This guest post written by Brian Perillat, Canfax Manager/Senior Analyst, originally appeared in the September 25, 2015 issue of the Canfax Weekly Market Outlook and Analysis (available to Canfax subscribers). It is reprinted with permission.
As we head into the fall run, producers are looking at different marketing scenarios for their calves. While many producers have already taken advantage of high prices by selling calves for forward delivery, a significant portion of the 2015 calf crop will be marketed over the next two months. While calf prices remain well above a year ago, they have been under pressure for most of September.
The reality has been that highly profitable feedlots and a lower Canadian dollar had propped up local calf prices while the US cash market and futures market have been projecting lower cattle prices for the past few months. While calf prices seasonally drop into October and November, retaining ownership decisions should not be about trying to recover losses or hoping for better prices, but deciding whether it is projected to be profitable to feed your calves versus selling them.
Retained ownership decisions need to be based on current calf prices, cost of gain, and projected feeder prices. These variables are all different for each producer, depending on their cattle, and their cost structure, therefore each operation needs to use their own specific values. While current calf prices are generally known, to project prices we use the cattle and Canadian dollar futures, and an estimated basis level. Cost of gain is also critical to understand and it is important to realize that the cost per pound of gain is highly variable depending on the rate of gain of the cattle being fed.
Cattle futures’ losses have been accelerating, and this has pushed the futures market into oversold conditions, and point to significantly lower feeder prices. It is important to recognize these conditions, but also understand the implications on retaining and/or feeding cattle in this market where prices and futures markets are trending lower.
The following example is based on current futures markets, calf prices, and estimated basis levels and cost of gain. The scenario of backgrounding a 550 lb steer from October through to 850 lbs in March, is based off the current 550 lb steer price of $3.05/lb and using March feeder futures of $174/cwt and a Canadian dollar of 75 cents. Basis levels have also been quite volatile given the volatile futures markets, but historically the basis for an 850 lb steer in March is -15. Therefore, using these assumptions an 850 lb steer in March would be projected to be $2.17/lb (174/0.75 – 15).
To use this projected price to calculate the profitability of retained ownership, accurate cost information based on the cost per pound of gain is critical. While some producers have estimated costs of feed, yardage and bedding for backgrounding calves at approximately $1.00/lb of gain, it is very important to understand that the other costs, of health, death loss and interest can add up to $0.30/lb of gain.
The following table calculates and summarizes the economics of retained ownership based on the assumptions discussed. Under current market conditions, backgrounding calves shows a $223/hd loss. That said, the markets have been extremely volatile. If calf prices continue to drop, the dollar drops, or if the futures rise, the projections can change significantly quite quickly. Below the projection are the break-even calf price, March feeder futures level, Canadian dollar and basis in order for retained ownership to break-even. For example, if the feeder futures rally and all other market factors stay the same, if the feeder futures surpass 193.7, it would mean retained ownership may be profitable. The key is to follow and understand market signals to make informed decisions.
Editor’s note: By retaining ownership, producers can reap the benefits of a genetic selection program and other investments made in calves, such as low-stress weaning and other preconditioning-related practices. Risk management is advised to producers that retain ownership.
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