Grass cattle economics
March 30, 2009
I am tired of reading about and writing about the economic mess we are in with the general economy. So, I will not mention it again in this article. At my house in the last week, I have seen a sunny day with temperatures in the 70’s and a cold, windy, snowy day with temperatures in the low 30’s. Those days were back-to-back. That tells me one thing; it must be spring. I checked on the south side of the house and the tool shed, and sure enough there is green grass appearing there. I did a window survey on my way to work and saw new calves beside their mama cows. Oh, the beauty of spring; life is renewed and the cowboy has new hope for a profitable year. It is also that time of year when green grass fever hits and lighter weight stocker prices are bid up by those who are sure this year they will make money running calves on grass. So, what are the prospects for profit this year?
I looked at market prices in Nebraska, South Dakota and Wyoming and considered the CME Feeder Cattle Futures to arrive at an expected purchase price for a 650 pound steer in the last week of April of $106 per cwt. The steer will cost you $689 per head. I will evaluate two different summer programs: a 120 day grazing period through the end of August, and a 150 day grazing period through the end of September. With the shorter 120 day grazing season, I will assume the steer gains 1.75 pounds per day for a total gain of 210 pounds for the summer. The result would be an 860 pound steer ready to sell at the end of August. For the 150 day grazing season, I assume that the steers will gain 1.67 pounds per day for a total gain of 250 pounds. The end result would be a 900 pound steer to sell at the end of September.
Let’s assume you can rent grass for $18 per head per month for yearlings from May through August/September. That is a cost of $72 for the four months and $90 for the five months. Veterinary, medicine, tags, death loss and other non-labor cost are probably about $27 per head and interest on the calf would be about $18 for the four months and $23 for the five months per head. Total costs for the summer would then be about $117 per head for the 120 day grazing and $140 per head for the 150 day grazing season.
The cost per pound of gain would be $0.56 ($117/210 lb) for the 120 day season and also $0.56 ($140/250) for the 150 day season. Feedlot cost of gain this summer will likely be in the upper $0.60 to lower $0.70 per pound range. Therefore, there is a higher probability of earning a positive return from a grass program than a feedlot finishing program. The rationale being that feeder prices are determined in large part by expected returns to feeding. Therefore, the price differentials in the market place between 650 pound steers and 850-900 pound steers reflect the expected cost of feeding that steer in a feedlot. If you can add that weight cheaper, in a grazing program for example, then the market is likely to pay you for that.
Presently, fall CME Feeder Cattle contracts are trading around $100 per cwt. If you assume that your local cash price for the 860 pound steer will be $3 below that price and that your local price for the 900 pound steer will be $4 below the futures, then you would expect to receive $97 per cwt for the 860 pound steer and $96 for the 900 pound steer. Your gross return for the lighter steer that was only on grass 120 days would be $834 ($.97 * 860). If you subtract the purchase price, $690, and the summer costs, $124, then your net return is $20 per head. For the 150 day grazing program, gross return is $864 per head and the net return is $27 per head ($864-$690-$147).
Those net return values are not that enticing for those of you who can recall making $50 or even $100 per head on summer stockers. Fall prices may strengthen enough to generate higher returns this year. Given the uncertainty of the present markets, I would say there is also a risk that fall prices will be lower than currently forecast based on the futures.
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Each of you must decide your own risk tolerance and how much return you need to justify running summer stockers. Furthermore, if you can get those stockers purchased for less than what I have shown in this analysis, then your returns will also likely be higher.