Kentucky calf prices appear to have decreased in the last few weeks as we approach winter and start to see larger calf runs. Feed prices have also softened over the last month or two and may be providing some opportunities for winter backgrounders. The purpose of this article is to examine potential returns to winter backgrounding programs.
At the time of this writing (October 25, 2012), spring feeder cattle futures were trading in the low-mid $150’s. As winter backgrounders consider purchasing calves today, they should be looking at these feeder cattle futures contracts for some sense of likely feeder cattle prices in the spring. A futures price in the $150’s suggests a likely Kentucky price for 850 lb steers in the low $140’s come spring: a likely sale value of $1,190 (850# x $1.40). This should be in the back of producer’s minds as they bid on calves this fall.
There is always a great deal of variation in calf prices, but sales during the first half of the week (October 22-26) suggested that Medium-Large Frame #1 550 lb steers sold in a range of $135 to $155 per cwt. It is very likely that a good group of 550# steer calves could have been put together for $150 per cwt. If so, the purchase price per head would have been around $825 (550# x $1.50). Based on current calf prices and spring futures prices, the market appears to be offering a gross margin (expected spring feeder value minus calf purchase price) of around $365 per head ($1,190 minus $825). As backgrounders consider placing calves right now, they should be asking themselves if they can make an acceptable return with a gross margin of $365.
Next, let’s consider the likely costs of wintering these calves from now until spring. The largest and most obvious cost is feed. Many producers have silage available to feed this winter, while others may be purchasing any number of feeds. We will look at two potential feeding programs, but there are an unlimited number of possibilities. One will primary use drought stressed corn silage and DDG’s. The other will use a combination of grass hay and a 50/50 corn gluten / soy hull mix with half the diet coming from each source. Both are targeted for about 2.5 lbs per day ADG, which means 300 lbs can be put on in approximately four months.
In terms of costs, drought stressed corn silage was valued at $40 per ton, DDG’s were valued at $325 per ton, grass hay was valued at $80 per ton, and the corn gluten / soy hull mix was
assumed to cost $260 per ton. All non-feed costs were assumed to be the same for both programs. Health costs were assumed to be $20 per head, commission was set a $15 per head, and transportation was set at $6 per head. An interest charge of 4% is included and death loss is assumed to be 2%. Of course, all these prices and costs will vary by location and operation, so readers are strongly encouraged to make individual estimates. Estimated budgets for the two programs can be found in tables 1 and 2.
Table 1. Winter Backgrounding Budget – silage based
Table 2. Winter Backgrounding Budget – commodity based
As can be seen in tables 1 and 2, based on the assumptions outlined previously, utilizing drought stressed corn silage valued at $40 per ton appears to offer greater profit opportunity that purchasing corn gluten and soy hulls at $260 per ton and utilizing grass hay valued at $80 per ton. However, even in situations where silage may not be available or operations may not be set up to utilize it, significant
profit opportunity likely exists based on a future’s based price estimate and the current fall calf market. As was mentioned earlier, these are only two potential winter programs and producers should consider other opportunities that might make sense for them.
Of course one of the key assumptions in tables 1 and 2 was the expected price of feeder steers in the spring. This price is subject to change and has the potential to greatly affect expected returns. So, winter backgrounders should also explore opportunities to manage downside price risk through futures and options markets, LRP insurance, and other strategies. While opportunities to make money exist, price risk is also prevalent and preserving some of those expected profits should definitely be a management goal. (Kenny Burdine)