Economic Leverage Points in Livestock Ranching by Eric Mousel

Economic Leverage Points in Livestock Ranching

Eric M. Mousel

Economic Leverage Points in Livestock Ranching The Best of the South Dakota Rancher Newsletter: 2005-2010

Eric M. Mousel

Cow Camp Publishing, LLC Brookings, South Dakota This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional services. If legal, accounting or other expert assistance is required, the services of a competent professional person should be sought. FROM A DECLARATION OF PRINCIPLES JOINTLY ADOPTED BY A COMMITTEE OF THE AMERICAN BAR ASSOCIATION AND A COMMITTEE OF PUBLISHERS. First printing, 2011 © Copyright 2011 Library of Congress Cataloging-in-Publication Data Mousel, Eric Economic Leverage Points in Livestock Ranching/by Eric Mousel p. cm. ISBN 1. Animal industry—United States—Finance. 2. Ranching—Economic aspects—United States. I. Title. Cover Design by Eric Mousel, Brookings, SD Manufactured in the United States of America

Table of Contents Economics of Production Systems Calving date comparison……………………………………… 6 Economics of early weaned calves………………………. 11 Economics of backgrounding calves…………………….. 16 The economics of grass cattle……………………………… 19 Can early weaning fall-born calves improve profitability of fall-calving systems in the northern plains?..................................................... 28 Economics of replacement heifers The value of replacement heifers………………………… 35 The cost of home-raised replacement heifers……… 42 The value of replacement heifers: Part II…………….. 45 Economics of heifer fertility…………………………………. 47 Economics of cow efficiency Economics of the weaning percentage measurement……………………………………………….………56 Economics of cow size………………………………….…….. 60 Economics of buying aged cows as replacements………………………………………………..…….. 72 Cost of production What does grass really cost?.................................. 80 The cost of grazing and haying annual forages…………………………………………………………….…. 84 Could sorghum silage replace corn silage for beef cow feed?....................................................... 89 4

Economics of creep feeding calves………………………. 93 Economics of protein supplementation……………… 99 Modeling cost of gain for feeder cattle marketing…………………………………………………………. 101 Developing return prediction models for cattle finishing enterprises………………………………………….. 106 Developing return prediction models for backgrounding calves………………………………………… 109 Economics of leasing vs. buying assets Is it cheaper to buy or lease pasture land?........... 113 Is it cheaper to buy or lease equipment?.............. 117 Economics of leasing and share agreements on cows………………………………………….. 125 Economics of marketing decisions Optimizing cull cow value……………………………………. 131 Identifying price break points and value spreads in the cash feeder cattle market…………….. 135 Sell bawling, backgrounded, grassed, or fat cattle…………………………………………………………. 146 Economics of efficiency Average daily gain vs. gain per acre…………………….. 153

Economics of Production Systems

How Does Calving Season Affect Cow Costs in Eastern South Dakota? A Production and Financial Comparison of Four Calving Dates for Beef Cows in Eastern South Dakota from 2002-2009. Introduction The amount of harvested and purchased feeds required to maintain a cow herd in eastern South Dakota is related in part; to calving date. Cows calving during the dormant season cause lactation to occur when range and pasture forage are not available and therefore need to be fed supplemental energy and protein. The majority of the difference in total annual cow cost is in the difference in the amount of supplemental feeds fed before summer grass is available. The unknown question is, ‘how much does total annual cow cost vary between different calving seasons’? The objective of this research was to use the South Dakota Integrated Resource Management (IRM) Database to compare the production and economic efficiencies of the four major calving seasons that are found in eastern South Dakota. Materials and Methods Data collected from cow-calf producers in eastern South Dakota who participated in the SDSU-IRM-SPA program were used in this study. Additional data was collected through individual consultation. Data were collected for the 2002 through 2008 calendar years; data were from the cow-calf enterprise only. All production data, regardless of source, were collected using the SPA system, in accordance with the SPA guidelines, developed by the IRM Coordinating Committee of the National Cattlemen’s Beef Association. Financial data was collected using the SPA system, in accordance with SPA guidelines; information was collected from IRS Schedule F to calculate Operating Expense Ratio (OER). The OER is defined as the proportion of gross revenue used to cover operating expenses. The ratio was calculated as follows: Operating Expense Ratio = Total Operating Expense – Interest Expense –Depreciation Expense Value of Farm Production Where Value of Farm Production is defined as Gross Income minus the value of purchased feeder livestock and purchased feed. Calf cost breakeven was calculated as follows: Calf Cost Breakeven =

