Economist highlights the value of gain on backgrounding cattle in the winter
The University of Nebraska-Lincoln (UNL) BeefWatch podcast welcomed Dr. Elliott Dennis, a UNL livestock marketing and risk management economist, assistant professor and Extension specialist, on Dec. 12 to discuss an article titled “The Value of Gain on Winter Backgrounded Cattle.”
The article was featured in the Oct. 31 Cattle Markets Newsletter and in the December BeefWatch Newsletter.
Value of gain versus cost
Dennis notes there are several things producers need to consider in any environment.
“We need to be very aggressive on controlling cost, and we have to know our cost,” he says. “We then have to try to aggressively cut cost until it hurts. One of the ways I try to talk about this is when we make a business decision, we have to know the numbers behind the decision – it allows us to make an informed decision about what we are going to do.”
In the fall, many producers make the decision to retain animals or sell them, and there are a lot of factors going into this decision, he explains. One factor Dennis focuses on is calculating numbers if the market is willing to pay a producer to put on additional weight and how weight changes a marginal value.
The article notes cow/calf producers who still have their calves are in the process of deciding whether to sell or retain weaned calves. The decision must consider both the cost to put on additional weight – total amount, quality, cost of feed resources, etc. – and the expected price received when cattle are sold at higher weights at current and future basis-adjusted prices.
The difference between these two is profit but only on additional weight gained. Positive values indicate profits could be made by retaining feeder cattle in the fall.
“The way we calculate this marginal value is through a formula called value of gain,” shares Dennis. “It essentially takes the corn price, historical basis, the feeder cattle futures market and gives producers an idea for every pound put on and what the market is willing to pay – it represents the current market valuation.”
Information resources
Producers can access information used in this process on Beef Basis.
“This is free to use, and it allows producers to calculate this value of gain,” Dennis shares.
The article mentions producers who retain cattle over the winter should recalculate the value of gain for cattle in the spring as they come off cornstalks or winter grazing to determine if the market is still willing to pay them to put on yet additional weight.
From a production standpoint, Dennis utilizes the Nebraska Beef Report. A survey from UNL shares producers can use a combination of price risk management and different lengths in their production system as hedge against adverse price movements.
The article states putting weight on during the winter and selling in March through April or selling in the late summer are two common backgrounding production systems. Within these two systems, total weight can be influenced by the type of feed.
Additionally, the article notes gain can either be fast or slow in the winter stocking 2022-23 and summer grazing 2023 seasons. These decisions impact the total weight gained at each phase and thus the time and weight feed cattle enter feedlots.
“The decision a producer has is if they should be targeting a slow rate of growth to get to the March timeframe, or if they should targeting fast growth to get there,” says Dennis. “Ultimately, what happens is there is going to be a relative difference in the weight of the animals. If there is slow growth, producers will be targeting about 625 pounds and about 785 with a fast rate of growth.”
“The market this winter has been indicating producers should target a slow winter performance rather than a fast winter performance,” he adds.
Overhead costs
and challenges
In regards to high and low rates of gain, there are several overhead costs producers need to consider.
“Producers really need to sit down and think about their level of performance and how many dollars of head per day on cornstalks, etc. They need to understand the cost side of things and profit. They have to find opportunities to make the highest amount of profit,” says Dennis.
“First and foremost, in high-feed environments, producers need to know their numbers. Once they know them, they need to be dynamic in this marketing decision and recognizing, if they choose to make that decision, they should feel confident they will be paid for the animals in the end,” he adds
In closing, historical basis can vary from year to year based on feed prices, transportation costs, etc. Dennis shares a projected outlook for basis for this year compared to a historical long-term average.
“Anytime we calculate this value of gain, we’re calculating it on a historical basis, generally calculated on a three- to five-year timeframe,” says Dennis.
He mentions a projected outlook for basis will depend on the type of weight, but overall, calculating the value of backgrounded winter cattle has two sides – the cost side and the sale and or revenue side.
Brittany Gunn is the editor of the Wyoming Livestock Roundup. Send comments on this article to roundup@wylr.net.
