| MMM 375 | August 14, 1998 |
Marketing time is approaching for many Carolina cattle producers, and, again considerable uncertainty is in the market. Two factors are influencing fall feeder cattle price expectations. First, record-heavy slaughter weights and active feedlot placements suggest that fed-cattle prices are unlikely to average above $65 during the last part of 1998, even with very low corn prices. Large fed cattle supplies have forced live cattle prices down and consequentially feeder cattle prices. Fed cattle marketings will need to increase significantly to improve this situation. Second, the drought in the southeast, especially Texas, is forcing early sales of cows and calves, increasing supplies and forcing prices down.
The prospect for summer cattle returns to equal last year's levels are not good. What about as we get into the fall time period? Is the market looking any better or is it suggesting the same thing? Most experts believe the longer-term outlook for feeder cattle is for higher prices as feedlot supplies finally diminish. Yet what can cattlemen that own 700 plus pound cattle do now to protect against poor fall prices?
One alternative available to these cattle producers are retained ownership through the feedlot. Many factors might lead a cattle producer to consider this option. Producers may elect to hold calves over to improve overall returns by participating in any future market price increases. Low fall prices, limited feed resources and expectations of higher winter or spring prices, makes retained ownership a viable option.
Feeder cattle produced in the Carolinas are not generally fed in-state, but are shipped to the Midwest. High feed costs and the possibility of a winter with a wet and muddy feeding environment lead many cattlemen to send their calves west. In addition, markets for fed cattle are very limited in the southeast. Fed cattle markets are concentrated in the Midwest and southern plains. Southeastern fed cattle markets are virtually nonexistent.
One point to remember is that retained ownership also can significantly affect your farm's cash flow. If your calves are not sold in the fall, but are sold next spring, your ability to meet loan payments or other farm or family commitments may be significantly altered. Your lender may want to be part of this decision.
Now let's evaluate a retained ownership example for the fall/winter of 1998/99. Keep in mind that your situation is different from my example, so you should do your own calculations, and do not just rely on mine for any decisions that you might make. The evaluation process for retained ownership starts with the producer comparing the potential returns between a fall feeder sale and a spring fed sale. The analysis also requires estimating the cost of gain during the retention period (Your Clemson Extension area beef cattle agent can help you estimate this cost).
In our example, we have 50 steers with an average weight of 750 pounds. This weight of calf is selling currently in the Carolinas at $54 per cwt. Out-of-pocket production costs to produce these calves averaged $300 per head (cow carrying costs). If this calf were sold on the market today, he would bring $405 per head or a positive return above cash expenses of $105 per head. August feeder cattle futures are $70.13. Historically, August basis are minus $12.43 per cwt. on 700 plus pound calves. Local cash prices are about $4 per cwt. lower than the historical average.
The futures market also is suggesting that fed cattle prices are going to improve over the winter. August 1998 live cattle futures prices are $62.88 per cwt. and February live cattle futures are $64.82 per cwt. This is a $2 per cwt. improvement from August to February. While this price is not as good as many analysts thought it might be, in their initial 1998/99 forecast, it is a definite improvement over summer 1998 live cattle prices.
Will this expected price improvement increase returns for these calves? If we ship 750-pound steers to a Midwestern feedlot, we can feed for 150 days and have a 1,200 average weight calf by the end of January (450 pounds of gain in 150 days equals a 3-pound ADG). Our estimate of the total feedlot cost of feeding these calves is $50 per cwt. or $225 per head over the 150-day feeding period. The total cost of the steer after feeding is estimated to be $645 per head or $53.75 per cwt. ($405 fall sell price, plus $15 in interest charges on the $435, for 150 days, plus $225 per head feedlot costs).
| Table 1: Break-even Prices of Feeding a 750 Steer at Selected Costs of Gain | ||||
|
(1) Cost of Gain ($/cwt.) |
(2) Weight Gain Pounds |
(3) Cost of Gain ($/Head) |
(4) Cost of Steer ($/Head) |
(5) Break-even Price ($/cwt.) (Col. 3+4)/1200 lbs. |
| 46.00 | 450 | 207.00 | 420.00 | 52.25 |
| 48.00 | 450 | 216.00 | 420.00 | 53.00 |
| 50.00 | 450 | 225.00 | 420.00 | 53.75 |
| 52.00 | 450 | 234.00 | 420.00 | 54.50 |
| 54.00 | 450 | 243.00 | 420.00 | 55.25 |
| Table 2: Estimated Net Income from Retained Ownership at Selected Costs of Gain | ||||
|
(1) Cost of Gain ($/cwt.) |
(2) Break-even Price ($/cwt.) |
(3) Estimated February Selling Price (cwt.) |
(4) Net Income ($/cwt.) |
(5) Net Income ($/Head) |
| 46.00 | 52.25 | 64.17 | 11.92 | 143.04 |
| 48.00 | 53.00 | 64.17 | 11.17 | 134.04 |
| 50.00 | 53.75 | 64.17 | 10.42 | 125.04 |
| 52.00 | 54.50 | 64.17 | 9.67 | 116.04 |
| 54.00 | 55.25 | 64.17 | 8.92 | 107.04 |
In our example, the decision to ship these heavy weight calves west, and feed them over the winter has netted the producer a small gain. Several factors can alter these results. The biggest negative that could affect our estimate would be if we had a large death loss. High death losses drastically affect net return levels. On the positive side, lower corn prices and the possibility of higher live cattle prices could significantly improve net returns.
In summary, if you have heavy weight calves, investigate feedlot-retained ownership this year. It might help you improve your revenue outlook for 1998/1999.
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