Total Cow Cost 7

Pounds of Calf Weaned per Cow Exposed Return on Assets (ROA) was calculated as follows: ROA =

Net Farm Income + Interest Paid – Labor and Management + Capital Gains Total Farm Assets

Each herd represented one observation which resulted in a final database of 178 production and financial observations. Calving dates were categorized as 1) January-February (49 observations), 2) March-April (71 observations), 3) May-June (30 observations), and 4) August and September (29 observations). Producers who were involved with the program more than 1 yr may be included multiple times. Operations ranged from 47 to 1,125 cows. Results and Discussion Points Pregnancy percentage • Pregnancy percentage was not different (P>0.1) between cows that calved MAR-APR and MAY-JUN. • Pregnancy percentage was 1.1% lower (P<0.1) for cows that calved JAN-FEB than for Cows that calved MAY-JUN. • Pregnancy percentage was 2.85% higher (P<0.1) for cows that calved in MAY-JUN than cows that calved in AUG-SEP. Weaning percentage • Weaning percentage was highest for cows that calved in MAY-JUN. • Weaning percentage was 1.59%, 2.84%, and 3.32% lower (P<0.1) for cows calving in JANFEB, MAR-APR, and AUG-SEP respectively, compared to cows that calved in MAY-JUN. • Weaning percentage of cows calving in MAR-APR was 1.26% higher (P<0.1) than for cows that calved in JAN-FEB and 1.76% higher than cows that calved in AUG-SEP. • Weaning percentage of cows that calved in JAN-FEB was 0.49% higher (P<0.1) than for cows that calved in AUG-SEP. Weaning weight • Calves born in JAN-FEB were the heaviest (P>0.1) calves at weaning and calves born in MAY-JUN were the lightest (P>0.1) calves. • Calves born in JAN-FEB were 7%, 13.1%, and 24.4% heavier (P>0.1) at weaning than calves born in MAR-APR, AUG-SEP, and MAY-JUN, respectively. • Calves born in MAR-APR were 7.3% and 24% heavier (P>0.1) at weaning than calves born in AUG-SEP and MAY-JUN, respectively. • Calves born in AUG-SEP were 15% heavier (P>0.1) at weaning than calves born in MAYJUN.

Average days to weaning • • •

Average number of days to weaning for calves born in JAN-FEB was 18.5%, 26.4%, and 38.3% greater (P<0.1) than for calves born in AUG-SEP, MAR-APR, and MAY-JUN, respectively. Average number of days to weaning for calves born in AUG-SEP was 9.5% and 24.2% greater (P<0.1) than for calves born in MAR-APR and MAY-JUN, respectively. Average number of days to weaning for calves born in MAR-APR was 16.2% greater (P<0.1) than for calves born in MAY-JUN.

Pounds of calf weaned per cow exposed • • • •

Cows herds that calved in JAN-FEB had the highest (P<0.1) pounds of calf weaned per cow exposed and Cow herds that calved in MAY-JUN had the lowest (P<0.1). Pounds of calf weaned per cow exposed for cow herds that calved in JAN-FEB was 5.1%, 13.6%, and 22.2% higher (P<0.1) than for cow herds that calved in MAR-APR, AUG-SEP, and MAY-JUN, respectively. Pounds of calf weaned per cow exposed for cow herds that calved in MAR-APR was 8.9% and 18% higher (P<0.1) than for cow herds that calved in AUG-SEP, and MAY-JUN, respectively. Pounds of calf weaned per cow exposed for cow herds that calved in AUG-SEP was 10% higher (P<0.1) than for cow herds that calved in MAY-JUN.

Cow feed cost • • • • •

MAY-JUN calving cows had the lowest (P>0.1) Cow Feed Cost. Cow feed cost for cows calving in AUG-SEP and JAN-FEB was not different (P>0.1). Cows calving in AUG-SEP and JAN-FEB had the highest (P<0.1) cow feed cost. Cow feed cost for cows calving in MAY-JUN was 45.4%, 42.3%, and 30.3% lower (P<0.1) than for cows calving in AUG-SEP, JAN-FEB, and MAR-APR, respectively. Cow feed cost for cows calving in MAR-APR was 21.6% and 17.1% lower (P<0.1) than for cows calving in AUG-SEP and JAN-FEB, respectively.

