Economics of Running Grass Cattle In The Summer of 2008 - Part II
Part I of this series was devoted to developing a set of planning prices for running grass cattle. This article will focus on the total budget generated to evaluate the economics of running grass cattle the summer of 2008.
Projecting The Profit From The Lbs Gained On Grass
Figure 1 illustrates the Wyoming production costs that I used to generate a budget running grass cattle in Wyoming during the summer 2008. This table illustrates the projected costs of individual production costs item by item.
In this Wyoming budget, the opportunity cost of grass was included at $17 per steer month for a total of 3.8 months for a total grass cost of $65 for the season. Note that a labor costs of $15 was also included. The projected total production costs come to $132 per head for a $0.66 per lb cost of gain.
The Projected Final Economic Summary
Figure 2 summarizes the combined projected marketing loss and gain while on grass. The projected $48 bottom line is the “earned returns to management, equity capital, and risk.” Given the projected $114 projected purchase price, the breakeven selling price is $103 per cwt. – very close to the guaranteed insurance policy Ranch-Gate-Price discussed in Part I of this series.
“What If” ADG Was Not 1.75 Lbs?
The target ADG was 1.75 lbs per day but what if this rancher experienced experiences a different ADG? Figure 3 presents some “what if” projections. For example, if the ADG turns out to be 1.50, the animals are projected to weight 821 lbs at selling time; however, due to he small price slide at this weight, the selling price is projected to go up only $0.82 for a gross income of $876 per head. With a $122 purchase price (see the bottom half of table) and a 1.5 ADG, the projected profit per head is a minus $36/head.
Figure 4 presents a complete 2008 Wyoming grass cattle budget for running 650 lb steer calves on grass in the spring of 2008 gaining 200 lbs and selling off grass at 850 lbs. A “your farm” column is available for you to modify this budget to fit your specific grass cattle situation.
posted by Dr. Harlan Hughes 9:46 AM
Economics Of Running Grass Cattle In The Summer Of 2008- Part I
Figures 1, 2, and 3 are at the top printed in reverse order. Double click each to load a larger view into your computer and to print with your browser's print command. You can go back to the print section by clicking the back arrow on your browser.
In response to this changing economic world, a Wyoming IRM Cooperator asked me to help him evaluate the economics of running grass cattle during the 2008 grazing season. He was wondering if he could purchase some 650 lb calves in early May and market them at 850 lbs in mid September 2008 and make any money.
Given the price volatility of corn and its direct impact on feeder cattle prices, he wanted to explore using USDA’s Livestock Risk Protection (LRP) Program to remove most of price risk associated with running yearling steers. The objective of this article in the series is to share the economic analysis that I went thorough to provide this IRM Cooperator’s a set of planning prices for running grass cattle summer 2008.
Ranchers need to answer two economic questions to determine the profit potential from running grass cattle in 2008. First question, how much marketing loss is projected on the initial weight of the feeder calves going onto the grass? This is determined by the magnitude of the negative buy/sell margin times the initial weight of the feeder calves. Second question, what will be the projected profit generated from the pounds gained during the grazing season? The projected profit potential from running grass cattle in 2008 is the sum of these two numbers.
Projected Buy & Selling Price For Yearlings On Grass In 2008.
I will describe two price forecasting tools that I will use to suggest a projected buy/sell margin for grass cattle in 2008. The results of these two projection models are presented in Figures 1 and 2.
Figure 1 suggests that buying 650 lb feeder calves in spring 2008 is projected to cost $114 per cwt (determined by extrapolating between the 600 and 700 lb prices under the Spring08 column in Figure 1; row 10, col U). Figure 1 also projects 850 lb feeder steers in September 2008 to sell for $103 (row 14, col V). These two prices, then, suggests a buy/sell margin of a minus $11 ($103 - $114). Taking 6.5 cwts x -$11 gives a projected -$71.50 marketing loss associated with these grass cattle.
Market price basis is defined as local cash price minus future market price. The above price projections are based on a +$4.16 market price basis for 650 lb feeder calves and a -$8.02 market price basis for 850 lb feeder steers. These basis numbers are based on the basis actually experienced in Western Nebraska the week of 23 Jan 2008. We know, however, that market price basis changes through out the marketing year. Experienced marketers also know that basis risk is the one risk that can not be passed on to someone else.
So...What Market Price Basis Should I Use?
There is now a comprehensive basis projection model available to ranchers that was just recently released by Kansas State University (see BEEF January Issue). This model is accessible at www.beefbasis.com. This model not only gives a projected market price basis by state (in my example Wyoming), it also provides a projected confidence interval for that basis projection.
