WHAT DOES IT COST TO HOLD BACK CALVES?
Originally published on October 4, 2007
Several of my firm's clients are considering holding back calves this fall. They plan to use their feed stocks and facilities to background them for either the feeder or grasser market.
Travis Peardon, a Saskatchewan Agriculture livestock development specialist, has sent me an Excel based software program, called the Break-even Calculator, which measures and forecasts backgrounding costs and profits.
It calculates a ration-based feed cost, a yardage cost and a cost per pound gain. It also provides a link to the Chicago futures market, allowing ranchers to extract prices from the futures month in which the cattle are to be marketed and forecast the backgrounding profit per head.
Using the rancher's backgrounding costs, the program calculates a break-even selling price per pound. The feeder versus grasser comparison is set out in the accompanying table.
What is the price of the weaned calves going in?
Light steers of 400 to 500 lb. averaged $1.20 per hundredweight for the week of Sept. 21, so this is our starting price for the weaned calves.
Remember that the rancher could sell his steers and use the winter-feeding time for other pursuits. With the current labour shortage in much of Western Canada, producers would be negligent to not consider this option.
Feedlots buying feed barley at $3.75 per bushel or better should put downward pressure on the market value of light calves this fall.
Looking at the results in the table, the backgrounding enterprise does not make a real profit per head, once we factor in direct yardage and feed barley costs.
What is your direct yardage cost?
No two ranchers measure yardage costs the same way. In our example we used a direct yardage cost of 37 cents per head day. While I agree with my economist friends on many things, I am at odds with them on their calculation of yardage.
In their Yardage Calculator, they include an overhead charge for facilities and equipment. I think overhead costs are incurred whether or not the rancher chooses to feed his calves. In our partial budget, we use only a direct yardage cost, which is identified as "other costs" in the calculator program.
Some ranchers will swath graze their weaned calves this fall and their computed direct yardage costs for these planned grassers would not reach 37 cents per head day, making their option more attractive over the 233 day feeding period.
Can your calves afford your barley?
Thereís a business adage: everything has its price.
This also applies to a rancherís home-grown feed barley. With the current market exuberance, if someone offers the farmer $4 per bushel for his barley, I bet it will be gone along with any plans he once had for backgrounding calves.
If the consumer wants beef and the cost of producing it goes up, then we should expect higher prices at the grocery store. This doesn't always materialize. For this reason, dumping barley into the semi-trailer at $4 per bu. is considerably easier than putting it in the feed wagon.
What did we conclude?
The results shown in the table, given our ration, feed cost and yardage up front, show our rancher earning 27 cents per head profit while backgrounding his calves for 175 days at an average daily gain of two pounds per day.
With the grasser alternative, he is losing $20.62 per head, backgrounding his calves for 233 days at an average daily gain of 1.5 pounds per day. The difference can be attributed to the additional interest and yardage costs for keeping the calf that much longer.
I encourage any rancher who is planning to background calves to use the break-even calculator to get a better handle on his costs. Knowing costs is essential to making the most informed decision.
In agricultural, with so many variables, itís common to hear "you canít make it work on paper, so why try". Our challenge is to make it work on paper so that it works in real life. To receive a free copy of the Break-even Calculator, contact Peardon at email@example.com.
Allyn Tastad, chartered professional accountant, is a partner in the accounting firm of Hounjet Tastad Harpham in Saskatoon at 306-653-5100, e-mail at firstname.lastname@example.org or website www.hth-accountants.ca. All data and information provided is for informational purposes only. Readers are cautioned that laws and regulations are subject to change. Consult your accountant for current professional advice tailored to your situation.