Total cow cost • • • •

Total cow cost was lowest (P<0.1) for the MAY-JUN calving cows. Total cow cost was not different (P>0.1) between JAN-FEB and AUG-SEP calving cows. Total cow cost for MAY-JUN calving cows was 30%, 23%, and 29% lower (P<0.1) than for cows calving in JAN-FEB, MAR-APR, and AUG-SEP, respectively. Total cow cost for cows that calved in MAR-APR was 9.7% and 7.5% lower (P<0.1) than for cows that calved in JAN-FEB and AUG-SEP, respectively.

Calf cost breakeven 9

• • • •

Calf cost breakeven was lowest (P<0.1) for MAY-JUN born calves and highest (P<0.1) for AUG-SEP born calves. Calf cost breakeven for MAY-JUN calving cows was 16.8%, 9.2%, and 3.2% lower (P>0.1) than for cows that calved in AUG-SEP, JAN-FEB, and MAR-APR, respectively. Calf cost breakeven for MAR-APR calving cows was 14% and 6.1% lower than for cows that calved in AUG-SEP and JAN-FEB, respectively. Calf cost breakeven for JAN-FEB calving cows was 8.4% lower than for cows that calved in AUG-SEP.

Percent feed cost • • •

Percent feed cost for MAY-JUN calving cows was 22.7%, 16.4%, and 8.9% lower (P<0.1) than for cows that calved in AUG-SEP, JAN-FEB, and MAR-APR, respectively. Percent feed cost for MAR-APR calving cows was 15.2% and 8.2% lower (P<0.1) than for cows that calved in AUG-SEP and JAN-FEB, respectively. Percent feed cost for JAN-FEB calving cows was 7.6% lower (P<0.1) than for cows that calved in AUG-SEP.

Operating expense ratio • • •

Operating expense ratio for cow herds that calved in MAY-JUN was 22.9%, 20%, and 12.3% lower (P<0.1) than for cow herds that calved in AUG-SEP. JAN-FEB, and MAR-APR, respectively. Operating expense ratio for cow herds that calved in MAR-APR was 12% and 8.8% lower (P<0.1) than for cow herds that calved in AUG-SEP and JAN-FEB, respectively. Operating expense ratio for cow herds that calved in JAN-FEB was 3.8% lower (P<0.1) than for cow herds that calved in AUG-SEP.

Return on assets • Return on assets for cow herds that calved in MAY-JUN was 29%, 44.4%, and 65.6% higher (P<0.1) than for cow herds that calved in MAR-APR, JAN-FEB, and AUG-SEP, respectively. • Return on assets for cow herds that calved in MAR-APR was 21.6% and 51.5% higher (P<0.1) than for cow herds that calved in JAN-FEB and AUG-SEP, respectively. • Return on assets for cow herds that calved in JAN-FEB was 38% higher (P<0.1) than for cow herds that calved in AUG-SEP.

Table 1. Mean and standard error (SE) of pregnancy percentage (%), weaning percentage (%), weaning weight at 205-days (lbs.), average days to weaning (days), pounds of calf weaned per cow exposed, cow feed cost, total cow cost, calf breakeven cost, percent feed cost, operating expense ratio, and return on assets for four calving dates (JAN-FEB, MAR-APR, MAY-JUN, AUG-SEP) for beef cows in eastern South Dakota from 20022009.

JANFEB MARAPR MAYJUN AUGSEP

Pounds calf weaned per cow exposed

Cow feed cost

Total cow cost

Calf breakeven

Percent feed cost

Operating expense ratio %

Return on assets %

Pregnancy %

Wean %

Wean weight

Average days to wean

93.79

90.3

603

269

544

$374.53

$513.06

$0.98

4.7

94.57

91.46

565

198

512

$310.28

$463.11

$0.92

94.86

92.94

456

166

412

$216.02

$354.13

$0.89

8.46

92.15

89.85

524

219

471

$395.74

$500.93

$1.07

2.91

Economics of Early Weaned Calves Early weaning calves is a tremendous opportunity for cow-calf outfits to optimize value potential and flexibility in their calf crop. Now, I did not say it was a more profitable practice, I just said that it creates more potential to be profitable. Whether or not it actually is more profitable depends on how you play the game in the market place. I am not going to go into any details on appropriate management strategies for managing early weaned calves or anything like that because there are libraries full of that type of information from land grant universities all across the country. Here is an example of the multitudes of data available: http://agbiopubs.sdstate.edu/articles/ExEx2031.pdf

