By now you’re surely sick of hearing
about ethanol, about how it’s impacting corn and calf prices and
how it could easily re-shape the entire beef business.
After all, no matter how idiotic
it is for the government to create an artificial corn market
through subsidies for domestic ethanol production—tax credits
and import tariffs—the pressure already exerted on cattle prices
is too real.
Figure every 50-cent per bushel
increase in the cost of corn takes about $12/cwt. off the price
of a five-weight calf, according to Cattle-Fax; $6-$7 off a 750
lb. feeder. The resulting cash price doesn’t mean a market
crash, nor does it necessarily define unprofitable price levels,
but it does mean ethanol policies have already robbed a
significant amount of equity from the cattle business compared
to what it would have been otherwise.
Moreover, the new reality of corn
politics and economics shines a brighter light on cows and
cowherd management. Though beef cows aren’t typically viewed as
a key corn consumer, as ethanol production buys more corn
acreage, there are fewer acres left for the forage staples of
cow-calf production, which means prices of these inputs will
continue to rise as well.
That’s bad news for average and low-return cow-calf producers.
According to Cattle-Fax, average profits in the cow-calf sector
were $2.33 per head—basically breakeven—from 1980 to 2000.
Low-return producers lost about $54 per head during that time.
“Many breakeven producers have
been successful at reducing costs, but at the expense of
productivity, and they need to re-evaluate those areas to
determine which areas have impacted productivity,” explains a
Cattle-Fax report shared in February at the Cattlemen’s College
sponsored by Pfizer Animal Health.
Conversely, high-return producers
earned $120-150 per head more than low-return producers, and
about $65 more per head than average-return producers. Keep in
mind this is for 1980-2000, before the last several years when
about anyone with a live animal and a pair of fencing pliers
could make cows pay.
Though these high-return
producers exhibited superior profit performance, they were
significantly below average in some key areas, says Cattle-Fax:
annual cow costs; breakeven calf costs; feed costs; input costs;
and general operating costs (Figure 1).
There’s not much that can be done about interest costs other
than working your way to lower debt levels. The other areas,
though, continue to be ripe with profit possibility.
For instance, according to the
Cattle-Fax, one way high-return producers achieve lower
nutrition costs is by utilizing home-raised feed more
efficiently and by procuring purchased feed at the most optimum
time. These are also the folks most likely to find more
efficient ways than traditional haying to preserve the nutrient
value of the hay they’ve got.
In terms of herd health, the
low-cost, high-return producers typically precondition calves
and utilize specific vaccination protocols, says Cattle-Fax.
These folks also tend to spend more money on genetics than
high-cost, low-return producers.
Bottom line, the high-return
crowd spends more money in areas that can return the most money,
and they spend the least money on things that can’t alter the
return.
“Low-cost production and
profitability is about more than keeping costs in check—it’s
about maximizing production relative to cost (more pounds weaned
per cow exposed,” emphasizes the Cattle-Fax report).
That’s one area where high-return
producers strive for above-average performance. It’s not just
the money in the bank defined by those pounds, it’s the
difference in how much money you must have from them.
Look at it this way. According to
Cattle-Fax, the breakeven price of a 550 lbs. weaned steer calf
is $80/cwt. if you assume an annual cow cost of $350 and an 80%
weaning rate. Increase the weaning percentage by 10 points,
holding all else equal, and the breakeven price drops to
$71/cwt. That works out to about to be about $50 difference in
the revenue per cow.
“At higher cow costs, these
differences widen even further,” explains Cattle-Fax. “If the
annual cash cost to carry a cow is $450, the difference between
weaning 90 percent and 80 percent is about $60 per calf.”
Compare that to the $6-$8/cwt.
decrease in breakeven cost that Cattle-Fax says comes with
increasing weaning weight from 550 lbs. to 600 lbs. while
maintaining the same cow cost.
Increasing Opportunity and
Challenge
Though still underutilized by the industry on average, these
concepts are certainly nothing new.
Now, think of a world shaded by
ethanol production. Ponder what the most efficient herds and
cows might look like when $4 per bushel is the low for corn
prices rather than the impending high. The value of management
principles embraced by high-return producers is magnified even
more.
As an example, the odds-on bet,
at least in the short-run, is that feedlots will seek to dilute
breakevens by placing older, heavier cattle on feed. On average
that means cattle will be on feed for fewer days. In effect,
that also means average feed yard occupancy rate will decline,
which is also negative to breakevens.
This suggests that faster growth
and greater feed efficiency on forage will be worth more.
Likewise, cattle with the ability to grade Choice with fewer
days on feed will likely be sought after even harder than they
have been. Since the only ways to increase grade are through
management and genetics, and since there will be fewer days on
feed to manage cattle as a group, it makes sense that genetics
will also gain importance.
Although it seems logical that
health risks at the feed yard will also decline because heavier,
older cattle are being placed, it’s going to take renewed focus
on health management prior to the feedlot to get them there
cost-efficiently.
The bottom line of all of this is
that if you haven’t made a profit when historically high prices
have been sustained for a historically long period of time,
you’re in a heap of trouble. Even average-return producers will
struggle harder to achieve breakeven status in the ethanol
world. The high-return folks, though, are positioned to exploit
the challenges of high grain prices rather than fall prey to
them.
Figure 1 - 11 Habits if High -
Return Producers
Source: Cattle-Fax
- Below average annual cow costs
- Lower than average calf
breakeven prices
- Lower feed costs
- Lower interest expense (less
debt)
- Lower general operating
expense
- Higher average weaning weights
- Higher conception rates
- More pounds weaned per cow
exposed
- High quality bulls with strong
genetics
- Preventative herd health
programs
- High-quality pasture (maintain
nutritional requirement of the cow)
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