| | Section IV, the Economics and Marketing unit of the Alberta Feedlot Management Guide is made up of twenty-five fact sheets providing information on the economics involved in the production and marketing of feedlot and backgrounding cattle. Topics range from calculation of the most cost effective way of feeding and finishing cattle to the various marketing options that are available and how to determine which option will provide the greatest return for the investment. The fact sheets include content on calculating a breakeven analysis for feeder cattle, selecting a custom feedlot, choosing from the many different options available for the marketing of cattle, explaining how futures markets and basis levels work and providing sources of information on the current prices and market conditions for cattle.
An Introduction to Livestock Marketing
A summary of the seven-step marketing plan for livestock forming an outline of how the marketing process can be organized into seven individual marketing steps. The planning process begins with an estimation of costs, including production costs and cash flow requirements, thus determining the type of animal to be produced and how it will be marketed. Steps 2 and 3 are information-gathering steps where an understanding of market trends and projected livestock prices along with knowledge of the product will influence an evaluation of different pricing and delivery options. Steps 4 and 5 involve the active setting of target prices and the evaluation of pricing and delivery alternatives, while steps 6 and 7 involve the actual utilization and evaluation of the plan.
Breakeven Analysis for Feeder Cattle
A detailed explanation of breakeven analysis, a financial tool used to evaluate feeder cattle purchase and sale decisions. The Breakeven analysis is a specialized partial budget that can compare different marketing options such as selling weaned calves verses selling finished steers. A feeder cattle worksheet calculates the projected value of an animal minus the production costs giving the breakeven sale prices. The Sensitivity of a breakeven projection can also be used to make decisions in determining changes in input to obtain a maximum return for the animal.
Farm Gate Value for Farm Raised vs Purchased Calves
A short explanation with sample calculations of the farm gate value of home raised calves and purchased calves, to be used in estimating the cost of placing a calf in a farm feedlot. Although the market selling price is the same for both, calculations to determine the value of home-raised calves differ, for the selling costs are deducted from the market price. To determine the farm gate value of calves purchased at an auction market, buying costs are added to the market price.
Partial Budgeting
A brief explanation of partial budgeting, a managerial tool that weighs the advantages and disadvantages of a proposed change in a farm operation. A partial budget considers all revenues and expenses that would change with an alteration to a farm plan. In creating a partial budget only one alternative at a time should be considered; each alternative requires a separate budget. Included are 11 steps to follow when developing a partial budget, which should be used as a guide along with other managerial tools to reach a decision on the feasibility of the proposed change.
Predicting Feeder Cattle Prices
A discussion of the principle factors of supply and demand which affect feeder cattle prices including a formula for summarizing how demand affects feeder prices in Alberta. Demand for feeder cattle is influenced by the cattle feeding, backgrounding and grazing industries and is related to the economic conditions within these sectors. Bidding prices are affected by slaughter cattle price expectations and the cost of gain, with feed costs being the most important factor in the cost of gain. By calculating an industry breakeven, together with supply considerations and arbitrage factors, a producer can put together the information necessary to formulate a price outlook for the class of feeders he intends to buy or sell.
Pricing Feedgrains
An appraisal of feed grain values and their importance to the feedlot operator in the calculation of a breakeven analysis. Factors influencing the determination of feed barley bids are local feed barley supplies, the strength of the U.S. feed market (corn prices), world barley values, grain company competition and the Canadian Wheat Board PROs. It is important to determine local supply by determining if it is a buyers’ (feeders) market or sellers (growers) market. Accurately calculating the costs of feed in determining the breakeven projection is crucial to the final determination of feeder profits.
Sources of Financing For Feedlots
A short summary of the types of financing required by a feedlot with a list of providers of lending programs in Alberta. The article stresses the importance of the right financing package to enhance the capability and profitability of a farming operation. The two types of financing required by a feedlot are capital loans such as longer term mortgage loans on land, facilities or equipment and operating loans for the purchase of feeder cattle or feed. Depending on the type of financing required, a variety of alternatives are offered by various institutions including the chartered banks, Treasury Branches and credit unions; or by the AFSC, Farm Credit Canada, feeder associations, private commission firms and feed companies.
Custom Feeding
A short discussion on the use of custom feedlots as an option for producers to finish their cattle on a fee for service basis. Custom feedlots offer a variety of different feeding and pricing options to clients, and a list of items to review when comparing different feedlots is included. The importance of negotiating a written custom feeding agreement outlining the feeding program, payment dates and agreed rate of gain is stressed.
Selecting a Custom Feedlot
A review of the features to look for when selecting a custom feedlot for the finishing of cattle. Among them is feeding expertise, where rations are very often formulated by a nutritionist; the quality of facilities and location; the health protocol implemented by a feedlot; a proactive environmental plan; and marketing expertise as a part of the service. A checklist summarizing the features to look for in a custom feedlot is included.
Marketing Alternatives for Feeder Cattle
A summary of the factors affecting calf and feeder cattle prices for each class of cattle produced. At a particular time of year calf and feeder cattle prices vary for the different sexes, weight, types, frame sizes and condition of livestock. Conditions of sale are any cost that affects the net return when marketing livestock and include shrinkage, commission, freight, feed and yardage, brand inspection fees and pricing practices. Five general marketing alternatives for livestock producers are discussed.
Marketing Alternatives for Fed Cattle
A summary of the options available to producers when marketing fed cattle and the importance of the marketing process in determining the final price a producer will receive. Basically fed cattle are sold directly to the packing plant, or indirectly through an auction market or commission house. A list of seven currently available options for producers includes live auction market, sealed bid, private treaty, electronic auction, video or satellite auction, forward contract and formula or grid sales. Conditions of sale to be accounted for include shrink, freight, grade and weight discounts and commission.
