Dillon Feuz: Is backgrounding calves profitable?
November 5, 2010
A couple of years ago I wrote an article on financial versus economic costs. I was tempted to just use that article again, because it may provide the key to be able to answer the question posed in the title. For those who didn’t read that article, or who can’t remember it, I will refresh your memory with the definition of financial versus economic costs. Financial costs are your costs that you incur this year, the checks you write, the cash you spend, the debit cards you use, the total amount that leaves your bank account.
Economic costs would likely include most of those financial costs but would value all of your inputs at market prices.
For example, if you were planning on backgrounding some calves this fall, what are your financial costs? If you raised the calves and feed yourself, the costs that went into raising that calf and producing the feed would be financial costs. Any purchased supplies, vaccinations and feed supplements would also be financial costs. If you did not borrow any money and you the owner are providing the labor, you may not have any other financial costs.
The economic costs for this same operation would value the calves and feed at market value (what ever they could be sold for), would include the purchased supplies, vaccinations and feed supplements and would also place a value on your labor and your facilities (after all you could rent your facilities to someone else and you could earn a wage working for someone else). These two different methods of determining costs would likely result in a vastly different cost per head for a backgrounding program and thus provide a different answer to the question above.
When agricultural economists prepare budgets, they almost always consider economic costs, not financial costs in the budget. I am no different. Over the last 20 years I have evaluated numerous different background programs. I have looked at hay-only rations, where calves may only gain one pound per day; and I have considered silage- and grain-rations, where the calves are gaining 2.5 pounds per day. I have considered many variations of rations with gains varying between 1-2.5 pounds per day. Most of the time when I consider all economic costs, backgrounding calves does not appear profitable.
Yet, in the real world I find that many of you background calves on a regular basis. I assume that you would not do so if it were seldom profitable. Is it just that you are only considering financial costs and I am considering economic costs? That would be the easy answer, and yet it leaves me thinking something still is not right.
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While I know that many of you just like to feed calves, I also know that there is still a profit incentive, and I think that many of you are smart enough to determine if you could make more money selling your feed and not feeding calves. Whenever my models or budgets don’t match up very well with what I observe in the real world of cattle production, I assume that usually I have made the mistake.
Let’s examine economic costs in more detail and see just how realistic those really are. First of all, consider the cost of the calf; even if you raised your own calf to background there is almost always a market for that calf. Therefore, I think you should all consider the market value of that calf when you are evaluating the profitability of backgrounding calves.
However, feed becomes a little more difficult. Perhaps the market value of a ton of alfalfa is $100. The economic cost of alfalfa in the budget should then be $100/ton. Underlying this is the assumption that you have probably used the large square ton baler to put up your hay, that none of it was rained on, and that there is in fact a demand in your specific area for alfalfa at $100/ton. Perhaps you have not planned on selling hay and you have found that you can bale it cheaper with a round baler. Furthermore, you minimize on twine to cut your costs so that you can get the bales from the field to the stack, but if you tried to move them multiple times, they would come apart. What is the market value of that hay? It is certainly less than $100/ton. It may actually be less than your financial costs in getting that hay to the stack. If this is your situation, then using $100/ton to value alfalfa would be incorrect and your true economic value may match your financial value and only be $60/ton, for example.
In most budgets that I do, I generally use a commercial yardage cost even if you are feeding your own cattle in your own lot. I assume the commercial yardage charge is the economic value of your facilities, labor and management. This, after all, is what a custom feedlot is charging you for the use of their facilities, labor and management and what you could charge someone else to feed their cattle. Most commercial yards are in good repair. The fences are all secure, the bunks are clean and you feel good about sending your cattle there to be fed.
In contrast, many of you have facilities that the only reason they hold cattle is that the cattle are too afraid to approach that maze of barbwire, broken wooden rails, ancient tractors used to hold up the post and provide windbreak and many other objects used to prop up portions of the fence. Now don’t be offended, I have worked cattle in those facilities myself. The point is, you know how to work cattle in your facilities but you probably could not rent them out to anyone else. They may have zero economic costs beyond the staples and nails you buy each year to make a few minor repairs.
What about your labor? What is the economic cost of your labor? If you live 30 miles from the nearest town which consists of a gas station, the school house, and the Ma-and-Pa grocery store (again don’t take offense, that is my home town) is anyone really going to hire you? If you are going to be feeding your cow herd anyway, what is the added cost of feeding a few calves as well? A little less time kicking tires in your shop does not put much value on your labor.
My point in writing this article is this: I will continue to evaluate backgrounding calves using market values and economic costs because I can’t know each of your unique situations and your true economic costs. But I would encourage each of you to place correct values on your true economic costs and evaluate your own situation. I assume that many times when my budget does not show a profit to backgrounding calves, your budget with your true economic costs will show a profit.