about when the market will be most likely to pay for the feed they put into these culls. 60 days from weaning/preg check may not be the best spread to work with. 90 days will look a lot different.

If guys look at more of a MAR time-frame for marketing, they should back calculate rations and cost of gain to optimize value.

Example:

Our average cow at 1150# @ $52.50 yields $603.75/head.

Now let's say we take this 1150# cow and put her on feed for 60 days.

She'll gain about 3 pounds/day with a cost fo gain of $0.75.

Now that we have put an extra 180 lbs. on her and she's weighing about 1330 lbs., in today's market she'll probably be valued somewhere around $59.50/cwt. So she will gross $791.35.

Using our Return on Feed Value Calculator we see that with a $0.75 cost of gain, she nets about $52.60 more than she would have if we didn't feed her.

So, if we go back to our original discussion on this topic, adding weight beyond the 180 lbs. is probably not economically feasible.

Here's why:

Once she has been fed to a fleshy appearance and she falls within the weight/value grid, any additional weight is paid for at the market place at the same price. Meaning, there is a price threshold where the market doesn't pay any additional value.

Example:

Same average cow at 1150# @ $52.50 yields $603.75/head.

Now let's say we take this cow and put her on feed for 120 days.

Now that we have put an extra 360 lbs. on her and she's weighing about 1510 lbs. she'll still be valued somewhere around $59.50/cwt.

So she will now gross $898.45/head.

Using the Return on Feed Value Calculator we see that with a $0.75 cost of gain, now she only nets about $24.70/head more than she would have if we didn't feed her.

So we lost about $27.90/head because we fed her more feed than what the market was willing to pay for.

So in effect our additional feed bill chewed up any margin made on the extra weight.

The other thing you have to watch out for is the spread between thin and fleshy. In our currrent market that is about to be flooded with culls, the spread is going to tighten considerably and probably won't begin to widen until until late-FEB or MAR.

In our example the spread was about $7.00/cwt. That is pretty typical for this time of year when supply is tight, but where we are now in the fall when supply increases, not only will the value drop but the spread will tighten. You will have to take this into consideration.

Let's look at the exact same example, but now the spread will shrink to $4.00/cwt.

Just by shrinking the spread between thin and fleshy, our additional profit over not feeding these cows shrank from $52.60/head to $12.70/head. Now feeding these cows is probably not worth the hassle.

So if you feed culls for 60 days and the spread is tight, back them off feed, put them on a maintenance ration, and wait for the spread to widen in late-FEB or MAR.

As a general rule, putting 180-220 lbs. on an average cow is probably going to most effectively optimize her value. You can adjust rate of gain with what you feed her so you have some market time flexibility built in to your system to take advantage of price point thresholds and thin/fleshy spreads.

Thank You and Have a Great Day!!