What I am more interested in is; how do you play the market game with early weaned calves? To effectively market these calves we first need to recognize that there are really only three scenarios from which to base this analysis on: 1) Sell an early weaned calf off the cow. 2) Grow the calf on a backgrounding ration, protect your investment on the board, and sell at some future price break threshold. 3) Retain ownership on that calf to slaughter. To set this analysis up we’ll compare our three scenarios to a control, which will be selling 205 day calves at an average of 512 lbs on October 1. We’ll assume an adjusted cost per calf of $473 which gives a breakeven of $0.92/lb. We’ll also assume an October 1 calf price of $1.18/lb on 5 wt. calves for gross income per head of $604.16. Net income per head would be $141.16/head or $0.275/lb. Scenario 1: Sell an early weaned calf off of the cow. Example We will wean these calves at 105 days (July 1) at 310 lbs. 12

Early weaning that calf at 105 days will only save us about 18% calf cost. Table 1 shows calf cost, sale weight, sale price, gross income, net income per head and net income per pound at four different days of age (105, 125, 150, 175) So we can see from the table that there is definitely a price break threshold using todayâ&#x20AC;&#x2122;s values at 175 days. This is the point where the weight of the calf and the value in the market optimizes economic efficiency. Of course this is compared to our estimate of $118, 5 wt. calves this fall, which I think is pretty reasonable. So in this example we gain $14.12/head by optimizing weight value with the early weaned calf. The increased marketing potential that I mentioned earlier is what allows for this type of market optimization. It is merely a matter of analyzing cash prices on a weekly basis and marketing when you think you can optimize the value of the weight you have. Scenario 2: Grow the calf on a backgrounding ration, protect your investment on the board, and sell at some future price break threshold. Scenario 2 is a little trickier, but adds additional profit potential because of the ability to maximize weight value.

Table 1. Calf cost, sale weight, sale price, gross income, net income per head and net income per pound at four different days of age (105, 125, 150, 175). Days of Age at Weaning 105 125 150 175 205 Calf cost $388.00 $406.78 $425.70 $444.62 $473.00 Sale weight 310 325 390 450 512 Sale price $1.46 $1.43 $1.38 $1.29 $1.18 Gross income $452.60 $464.75 $538.20 $580.50 $604.16 Net income (hd) $64.60 $57.97 $112.50 $135.88 $131.16 Net income (lb) $0.21 $0.18 $0.29 $0.30 $0.26

Table 2. Backgrounding cost and return profile for early weaned calves weaned at four different days of age (105, 125, 150, 175) compared to a 205-day weaned calf sold off the cow at weaning.

Calf cost Wean weight Total gain Cost of gain Total cost Sale weight Sale price Gross income Net income (hd)

105 $388.00 310 265 $0.42 $499.30 575 $1.11 $637.96 $138.66

Net income (lb)

$0.24

Days of Age at Weaning 125 150 175 $406.78 $425.70 $444.62 325 390 450 265 265 265 $0.45 $0.48 $0.51 $526.03 $522.90 $579.77 590 655 715 $1.10 $1.10 $1.09 $647.23 $718.54 $776.49 $121.20 $165.64 $196.72 $0.21

$0.25

$0.28

205 $473.00 512 ---512 $1.18 $604.16 $131.16 $0.26

Table 3. Finish cost and return profile for early weaned calves at four different days of age (105, 125, 150, 175) compared to a 205-day weaned calf sold off the cow at weaning. Days of Age at Weaning 105 125 150 175 205 Calf cost $388.00 $406.78 $425.70 $444.62 $473.00 Wean weight 310 325 390 450 512 Total background gain 265 265 265 265 -Total background cost of gain $0.42 $0.45 $0.48 $0.51 -Total background cost $499.30 $526.03 $522.90 $579.77 -Background weight 575 590 655 715 -Finish gain 775 760 695 635 --

