Ranchers need to determine break-even costs to manage beef herd efficiently | TSLN.com

Ranchers need to determine break-even costs to manage beef herd efficiently

Gayle Smith

As cow herd numbers in the United States continue to decline, other segments of the beef industry are impacted by smaller calf crops.

Although more heifers are going into the feedlot, rather than back into the cow herd as replacements, the increase is still not enough to fill the vacant pens. According to Brett Stuart, research analyst with CattleFax, cattle feeders are struggling to find enough feeder calves to fill their empty lots.

“A lot of ranchers are backgrounding their calves on the ranch this year because feed is so cheap,” he said.

In 2006, alfalfa prices climbed to over $100 a ton, mostly because of a big demand for high quality alfalfa in the dairy industry.

“Most ranchers thought that was too much to pay, and started looking for cheaper feed sources for their cattle,” said Stuart.

By the time it reached its peak in 2009, some dairy quality alfalfa was selling upwards of $180 a ton, before milk prices declined. This year, with a plentiful hay supply available and prices a lot lower, more ranchers are choosing to background their calves on the ranch rather than send them directly to the feedlot at weaning.

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“Cattle feeders are complaining they have a lot of empty pens and are running out of cattle,” Stuart said. “But, I think by spring, there will be a lot of placements. There are a lot of feeder cattle out there, but the supply is flat right now because a lot of them are staying on the ranch.”

In fact, Stuart said the feeder calf supply in feedlots as of Jan. 1 is down about 35,000 head. Cattle on feed on Jan. 1 was slightly below 28 million head.

Stuart said feedlots are also starting to suffer from massive overcapacity.

“The biggest factor during the last five years is excess feeding capacity,” he explained. “That is a great problem for someone selling calves. But, for the guys feeding cattle, they need to be 100 percent full to make money. In order to stay in business, the feedlot guys are chasing a smaller supply of calves, and they are paying more in order to try and stay in business.

“As a result, we have cattle feeders bidding too much for calves,” he added. “They haven’t been able to hedge for two and a half years now, because the futures market isn’t there to support what they have to get for yardage. It has definitely been a lot better for people selling feeder calves, than for people selling fat cattle.”

Stuart urged producers who plan to feed cattle to pay attention to their corn supply.

“Ethanol is not going away any time soon,” Stuart said. “There is a lot of political power in Washington DC government that is committed to this program. It is not going away. If you are feeding cattle, you can not get lazy about your corn supply.”

Stuart explained a graph that showed a steady increase each year in ethanol production since 1995. However, the biggest climb has come since 2006, when corn used for ethanol production has climbed from two billion bushels a year to over 4.2 billion bushels a year in 2009-2010.

On a worldwide scale, Stuart indicated there is a bigger demand for corn than what is being produced.

“Corn trends worldwide indicate we are using more corn than we can produce,” he said. “There is a big demand for our corn supply. If you will need corn to feed cattle, pay attention to the market.”

Stuart urged producers to determine how they can make their operations even more efficient.

“We are getting a temporary reprieve from skyrocketing feed grain costs, but it will not last,” he said. “Therefore, pounds are worth more, and producers should add gain wherever and however possible whether it is by pre- or post-weaning.”

First, Stuart said cow/calf producers need to determine their unit cost of production.

“You can not manage what you do not measure,” he said. “Risk management and retained ownership decisions are nearly impossible to make without determining the break-even costs of production.”

Producers need to consider all costs including pasture, labor, diesel, feed, and any other costs that will help determine the cost of pounds weaned.

After they determine a break-even point, ranchers can decide whether to background their calves, improve or change genetics, determine a least-cost feed analysis, and decide whether to summer graze yearlings or calves.

Stuart provided producers with a example of a break-even point of $88 per cwt.

“Summer bids for fall delivery are $110/cwt,” Stuart said. “By knowing your net, you can plan for the fall.”

Decisions on leasing winter pasture, expanding the herd, retaining or buying calves for backgrounding, paying down loan principal, and determining whether additional cash resources will be needed to make the loan payment in the fall should all be easier questions to answer once ranchers have determined a break-even point for their calves.

Stuart said ranchers may also want to make a marketing plan.

“During the past two years, the feeder calf market has collapsed in the fall,” he said.

In response to that, ranchers may want to create two marketing windows to reduce their risk, he continued.

Stuart also discussed how profitable it is to run summer yearlings. “Seasonals work eight of 10 years,” he said. “With high grain costs, running yearlings can also increase the value of gain.”

Stuart said yearling producers should also figure a breakeven cost to manage the business. “Margins are thin over time,” he said.

He also encouraged them to evaluate niche markets to enhance margins, and use seasonals, futures and forward contracts.

However, Stuart cautioned yearling operators from becoming too greedy.

“You need to manage yearlings for return on investment, not profit per head,” he said. “Don’t get greedy. If you have a set amount you plan to profit, you may end up making nothing. If you get a chance to lock in a good solid return in the futures market, do it.”