The input used by Beefbasis.com was state where the cattle are marketed, average weight of the feeders to be sold, number of head and the target selling date. The model retrieved the appropriate live cattle futures price, feeder cattle futures price, and the appropriate corn futures price selected for my targeted marketing date. All of this is reported in the top-half of Figure 2.
The Beefbasis.com Model presents two different projected results summarized in the bottom-half of Figure 2. The first projection is based on Wyoming’s historical feeder cattle prices and projects a minus $4.43 average basis for September 2008. Due the high volatility of current prices, the 68 percent confidence interval for the basis forecast is wide and ranges from -$0.77 to -$8.09.
The second projection in Beefbasis.com model also takes live cattle and corn futures prices into account and it projects an average basis of a minus $0.03 with a confidence interval of -$4.02 to +$4.22. I have elected to use the average of these two basis estimates and settle on a minus $2.23 Wyoming basis for this study. This Beefbasis.com Model can be used to calculate a local basis for your ranch by taking your state’s historical prices into account.
The Beefbasis.com model also provides an expected cash price of $105.47 in the feeder cattle model and $109.87 in the Live Cattle & Corn Model for an average projected selling price in September of $108.
Both the PPP-MIS Model and the Beefbasis.com Model are futures based. The primary difference in the planning prices projected by these two models is the basis projections. The Beefbasis.com projection model is built around considerably more historical price data which, in turn, should lead to more accurate basis predictions.
Using Livestock Price Protection (LRP) To Guarantee A Selling Price.
In recent years, USDA has been offering various new price risk protection programs for ranchers. My Wyomig rancher wants to take the guaranteed market price from a LRP price insurance policy and work backwards to see what he can afford to pay for feeder calves going onto grass.
The USDA insurance coverage price is based on the futures options market so the insurance premium and coverage price changes daily along with the options prices. You can look at the daily price quotes at
Figure 3 summarized my personalized worksheet that I use to calculate the insurance coverage price at the ranch gate. The insurance coverage price is labeled the “Ranch-Gate-Price” on the right-hand side of Figure 3.
You take the coverage price from the USDA daily Price Table, use the provided premium rate, adjust it for the USDA premium subsidy, and, in my example, you get the $3.74/cwt premium rate that the rancher pays that day. The “Net Price” is the insured price after the premium is taken out and “Ranch-Gate-Price” is the net price adjusted for local basis. The premium and Net Price can be locked in the day the premiums are paid . The basis, however, is a projected value so the final Ranch-Gate-Price can vary a little from the projected price. That variance will be the error generated in the basis forecast.
To initiate an LRP insurance contract. a ranchers signs up with his local crop insurance agent and pays his premiums. The contract includes that day’s specific price coverage and insurance premiums inserted for that day, All insurance costs are paid up front and there are no hidden costs like “margin calls” in this insurance program.
In this case, a Wyoming rancher could have signed up for an LRP insurance policy on Jan 29, 2008 that would have set the insured Ranch-Gate-Price at $100.03 per hundredweight for 850 lb feeder steers to be sold in late August.
In summary, I used $114 dollar feeder calves going on grass and $108 dollar feeders cattle coming off grass. USDA’s risk management Livestock Risk Protection (LRP) was evaluated setting the insured price at $100 per cwt. We now have a set of suggested planning prices that can be used to prepare a total budget for running grass cattle during summer 2008.
Next month I will present the actual 2008 grass cattle budget generated for this IRM Cooperator.
posted by Dr. Harlan Hughes 1:34 PM
2007 FEEDLOT REVIEW
According to the Kansas State University "Focus on Feedlots"
survey for calendar year 2007, feeding performance for steers
and heifers deteriorated compared to 2006's. Average closeouts
weights were about unchanged in 2007 compared to 2006. As
expected, in 2007, the cost of gain for both steers and heifers was
well above the prior year, reflecting surging corn and hay costs.
In 2007, the average closeout weight for steers was 1314 pounds
or about 2 pounds heavier than 2006's and 43 pounds above the
2001-2005 average. Heifers closed out at an average 1189
pounds, down a tad from the 1192 pounds reported for 2006 and
3 percent higher than the prior five-year average. In November
steer closeout weights peaked at 1404 pounds while heifer
weights topped out at 1242 pounds in October. In 2007,
placement weights for steers averaged 781 pounds, 5 pounds
heavier than 2006's, while heifer placements weights were down
about 12 pounds.
