During my first couple of years at the University in Edmonton, there could have been anywhere from 300 to 500 students in the class. When one student asked a question, the professor assumed that 50 to 80 per cent of the students had the same question but were too afraid to ask. This is analogous to many calls and questions I receive from cow-calf producers.
Over the years, it never seems to amaze me that I receive the same questions over and over again. Therefore, I thought this would be an opportune time to discuss factors that influence the price of feeder cattle, and correct a few common misconceptions.
Cow-calf producers are always asking, “What is a fair price for my feeder cattle?” The feeder cattle market is a pure, competitive market. Therefore, in the long run, finishing margins are close to zero. Finishing feedlots focus on efficiencies and prudent risk management. They know the exact value of the animal when finished and they know the costs per pound of gain each month.
Number one factor
The most important factor influencing feeder cattle prices is the price of the animal when finished. The price of fed cattle changes from week to week and month to month. The price is not constant throughout the year. Over the past couple of years before the COVID pandemic, the price variation in the fed cattle market would be in the range of $25 to $30. This means the value of a 1,400-pound steer can vary by $400 between the highest and lowest prices of the year.
It is important that cow-calf producers have an idea of the fed cattle market for the specific timeframe when the feeder cattle will be finished. Usually in backgrounding operations, the rate of gain is around 2.2 pounds per day. When the animal is over 800 to 850 pounds, the rate of gain is increased to 3.0 to 3.6 pounds per day. If a calf is fed too much grain and gains three pounds per day in the backgrounding lot, the finishing operator can’t push efficiencies and the yearling price will be discounted.
The second major factor influencing the price of feeder cattle is the price of feed grain. The cost per pound gain also changes each month depending on the price of barley or corn. It’s important that cow-calf producers have an idea of the input costs and also various costs for having the animal in the feedyard. The cost per pound gain can vary from $0.85 to as high as $1.20. This includes all costs from barley, silage, processing and yardage. It’s not uncommon to see the barley price fluctuate by $50 tonne throughout the crop year. The cost per pound gained will not be the same in September as it is in March the following year.
There is no conspiracy
I often receive calls from cow-calf producers regarding the Livestock Price Insurance Program. This program is self-explanatory but there seems to be misconceptions about its purpose. It’s insurance, not hedging. A farmer buys hail insurance for the crop hoping they never have to use it. Another example is fire insurance for your house. The Livestock Price Insurance Program is largely based on options market for the feeder cattle futures. When the feeder cattle futures are at 52-week lows and the cow-calf producer wants a “lock in” a profitable price from when the local feeder market was at 52-week highs, the premium is going to be very expensive. It’s important that cow-calf producers are aware of the fundamentals on both sides of the border. On a side note, I’ve received comments that producers believe finishing feedlots want all ranchers to buy price insurance so they don’t have to pay up for the feeder cattle. This conspiracy theory is so false I can’t even begin to discuss it.
Finally, it’s not uncommon for producers to tell me they market their calves every October. This is the way their father marketed calves for 40 years and they’ve followed this pattern for another 20 years. There is an old saying that insanity is doing the same thing over and over again and expecting different results.
In certain years, the highest price for calves may be in October but most often it’s not. I may sound a bit harsh here, but cow-calf producers have to be smarter than this. Pencil out the potential profitability if you backgrounded the feeders or placed them in a custom backgrounding lot. After this, pencil out the profitability if you would place the cattle in a custom finishing lot. Every segment of the industry is trying to make a dollar. Therefore, figure out the value of the animal when it is 850 pounds and 1,400 pounds. If there are additional profits to owning the animal longer and putting on additional pounds, why not try it?
My dad always said that you can work in the corrals all day but your profitability is made sharpening your pencil after supper. Cow-calf producers should do some research or hire someone to determine where the feeder market should be in your area. In any given year, several different factors will influence your local price and I’ve discussed a few of the drivers in this issue.