By Jeff Lehmkuhler
This time of year, we receive several questions regarding supplementing cows and calves. Often, I must ask what feeds are available and prices as this is rarely included in the original request. I see a wide range in feed prices when this information comes back. However, one thing is certain, feed prices are higher in 2021. What impact will this have on the backgrounding segment?Source : osu.edu
The backgrounding and stocker enterprises are tight margin industries. By margin, we are referring to the difference in the value of a feeder calf at marketing and the price paid at purchase. If an 800-pound feeder is expected to bring $1,050 and was purchased for $750, the margin would be $300 to cover all costs and hopefully leave a bit of profit. If feed costs increase and all other factors remain the same, then the margin is decreased. To compensate, buyers will have to pay less for feeders if the projected sell price does not march up with the feed costs. Let’s compare two scenarios where feed cost is $180/ton versus $280/ton. I’ll use a model that includes typical enterprise budget information. I am leaving labor out, though one should value their time. Many enterprise budget tools are available, and you should find one that you like and enter your own values.
Additional inputs are necessary and include days owned or fed. Purchase date and expected marketing date to look at the feeder cattle contract closest to your marketing day along with the basis. The diet or ration to be fed and cost is a critical part of this example. We know our feed cost will be either $180 or $280/ton. Animal performance can be assumed to estimate a market date if you are selling based on a pre-determined weight. For instance, many managers call saying they are buying 5 weights to sell at 800. I am using the April feeder contract price of $144 (as of 1/27) with no basis in this example.
The intent of pulling all this information together is to help one determine breakeven prices and at what point after purchasing is breakeven reached. Consider that the first days you own the calf and the costs accrued. The calf lost weight from when it sold to when it arrived at your farm, you have processing costs, trucking expenses, buyer commission fees, and other expenses. You have to recover this investment with pounds added.
Early in my career I was visiting with Mr. Riechers, a knowledgeable farmer-feeder, discussing closeouts and breakevens. Twenty years later, I still vividly recall our conversation and Mr. Riechers telling me sternly that he does nothing to breakeven. He was trying to drive home the point that a profit margin should be included in your budgeting process. Last year, one of our stocker conference speakers discussed how he tries to realize a set daily profit on the cattle managed. In these examples, I have included a fixed $0.20/d profit “cost”.
Running through the model with feed set at $180/ton, the breakeven matches the feeder cattle contract price of $144 after about 70 days on feed. Assuming the calves are held for the projected 90 days, the breakeven drops to $141. Accumulated feed costs are projected to be roughly $148 versus $230 for the 90 days. The increased feed cost equates to an $82 difference or a daily feed increase of roughly $0.90/d. The 55% feed price jump follows directly through as all other factors are assumed to remain the same.
The intent of my ramblings is to have you consider the impact of the current feed prices on your feed cost of gains. This year increased international demand for crops are anticipated with these export opportunities being supportive of increased grain commodity prices. Take the time to sharpen your pencil and see what the breakeven may need to be for calves. Feed costs could represent 70-80% of the variable costs in your backgrounding operation this year. An $80 added production cost would mean the price offered for a 550-pound feeder would be $13-14/cwt less keeping the sell price fixed in this example. Looking at the current market report averages for the state, 500- to 550-pound steer calves fell from $153 to $140 in a week. Do you think someone is figuring the breakevens or just coincidence?
Stay on top of the market conditions, feed costs and think outside the box. Find the opportunities when they present themselves for a profit, even if small. Consider options to reduce feed costs. Is this a year to consider corn silage if you haven’t previously? Is this a year to consider a slower daily gain, longer days on feed backgrounding program? Will the market reward you for enrolling calves in certified programs, natural, NHTC or others? Stay warm and dry as we enter the heart of winter and contemplate what you can do a bit different to find an opportunity.