As cow herd numbers in the United States continue to decline, other segments of the beef industry are impacted by smaller calf crops.

Although more heifers are going into the feedlot, rather than back into the cow herd as replacements, the increase is still not enough to fill the vacant pens. According to Brett Stuart, research analyst with CattleFax, cattle feeders are struggling to find enough feeder calves to fill their empty lots.

“A lot of ranchers are backgrounding their calves on the ranch this year because feed is so cheap,” he said.

In 2006, alfalfa prices climbed to over $100 a ton, mostly because of a big demand for high quality alfalfa in the dairy industry.

“Most ranchers thought that was too much to pay, and started looking for cheaper feed sources for their cattle,” said Stuart.

By the time it reached its peak in 2009, some dairy quality alfalfa was selling upwards of $180 a ton, before milk prices declined. This year, with a plentiful hay supply available and prices a lot lower, more ranchers are choosing to background their calves on the ranch rather than send them directly to the feedlot at weaning.

“Cattle feeders are complaining they have a lot of empty pens and are running out of cattle,” Stuart said. “But, I think by spring, there will be a lot of placements. There are a lot of feeder cattle out there, but the supply is flat right now because a lot of them are staying on the ranch.”

In fact, Stuart said the feeder calf supply in feedlots as of Jan. 1 is down about 35,000 head. Cattle on feed on Jan. 1 was slightly below 28 million head.

Stuart said feedlots are also starting to suffer from massive overcapacity.

“The biggest factor during the last five years is excess feeding capacity,” he explained. “That is a great problem for someone selling calves. But, for the guys feeding cattle, they need to be 100 percent full to make money. In order to stay in business, the feedlot guys are chasing a smaller supply of calves, and they are paying more in order to try and stay in business.

“As a result, we have cattle feeders bidding too much for calves,” he added. “They haven’t been able to hedge for two and a half years now, because the futures market isn’t there to support what they have to get for yardage. It has definitely been a lot better for people selling feeder calves, than for people selling fat cattle.”

Stuart urged producers who plan to feed cattle to pay attention to their corn supply.

“Ethanol is not going away any time soon,” Stuart said. “There is a lot of political power in Washington DC government that is committed to this program. It is not going away. If you are feeding cattle, you can not get lazy about your corn supply.”

Stuart explained a graph that showed a steady increase each year in ethanol production since 1995. However, the biggest climb has come since 2006, when corn used for ethanol production has climbed from two billion bushels a year to over 4.2 billion bushels a year in 2009-2010.

On a worldwide scale, Stuart indicated there is a bigger demand for corn than what is being produced.

“Corn trends worldwide indicate we are using more corn than we can produce,” he said. “There is a big demand for our corn supply. If you will need corn to feed cattle, pay attention to the market.”

Stuart urged producers to determine how they can make their operations even more efficient.

“We are getting a temporary reprieve from skyrocketing feed grain costs, but it will not last,” he said. “Therefore, pounds are worth more, and producers should add gain wherever and however possible whether it is by pre- or post-weaning.”

First, Stuart said cow/calf producers need to determine their unit cost of production.

“You can not manage what you do not measure,” he said. “Risk management and retained ownership decisions are nearly impossible to make without determining the break-even costs of production.”

Producers need to consider all costs including pasture, labor, diesel, feed, and any other costs that will help determine the cost of pounds weaned.

After they determine a break-even point, ranchers can decide whether to background their calves, improve or change genetics, determine a least-cost feed analysis, and decide whether to summer graze yearlings or calves.

Stuart provided producers with a example of a break-even point of $88 per cwt.

“Summer bids for fall delivery are $110/cwt,” Stuart said. “By knowing your net, you can plan for the fall.”

Decisions on leasing winter pasture, expanding the herd, retaining or buying calves for backgrounding, paying down loan principal, and determining whether additional cash resources will be needed to make the loan payment in the fall should all be easier questions to answer once ranchers have determined a break-even point for their calves.

Stuart said ranchers may also want to make a marketing plan.

“During the past two years, the feeder calf market has collapsed in the fall,” he said.

In response to that, ranchers may want to create two marketing windows to reduce their risk, he continued.

Stuart also discussed how profitable it is to run summer yearlings. “Seasonals work eight of 10 years,” he said. “With high grain costs, running yearlings can also increase the value of gain.”

Stuart said yearling producers should also figure a breakeven cost to manage the business. “Margins are thin over time,” he said.

He also encouraged them to evaluate niche markets to enhance margins, and use seasonals, futures and forward contracts.

However, Stuart cautioned yearling operators from becoming too greedy.

“You need to manage yearlings for return on investment, not profit per head,” he said. “Don’t get greedy. If you have a set amount you plan to profit, you may end up making nothing. If you get a chance to lock in a good solid return in the futures market, do it.”

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