Beef Market Advisor

Monday, March 03, 2008

2008 Business Plan for Grass Cattle in the Emerging Biofuel Era

Harlan Hughes
Professor Emeritus
North Dakota State University

Planning Prices for Grass Cattle

(double click the figure images to load a larger version into yout computer. Then, use your browser print option to print the figures. Click back on your browser to return to the text of this article.)

My 2008 ranch business plan for the emerging biofuel era calls for the marketing of heavier feeders off grass. Looking at Sep08 planning prices in my April08 BEEF Market Advisor, Figures 4, suggests a $126/cwt planning price for 625 lb steer calves going on grass in May08.

Figure 1 above presents my detailed Sep08 futures-based planning prices for alternative animal weights. Since I wanted to evaluate the production of 850 lb feeders off grass, I selected the $108/cwt planning prices for my 850 lb steers off grass in 2008. This is an Eastern Wyoming/Western Nebraska planning price.

Grass Cattle Profit Center Budget

Now that I have my planning prices for running grass cattle in 2008, I can now project my resource costs for running grass cattle in 2008. This, then, gives me a grass cattle profit center budget for running yearlings on grass in 2008 (see Figure 2 above).

In summary, the buy/sell margin for 2008 grass cattle is projected to be a minus $18.35. This generates a $115 marketing loss on the initial 625 lbs. To make a profit, the profit from the pounds gained has to exceed the marketing loss.

The market value of the 225 lbs gained is projected to be $242 with a total cost of gain at $126/head for a projected profit on the lbs gained of a $116. The per lb cost of gain is projected at $0.56/lb. Adding the marketing loss to the gain profit gives only a $1 profit overall. I would, however, get paid $15/steer month for my grass.

No labor charge, however, is included. If labor cost were to be added in, I typically use $15/head labor costs. Instead, I am letting unpaid labor be one of the residual claimants in the bottom line along with facilities, management, and risk. All three of these resources are not charged for in this economic analysis.

Management Actions

Let's review what I did. In the April08 BEEF Market Advisor I used CME futures market for a given contract month as my base planning price. I then localized this CME price to my geographic location via the basis adjustment giving me a futures-based localized planning price. I then adjusted the localized planning price by my calculated price slides to adjust the planning price to my specific weight of cattle being marketed. I arrived at a May08 $126 price on grass and a Sep08 $108 price off grass.

Then in this article, I prepared a profit center budget utilizing these planning prices for wintering steers on grass summer 2008. I then integrated that grass cattle profit center budget into a business plan for running fall calving cows in 2007.

Economic Analysis of a 2007 Fall Calving Beef Cow Herd

The grass cattle budget discussed above is integrated into a set of four production/marketing alternatives for a Fall 2007 Calving Cow Herd (see Figure 3). The grass cattle budget is the 3rd marketing alternative from the left in Figure 3.

As you probably can guess, the exact same procedure as described in detail for the grass cattle profit center was used to generate the beef cow herd profit center budget, the wintering profit center budget, and the finishing profit center budget for a complete economic evaluation of a fall calving cow herd.

The 2007 fall born calves are wintered in 2008, summer grazed in 2008, and finished in the fall of 2008/winter 2009. Now I can evaluate four different marketing points for running a fall calving beef cow herd. The four marketing points are:
• Selling at weaning,
• Wintering the calves through the winter,
• Running the calves as grass cattle through the summer, and
• Finishing the grass cattle off grass.

Line 44 in Figure 3 presents my projected profits for each marketing point:
• Selling at weaning with $60 projected profit per cow,
• Selling at grass time with an added $25 projected profit per calf,
• Selling off grass with an added $4/head (a rounding difference of $3 from Figure 2) projected profit per calf, or
• Selling finishing the animals with a negative projected profit of $139 per head.

Remember, these profits are accumulative as you go from left to right. Even if I take my potential profits from selling at weaning, wintering the calves, and running grass cattle, and subsidize the finishing profit center,( a common rancher practice), I am projected to not make any money finishing these calves. Why, then, would I want to finish these calves?

Also, for income tax purposes, the first 3 marketing points all would occur in 2008 so there are no different tax consequences.

My conclusion from this 2008 ranch business plan is that I am interested in keeping my calves through Sep08 and marketing the calves as feeders off grass. I am not interested, at this point, is finishing these calves.

posted by Dr. Harlan Hughes 8:42 PM [edit]

This page is powered by Blogger, the easy way to update your web site.