Hold ‘Em

If you're a typical spring-calving cow-calf producer, you'll find the cattle market this fall has been turned on its head since last year. Fed cattle prices haven't kept up with corn prices and that points toward weaker demand for calves than we've seen in recent years.

Worse, or at least more interestingly, the market for feeders is also "inverting"—so that the value of calves is trying to get below the price of fed cattle. That means the value of gain on post-weaned calves has doubled since corn prices went all goofy on us.

That means most cattlemen will want to reconsider their marketing programs, according to people charged with under-standing the flexibility of cattle markets.

At mid-summer, with the corn market in the $7.50 per bu. range, Don Close, head of the marketing department at Texas Cattle Feeders Association (TCFA), says the traditional methods for calculating cost of gain for cattle in feedlots yielded a figure of $1.20 per lb. That was about 20¢ more than a fed animal was worth at the moment.

Many feeders are trying a lot of byproducts and other cost-cutting measures, he says, that probably render the "traditional" figures inaccurate. Still, it is costing a ton to add pounds to cattle in feedlots.

When cattle feeders can buy pounds of calf cheaper than they can add pounds—such times are rare but not unprecedented—cow owners have new opportunities. Make that "grass" owners. Everyone's numbers vary, but if a pound of feedlot gain costs $1.20 and feeders are worth $1.05 to $1.15, as Close says: "You can't make them too big."

One important change is the value of backgrounding and preconditioning. Take, for instance, a program like the popular VAC 45 program pioneered by Texas A&M University (TAMU). The downstream benefits of the program are manifold, ranging from improved health to improved daily gains and feed efficiency to improved carcass performance.

Such programs—properly administred and marketed—earn wider premiums each year. That is if you follow a few rules. One is to pick a well-respected, third-party program. A study done by Iowa State University Extension a couple of years ago indicated that the market value for calves with third-party certification of preconditioning claims gathered a difference of $6.15 per cwt. over the base and an additional $2.75 per cwt. over calves with uncertified claims.

Moreover, the premiums for such cattle get wider each year—not only because they're more popular with feeders, which they are, but because they are worth more in times of higher priced cattle, feeds and medicines.

In a normal year, one drawback for cow-calf producers considering such programs is the rollback on larger cattle. As cattle get larger during that post-weaning period, their value per pound tends to go downward. If you take a 600-lb. calf to 700 lb., the monetary value on that extra 100 lb. must offset not only the cost of adding it, but the fact that the original 600 lb. are worth less on the larger animal.

Profitable gain. In an inverse market, you not only get the extra 100 lb. to sell, but you also sell the original 600 lb. for more money. All at once, the reward for a preconditioning program is greater than it was in years past.

And it's already a pretty handsome reward. Jim Kelley at Superior Livestock Auction, cites a case from earlier this year as illustration of just how important buyers think it is to get cattle to have at least some preconditioning in them. He says the cattle at auction were good, black, 625-weight calves to be weaned and delivered in July. They were described only as having their blackleg shots.

"We got them to $106.50 cwt.," Kelley says, "and we cranked and cranked, and they were about to go." But then the seller, on the line with his Superior representative, said he would take the cattle to the VAC 34 program and the bidding came back alive, finally selling for $117 cwt.—a premium Kelley describes as "$65 a head for $3 worth of shots."

At the same time, if the cattle had been held an extra 45 days after weaning and then sold at 725 lb.—or even carried to 825 lb.—their value would increase (assuming the market remained the same) even more in an inverted market. In one June 2008 sale week, for instance, an average 625-lb. steer brought $638 on Superior Livestock's Internet auction. Add 100 lb., and he was worth $795. Add another 100 lb., and the average value of an 825-weight steer was $867.

The value of adding 200 lbs. to a 625-lb. calf would have been more than $1.14 per lb.—a handsome return on most gain programs—not counting the added value of having him sell as preconditioned. In 2006, TAMU calculated the value of 60 lb. of gain at about 50¢ per lb.

Chuck Coffee at the Noble Foundation in Oklahoma, says he calculated the value of gain at the Oklahoma City sale earlier this summer as high as $1.68 per lb. taking calves from 554 lb. to 620 lb. Even with supplements costing cattlemen $216 per ton, Coffee says, it makes sense to hold cattle longer.

Watch the details. Coffee and TAMU's Jason Cleere note that greater gains won't come free, though. In most cases, they say, the more you can rely on forage to add the gain, the better. Usually, some supplementation will pay for itself but with feed prices this high, he says "be very careful with that."

One point to remember in inverted markets is that it is often prudent to be a bit more patient with average daily gains. You can make the cattle weigh more faster with more feed, but the cost of gain is more important. For instance, Cleere says calves on grass might gain 1/2 lb. per day, while you might triple that or more by adding alfalfa, and even faster if you added corn. But after finishing the math with one producer, Cleere says the cost of gain quickly passed the $1 per lb. mark.

One way of looking at that is your grass is worth more today than ever before because it is, in this kind of situation, competing with other feedstuffs that are at record high prices.

Of course, selling bigger cattle may not be the only "new" thing to consider this fall. Cattle feeders have had a record bad run of losses, and as the red ink quickly mounts and their equity continues to disappear, cattlemen have got to wonder how aggressive buyers will be able to be come market time.

As TCFA's Close points out, none of the above is a big secret. Pasture conditions are great in much of the country. He expects there may be tons of those 800 lb.-plus cattle coming to market this fall, and he says that could create a bit of a market backlash as those cattle bump into a stout corn market.

At mid-summer, the futures market would have offered a chance at a break-even hedge for such big cattle after a quick run through the feedyard, but as they all come off grass at the same time, any weakness out back might force feeders to bid the feeder market down.

In that case, incongruently enough, cow-calf producers might be wise to look at a retained ownership program in spite of feeding costs. Feeders' borrowing capacities are much weaker than they were last year, and funding is less available for most of them.

Cow owners, with a few dollars still jingling from their own good run and now facing the tightest market in a long time for their calves, might decide it's a good idea to keep those calves that extra three or four months it takes to get the packers' attention.

Your situation will vary. The important thing is to realize just how drastically the world has changed this year. That much change in the situation just about demands adjustments in any business operation. BT

Changes to Consider

Nobody sells more cattle than Superior Livestock Auction's Internet and satellite sales—and certainly nobody sees more top-end cattle from top-end marketers. That gives company manager, Jim Kelley, an unique perspective into what's hot and what's not in the market. His suggestions for producers:

1. Source and age verification. Management records are not hard to update and will help buyers get access to export markets and help them meet the criteria for country-of-origin labeling. Kelley says it adds $8 to $10 per head in value.

2. Wean and vaccinate. If producers can't figure out a way to hold cattle after weaning, they can at least do the minimum. A VAC 34 program—vaccinate them two to three weeks before weaning—will add value, as long as you make sure buyers know it has happened. You have to buy the pharmaceuticals anyway, so you might as well incorporate the activity with your records into a 3rd party verified program.

3. Test for BVD-Persistently Infected cattle. Kelley says more buyers are demanding such tests and it more than pays for itself.

4. Reconsider "natural" programs. Lots of "natural" calves are offered, and the rewards have almost disappeared, Kelley says. Premiums probably no longer offset the lost benefits of traditional management programs. "We've got some buyers who like them because they know they'll get 30 lb. of compensatory gain because they haven't been implanted," Kelly says, but they don't pay much extra.

5. DNA test calves' parentage. Then share the results with marketers. "We don't see as much of that as I expect we will," Kelley says, but it's information that will become increasingly valuable in the future.