Table 3 (continued). Finish cost and return profile for early weaned calves at four different days of age (105, 125, 150, 175) compared to a 205day weaned calf sold off the cow at weaning. Days of Age at Weaning 105 125 150 175 205 Finish cost of gain $0.86 $0.86 $0.86 $0.86 -Total cost $1,165.80 $1,179.63 $1,150.60 $1,125.87 -Sale weight 1350 1350 1350 1350 512 Sale price $0.94 $0.94 $0.95 $0.95 $1.18 Gross income $1,264.55 $1,264.55 $1,282.50 $1,282.50 $604.16 Net income (hd) $98.75 $84.92 $131.90 $156.63 $131.16 Net income (lb) $0.07 $0.06 $0.10 $0.12 $0.26

Example We’ll take the four different aged early weaned calves and grow them to a specific price break based on futures prices. Let’s say OCT 10 at $109.95, NOV 10 at $109.70, and JAN 11 at $108.60. So now we want to optimize our 90 day cost of gain to take advantage of a fixed price end point (Table 2). We’ll use the same cost values as in the previous example and set ADG at 2.9 lbs/day and the cost of gain at $0.42-$0.51/lb. This option gains anywhere from $34.48 to $65.56/head over selling the 205 day calf at weaning. Scenario 3: Retain ownership on that calf to slaughter (Table 3). Now we’ll take the four different aged early weaned calves and background them for 90 days and ship them to a yard to be finished to 1350 lbs. Let’s say FEB 11 at $93.67, and APR 11 at $95.00. We’ll use the same cost values as in the previous example and set ADG at 3.6 lbs/day and the cost of gain at $0.86/lb.

In this example, we don’t gain a heck of a lot from retaining these early weaned calves. Calves weaned at 175 days and fed to finish only net $25.47/head more than selling that calf off the cow at 205 days. Twenty five dollars per head isn’t chicken feed by any means, but the point is that you really have to understand where the inherent efficiencies in your system can be found and capitalized upon them in the market place. I hope from this analysis you can see how much flexibility a tool like early weaning can introduce to your marketing system. I didn’t even look at comparing these options with backgrounding the 205 day weaned calf or finishing the 205 day weaned calf. That’s another analysis for another day.

Economics of Backgrounding Calves A conversation from earlier this week: Rancher: "Why is it that so many West River ranchers background their calves every year and most East River ranchers don't?" Me: "The market won't pay for what East River ranchers are backgrounding their cattle on." Rancher: "Well, we have all the feed here and they have little to none extra out there and ours is a lot cheaper." Me: "It's cheaper per unit, but E. River ranchers are feeding too much of it for what they are getting on the return." So we went on to discuss the core economic conundrum of what he was asking, which is a really good question and as he pointed out, is a little counter-intuitive until you have a full grasp of what the market will pay for and what it won't. Example: 650# East River weaned steers off the cow goes straight to the lots and are fed a backgrounding ration for 90 days. East River guys typically shoot for about 3 lbs. of gain per day. Why? Because that's what cattle feeders do...and here-in lies the problem. The market won't pay for what it costs them to put 3 lbs./day on those calves. Data from the 2008 SDSU Cow-Calf Business Report shows that the average gain for backgrounders East River is 2.76 lbs./day at a cost of $0.69/lb. 2.76 lbs./day x 90 days = 248 lbs. of gain 248 lbs. of gain x $0.69/lb. = $171.39 650 lb. weaned steer + 248 lbs. of gain = 898 lbs. (Today the market is paying about $103.50) 248 lbs. of gain x $103.50 = $256.68 gross return on gain/head $256.68 gross return on gain - $171.39 total cost of gain = $85.29 net return on gain/head Now let's look at a typical West River system: 17

