| ||The previous two issues of the AgriProfit$ Newsletter for Alberta Cattlemen laid the groundwork for where we’d like to go with this publication. We know there’s a lot of good information “on the shelf” about different management approaches, new technologies, tools, budgets, etc. This information needs to be presented so that it can be readily translated by producers into practical, on-farm applications.
Through this newsletter we strive to put this material into context for you, with examples of how you can assess the economics, and then follow through on your own operation. Our success will be measured by the follow up questions you ask, and the changes you make in your businesses.
In this issue, I’ve brought forward some of the drylot backgrounding production cost information we put together over this past year … in context with the business choices facing producers who have retained their ’03 calves.
Diane McCann-Hiltz will fill us in on her views on the feeder calf market in the “Market Watch” section.
In the "So What ...?" column, Ted Darling talks about an investment Alberta Agriculture has made, in conjunction with the University of Alberta, to develop management skills in the next generation of Alberta beef producers.
So you kept your calves.............
One of the most popular questions I fielded this fall from Alberta cow/calf producers was, “What should I do with my calves?” For those of you who know me, you know I usually reply back with questions of my own, “What do you want to do?” and “Why?” The best options for you, come from you, based on what you know about your business. My role in these discussions is to help you narrow down your choices and define your best options.
Many of the cattlemen I spoke with were already moving down the road to retaining their calves. The two most common reasons they gave were:
To which I responded:
- At today’s prices, I cant afford to sell, and
- I had a good crop this year and/or have decent feed supplies on hand, so I can feed them.
Now I realize that BSE put a lot of uncertainty into the calf markets and that as cattlemen, we tend to be an optimistic lot. BSE has put a lot of stress on individual’s financial positions so it’s human nature to try to re-gain some of the short term value that was lost in the ’03 calf crop.
- Is feeding calves what you do well?
- Can you make money feeding calves? and
- What is your feed worth?
You made your decision
Our discussions usually closed with some agreement on “if you can’t pencil in a profit for feeding your calves, knowing your own costs, why would you do it?” Many Alberta producers have decided to retain their calves … given the emotions and price uncertainties this fall, I hope that all gave serious thought to this question.
So ... now you’re feeding calves. Given that you:
the farm as a whole, combining the cow herd, the calves and the land base, should go on to earn more than if the calves were sold outright, right?
- valued in your calves at the market,
- brought in your feed at close to market, and
- have some skills at feeding calves and the facilities to do it effectively
From an economics perspective, in the short term this is a rational choice. It does, however, imply that you know what your costing break points are.
When are you selling these calves?
Producers backgrounding calves this year are facing considerably more uncertainty than years passed ... near term calf prices have shown reasonable strength but we’re seeing a lot more week-to-week variability in pricing. The further out you go into the late winter - early spring, the less certain the pricing for the calves you expect to take to market.
With this in mind, it’s important to recognize that you have choices... in previous years you may have had a target date or weight in mind. From a risk management point of view, perhaps now it’s key to form a target margin. When you see pricing start to weaken towards the point where you’ll strike that margin, move your feeders to market.
Now more than ever it’s important to recognize you’re not locked-in to feeding until the spring. Last year’s experience with drought has taught us that feed has value and that it will do fine in storage until a profitable alternative presents itself.
You have choices as to when you market your calves. Knowing your break points, in terms of your unit costing, gives you a leg up on identifying when to sell.
Defining your break points
Last year we started out building some costing profiles with AgriProfit$ participants as part of the Northern Alberta Beef Industry Development project. The team’s broad objective was to "create economic and productivity benchmarks for drylot backgrounding of beef feeder cattel". I’ll share some of the case study results to illustrate both potential break points and profit opportunity.
Table 1 is drawn from a recent project bulletin we prepared based on the information from our backgroundintg participants. The averages are fairly typical of what we expect to see for feeder calves retained on-farm, given the economic circumstances of the day.
Feeding information was collected on a fiscal year basis. Pens on-hand as of Jan. 1st (or Dec. 31st ) were valued as if purchased (sold) at that time..
Let’s look at the main cost areas. Feeder calf bids, or placements of farm-raised calves, tend to be based on the major “visible” costs of feed & bedding, vet. & med., and trucking & marketing ($1.16/head/day). Then we factor in the cost of the feeder (bringing this tally to $10.00/head/day). The remainder of the backgrounding costs are essentially “yardage” ($0.37/head/day). These can be considered as your primary break points … the cost groupings you focus on covering in a step-wise fashion. When all of these are valued at “market” the break points represent the steps to covering full production costs.
If you’re willing to bring feeds, or your calves, in at less than market value, then the break points change. You will need to keep your sights on the foregone “profits” you’re trading off on your homegrown products … and adjust your target margins accordingly.
The figures in Table 1 stress the obvious:
Individual producer’s costing profiles and feeding performance speak volumes about their business strengths and weaknesses … what they do best with the feed and facilities they have at their disposal.
- gain on feeder cattle must be cost-effective,
- rarely do you find the right cattle at a bargain, but “cheap cattle”( ie. poor gaining, inconsistent stock, or cattle that don’t meet your feeding system) will erode gains and inflate unit costs,
- yardage elements, although small in comparison with the majors, present a significant cost burden to feeding operations in the long term.
Is there profit opportunity?
Table 2 highlights key production and economic performance elements from the case study data. Average feed use, feed conversion and daily gain statistics are in range with expectations for feeding calves through the fall and winter.
Perhaps as important as the averages is the variability in both the productivity and the costing elements … these identify “opportunity for profit”. If you can identify strengths in your operation in these elements, the path to reaching your break points (covering cash and/or total production costs) is much clearer.
Pushing the feed and gain efficiency side of the ledger, maintaining reasonable yardage costs, and keeping your feed costs under control, are the clearly the keys to creating short term profit opportunity in backgrounding cattle both this winter and into the future.
We’ve just scratched the surface in examining the economics behind the dynamic backgrounding business. The information I’ve put in front of you should certainly give you cause to think about what it takes for you to be profitable in backgrounding.
Having your basic costing profile on hand can be valuable for both the placement and close-out decisions. Transforming these unit costs into a budget, with adjustments for feed and feeder prices, plus any carrying charges, will show you immediately where your break-evens lie.
Moreover, at times like this, where fed/feeder cattle prices are quite uncertain, using your costing to establish “break points” for your feeders will give you more of the management control you need. You’ll be able to define your choices in advance, ie. the actions you will take given possible market situations, and respond quickly to these events to preserve some of the profit that lead to your decision to retain your calves.
On a closing note, special thanks go out to Freeman Iwasiuk, Rod Carlyon and the rest of Alberta Agriculture’s Northern Alberta Beef Team for their efforts in getting the beef drylot economics activity underway. With their help, we’ve made the backgrounding component of the AgriProfit$ program an on-going service.
Remember ... you can’t manage what you don’t measure. If you’d like to come on board the program to develop a backgrounding costing profile for your operation, don’t hesitate to give me a call.