Marketing time is approaching for many Carolina cattle producers. The same factors that affected last year’s retained ownership decision are present today but they are not giving us the same signals as last year. Fed cattle prices are higher than last year and corn prices are expected to remain low through the winter and spring. Placements are higher than last year, marketings are staying current but cattle out-weights remain above last year’s weights. The signals are mixed.  What does this mean to cattle producers that are considering retaining ownership of their 1999 calves

The prospect for improved returns is good this year. Fed cattle prices are $2-5/cwt. higher than last year. Will the market continue to improve this spring? Most experts believe the longer-term outlook for fed cattle is bright. What can Carolina cattlemen with heavy weight calves do now to participate in this projected price increase?

One alternative available to these cattle producers is retained ownership through the feedlot. Retained ownership is generally considered to be a strategy when cattle prices are depressed not when prices are expected to improve. It is true that producers limit retained ownership to depressed price years. But conditions this year warrant an evaluation. Low corn prices and the possibility of higher fed cattle prices in the spring suggest that producers should evaluate this marketing alternative in 1999.

There are some points to remember about retained ownership in the Carolinas Feeder cattle produced here 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 emphasize is that retained ownership can also 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 and family may want to be part of this decision.

Now let’s evaluate a retained ownership example for 1999 calves. Keep in mind that your situation is different from my example, so you should do your own calculations, and not 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 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 $68 per cwt.   Out-of-pocket costs to produce these calves averaged $300 per head (cow carrying costs). If this calf were sold on the market today it would bring $510 per head or a positive return above cash espenses of $210 per head. We can check this figure by looking at the October feeder calf futures quote for the month of October. This estimate of the price for a 750-lb. feeder calf is $81.65per cwt. Historically the October basis has been $9.26 per cwt. The futures market is suggesting that the local price for 750-lb steer calves should be closer to $72.39 per cwt. Today the local market is discounting this heavy weight calf by over $4 per cwt., a practice that is not uncommon in the Carolinas.

The futures market is also suggesting that if you retain these calves that “fed cattle” prices will allow you to regain the lost “ local feeder calf” price during the course of the winter. October 1999 live cattle futures price is $69.18 per cwt. and April live cattle futures are $70.12 per cwt. This is about a one-dollar improvement from October to April. Retaining ownership, in this case, will allow the producer to avoid the current local market discount and continue participating in any additional price increase at the “fed cattle” level.

Will this expected price improvement increase total returns for these calves? If we ship 750-lb steers to a Midwestern feedlot, we can feed for 150 days and have a 1200 average weight calf by mid March (450 lbs. of gain in 150 days equals a 3-lb ADG). Our estimate of the total feedlot cost of feeding these calves is $45 per cwt. or $202.50 per head over the 150-day feeding period. The total cost of the steer after feeding is estimated to be $734 per head or $61.16 per cwt. (Table 1; $510 fall selling price plus $21.50 in interest charges on the $510 for 150 days plus $202.50 per head feedlot costs).

What is the market offering for April 2000. The futures market is suggesting that the April price would be $71.20 (quote as of Oct. 8, 1999). Because the packinghouse is within 50 miles of the Kansas feedlot the basis is $0.65 per cwt. The expected selling price for our 1200 lb steer in the Midwest is $70.55 per cwt. This is an expected sales value of $846.60 per head. The difference between retained ownership and selling the calves in October is $112.60 per head ($846.60-$734.00). This is a return of 22.1 percent above the sales price of the calf in October. The following tables show what expected net returns and break-even prices would be for selected costs of gain.

Table 1: Break Even Prices For a 750 lb. Steer at Selected Costs of Gain
(1)	(2)	(3)	(4)	(5)
Cost of Gain ($/cwt.)	Weight Gain Pounds	Cost of Gain ($/hd)	Cost of Steer Plus Interest	Break-Even Price ($/cwt)
				(C0l 3+4)/1200 lbs
$40.00	450	$180.00	$531.50	$59.29
$45.00	450	$202.50	$531.50	$61.16
$50.00	450	$225.00	$531.50	$63.04
$55.00	450	$247.00	$531.50	$64.91
$60.00	450	$270.00	$531.50	$66.79

It is apparent that the cost of gain is an important factor in the retained ownership decision. The cattle producer has two areas that are affect his net income from retained ownership. One is the animal’s weight gaining ability (ADG). The other is the cost of gain. In our example an increase in the cost of gain from $40 to $60 per cwt. increases the break-even price (break-even price above out-of-pocket expenses) by $7.10 per cwt. Net income on a per cwt. basis falls from $10.86 to $3.76 per cwt. On a per head basis net income declined from $130.32 to $45.12

 

Table 2: Estimated Net Income from Retain Ownership at Selected Costs of Gain
(1)	(2)	(3)	(4)	(5)
Cost of Gain	Break-even Price	Estimated October Selling Price	Net Income	Net Income
($/cwt)	($/cwt)	($/cwt)	($/cwt)	($/head)
$40.00	$59.69	$70.55	$10.86	$130.32
$45.00	$61.16	$70.55	$ 9.39	$112.68
$50.00	$63.04	$70.55	$ 7.51	$ 90.12
$55.00	$64.91	$70.55	$ 5.64	$ 67.68
$60.00	$66.79	$70.55	$ 3.76	$45.12

In our example, the decision to ship these heavy weight calves and feed them over the winter has netted the producer about $100 per head. 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, the prospects of low feed prices and higher fed cattle prices in the spring could significantly improve net returns. In summary, if you have heavy weight calves, investigate feedlot-retained ownership this year. It might help you improve you revenue outlook for this year.

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updated 11/28/98