For reporting feedlots, steers in 2007 were on feed an average
162 days, nearly 4 days longer than in 2006, while heifers were
on feed an average 9 days more than a year earlier. Average
daily gains for both steers and heifers worsened compared to
2006's, as feedlots reported an average daily gain for steers at
3.31 pounds per day versus 3.40 pounds, with heifers at an
average 2.94 pounds per day which was 3.5 percent lower than
2006's. For steers and heifers sold in 2007, the amount of feed
needed per pound on gain dry matter basis was higher than in
2006. Steers required an average 6.19 pounds of feed, up from
the 5.95-pound average for 2006, whereas heifers needed an
average 6.42 pounds well above the prior year's 6.19-pound
As expected, feedlots reported record high feeding cost of gain for
2007 due to higher corn and hay prices. For 2007, the cost of
gain for steers was $73.51 per cwt. versus $53.94 per cwt in 2006
and over $21 per cwt. higher than the 2001-2005 average. Heifers
closed out at an average $77.91 per cwt., $20.81 per cwt. higher
than 2006's average. For 2007, feedlots reported an average corn
price of $4.12 per bushel, $1.43 per bushel higher than 2006's,
with corn prices only dropping below the $4 mark twice late in the
2007 year. The annual price for alfalfa hay at $135.12 per ton
was the highest ever reported for calendar year and was nearly
$28 per ton above 2006's.
posted by Dr. Harlan Hughes 11:01 AM
Cattle Cycle Gone -- Production Cycle Here
"From an inventory standpoint, I think the cattle cycle is dead," said Randy Blach, Cattle-Fax CEO, at that organization's Outlook Seminar last week.
He and other Cattle-Fax analysts explained the cattle cycle is evolving into one defined by production and technology where the same or more beef can be produced with the same or fewer cattle.
They expect the soft liquidation of beef-cow numbers last year (see "Cow Numbers Decline" elsewhere in this issue) to continue this year; numbers should remain stagnant at best for the next several years. Yet, there's little reason to expect beef production will decline much.
Besides the technology enabling heavier carcass weights, Blach explained, "We will rely on countries like Canada and Mexico to supply more of the raw material (fed beef and feeder calves) we need to run the factory here."
According to Kevin Good, Cattle-Fax analyst, the U.S. will import about 2.5 million head this year. Even so, U.S. per-capita consumption will decline slightly because of supply, not demand.
Though cattle supplies are running tight, Good says Cattle-Fax believes more cattle will be placed this month and next than popular perception suggests because more calves were placed into grower yards than people think. Popular reasoning has figured most all the calves that would have gone to wheat pasture last fall and couldn't were placed directly on feed.
For prices next year, Cattle-Fax is calling 550-lb. calves at $115 for average (range of $110-$125), 750-lb. feeders at an average of $104 (range of $94-$116), and fed cattle at $92-$94 on average (range of $85-$102).
If these estimates are in the ballpark, selling prices remain near historically high levels. Unfortunately, input costs will continue to rise, pressuring net profit potential.
For instance, Cattle-Fax analyst Mike Murphy said more acres of corn than last year's record level are needed this year at similar yield levels to avoid upward price pressure, given burgeoning corn demand. Raw demand and the weak U.S. dollar boosted U.S. corn exports to a record high last year at 2.45 billion bu. Meanwhile, global corn consumption has exceeded global corn production four of the previous five years.
"Higher prices should ration demand, but we're not seeing it," Murphy explained. Wheat and soybean prices are record high on the board and come with lower input costs. Bottom line, corn acres are expected to decline by at least 4 million acres this planting year.
"Last year's large acreage numbers took some pressure off yields. With a smaller number of acres, there will be more pressure to maximize yield potential," Murphy said. Cattle-Fax expects corn to run $3-$5/bu. this year, barring a hiccup in production, and with plenty of volatility.
On the other side of that, Blach believes there's plenty of opportunity because so many more points of differentiation are available in the market. Whether it's source and age verification, natural, or any of the other value-added attributes, Blach expects price spreads that are already record wide for same-weight, same-class cattle to widen even further.
"You're going to have to embrace more risk management in your operations," Blach said.
Overall, USDA's Economic Research Service predicts the Consumer Price Index (CPI) for all food will increase 3-4%, as retailers continue to pass on higher commodity and energy costs to consumers in the form of higher retail prices. The all-food CPI increased 4% between 2006 and 2007, the highest annual increase since 1990.
posted by Dr. Harlan Hughes 10:48 AM