Electronic Marketing of Cattle
A description of the use of an electronic marketing auction as a marketing alternative for feeder and slaughter cattle. In this form of marketing, computers are used to communicate between buyers and the electronic auctioneer, a process which can give cattle good exposure to a variety of markets without risk. Procedures to be followed by the seller are included, and include the information that is included in a “description sheet” which must be filled out at least a week ahead of the auction. In Alberta electronic auctions are conducted by The Electronic Auction Market (TEAM), which is located in Calgary.
Forward Contracting of Cattle
An explanation of forward contracting of cattle, a marketing tool that offers a way for cattle sellers and buyers to price their livestock ahead of an expected sales date. As a result, forward contracting can help producers deal with higher price risk, narrowing margins and the need for additional financing. Included are definitions of common marketing terms and a brief review of the two main types of forward contracts, basis contract and flat (or cash) contract, also called forward price contract. Also included are examples of forward contracts for slaughter and backgrounder cattle and calves.
Marketing Cull Cows
Some strategies to consider in order to gain the greatest economic advantage when evaluating the various methods of marketing cull cows. When a cow is no longer productive, a decision must be made to either sell it immediately, consider wintering it with the herd in anticipation of increased cow prices or feed it on a high grain diet before sale. Points to consider are the seasonal nature of the cow market (prices are lowest in November and December); the age of the cow (younger cows have a greater potential to grade A or B if fed on a grain diet while older cows are better off overwintered on a diet of roughage and very little grain); and the estimated cost per gain for cows verses the sale price per pound.
How Shrinkage Affects Returns for Feeder and Slaughter Cattle
An explanation of shrinkage, which occurs in the marketing of calves, feeder and slaughter cattle, and how it affects net returns. Shrinkage is the amount of weight an animal loses during sorting, transporting, standing, weighing or any situation that may stress the animal. Factors that influence the amount of shrinkage and preventative measures are listed. Following preventative management practices that reduce the amount of stress the animal experiences can minimize the loss of net return experienced as a result of shrinkage.
Dressing Percentage of Slaughter Cattle
A discussion of the factors affecting dressing percentage in slaughter cattle and how its variability can affect the carcass value of an animal. Dressing percentages should be viewed in relation to other carcass quality factors as a higher percentage does not always translate into higher dollar returns. Dressing percentages can be highly variable because they are influenced by factors such as days on feed, the season and the market where the cattle are sold. Tables giving examples of factors causing variability are provided.
Beef Carcass Evaluation
An overview of the beef grading system in Canada as of January 2000 and administered by the Canadian Beef Grading Agency. The grade is evaluated based on a set of six criteria that are directly related to the tenderness, juiciness, consumer acceptability, shelf life and yield of a carcass. These are assessed by determining the maturity of a carcass, the amount of marbling, fat colour and texture, and meat colour. Grading is broken down into multiple A to E grades, with a “Canadian Prime” grade introduced in 1999.
Value Based Marketing of Cattle – More Than Just Carcass Quality
An explanation of value based marketing being utilized as a management and marketing tool that will reward or penalize cattle based on carcass merits. A variety of options provided by feedlots and packing plants is described. A producer with a high quality product that can be tracked back to its primary production such as Certified Angus Beef would benefit more through value based marketing than from selling on the grid. To profit from value based marketing, a producer must identify the cost of production for the entire production process from conception to consumer.
Commodity Futures Markets: How They Work
An explanation of commodity exchanges and their major functions, and of the terminology specific to futures trading. Also included is a list of commodity exchanges and the products they deal with, as well as an explanation of the commodity clearing house. A table outlines the details of a futures contract and explains the terms specific to each part of the contract. An explanation of margin transactions, along with examples is included.
Using Hedging to Protect Farm Product Prices
A discussion on the use of hedging by farm managers to lock in favourable prices until actual deliveries can be made. To be successful in hedging, a producer must be aware of both cash and futures market price movement as well as basis levels. Advice is given for choosing the right month for the futures contract, the use of rolling futures contracts and hedging pitfalls to keep the risk at a minimum. The producer must keep in mind the final goal of reducing risk and locking in favourable prices.
Basis Levels in Cattle Markets
An explanation of basis levels and how they are calculated to be used as a marketing tool for feeder and fed cattle. Basis is defined as the difference between the nearby futures market (which is expressed in U.S. dollars) and the current cash market. A thorough understanding of the relationships between the different market forces is needed for using basis levels as a successful marketing tool when developing pricing strategies. Included is a table giving a summary of recent historical basis levels.
Choosing a Commodity Broker
Some steps to follow in choosing the right farm commodity broker for a farm operation and a list of available brokers in Alberta. Step one in choosing a Commodity Broker (also known as a Futures Commission Merchant (FCM)) is deciding on the kind of service that is needed, whether it is the provision of market background and outlook information, or merely the filling of trader orders. Step two involves talking to several firms and their brokers in order to find one you are comfortable with. The article describes the functions of two types of FCM firms (clearing or carrying brokers and introducing brokers) and details the client financial requirements.
Market Information Sources for Western Canadian Farms
An examination of the kinds of market information that a successful farm marketer needs to access and a list of information sources that can provide complete and timely market information. To be successful, a manager needs price information, market analysis and market outlook information as well as market strategy suggestions. Sources of information are listed along with their delivery method and a brief description of the kind of information that is provided.
Market Information on the Internet
A short guide to using the Internet as a source of market information with a list of websites with links that provide free market information to western producers. Each resource is given with an accompanying url, a short description of the type of information provided and details of the timeliness of updates for each site. |
|