650# weaned steer off the cow goes straight to the lots and fed a backgrounding ration for 90 days. West River guys typically shoot for about 1.5 lbs./day gain. Why? That's all the feed they have on hand will produce and most won't buy supplements to increase gain because they have learned indirectly that the market won't pay for it anyway. So we'll call it 1.5 lbs./day at $0.52/lb of gain ($0.35/day). 1.5 lbs./day x 90 days = 135 lbs. of gain 135 lbs. of gain x $0.52/lb of gain = $47.25 650 lb. weaned steer + 135 lbs. of gain = 785 lbs. (Today the market is paying $115.17) 135 lbs. of gain x $115.17 = $155.48 gross return on gain/head $155.48 gross return on gain - $47.25 total cost of gain = $108.22 net return on gain/head In summary, East River net return on gain was $82.21/head West River net return on gain was $108.22/head Both of the net returns on gain in this example are pretty good, but when you consider that a $0.69/lb. cost of gain is just an average and there are some who are running a COG of $0.80/lb. of gain, it's no wonder some of these calves don't get backgrounded. So how did the West River calves have a higher net return on the gain with less total gain? It is simply a function of how the gain put on the calves is valued in the market place compared to what it cost to put the gain on. So the WR calves had a cheaper cost of gain and that gain was valued higher in the market place. In fact, to get the same economic performance, the ER calves would have needed a $0.60 cost of gain to net the same return as the WR calves, eventhough they were outperforming them nearly 2:1. 18

The two biggest miscalculations guys make when backgrounding calves is, 1) how to value the gain they put on and 2) the difference between gross and net. We just looked at valuing the gain in the example above, however, the common mistake is looking at gross return per head rather than net return on the value of the gain. Example If you take the ER and WR calves from the example above after the 90 day backgrounding period and calculate gross return: ER - 898 lbs. @ $103.50 = $929.43 WR - 785 lbs. @ $115.17 = $904.08 So on a gross return basis, of course the heavier cattle gross more because they are heavier. But gross says nothing about what it cost to get to that weight. So when you think about backgrounding your calves consider how your cost of gain is going to be valued in the market place. Feeding cheaper feed and sacrificing performance can actually improve the economic efficiency in some situations. That is where the money is made in backgrounding.

The Economics of Grass Cattle Profiting off of grass cattle is as much an art as it is a science. The primary difference between grass cattle and grow-yard cattle is that with grass cattle, we are counting on cheap gain through the conversion of cheap grass into pounds of liveweight. However, unlike in a grow yard, the cost of gain on grass is driven primarily by the animals response to the quality of grass in the pasture. If cattle donâ&#x20AC;&#x2122;t gain well, there isnâ&#x20AC;&#x2122;t a whole lot you can do about it and your cost of gain begins going up as ADG goes down because the cost of the grass stays the same. In a grow yard, you have some control over diet composition and diet price to regulate cost of gain. But with pasture grass, what you have is what you have and what you paid for it is what you paid for it. So the only cost of gain regulation on grass is cattle performance. Table 1 shows how you calculate cost of gain on grass: If you use this template and simply adjust average daily gain up or down, you can see how dramatically it affects cost of gain. Now the question becomes: how do you regulate ADG on grass?

Table 1. Template for calculating cost of gain on grass. Weight in 662 Grass cost/head/day $ 0.72 Total days on grass 120 Total grass cost/head $ 86.40 Operating costs/head $ 35.00 Total Costs/head $121.40 Average daily gain 1.90 Weight out 890 Total gain/head 228 Cost of gain/lb. $ 0.53

A B C E F G H I J K

BxC E+F A+(CxH) I-A G/J

Table 2. Template for calculating expected returns on grass cattle. Weight In Price paid Total Price Total days on grass Grass cost/head/day ADG Operating cost/head Total cost/head Weight out Breakeven Price out (or futures position) Profit/loss

626 $ 1.21 $ 757.46 75 $ 0.72 2.15 $ 20.00 $ 831.46 787.25 $ 1.06 $ 1.15 $ 72.46

A B C D E F G H I J K L

AxB

C+(DxE)+G A+(DxF) H/I (I x K)-H 21

Well, as I said above, it is hard to do based on the forage, so your only other options are, 1) Feed supplements and 2) growth enhancers. I can tell you that in most cases, feed supplements won’t pencil because the product is too expensive or the labor is too intensive. From our example above, you already have $0.53/lb of gain in these cattle, so if you throw in another $0.15-$0.20 on top of that in supplement costs, you’d just as well put them in a grow yard. So your only viable alternative to get extra gain out of these cattle is to use growth enhancers like implants and/or ionophores (Rumensin, Bovatec, etc.). Research has shown pretty clearly that implants alone can add 0.25 lb/day in gain on steers, maybe a little less on heifers. So punch in 2.15 lb./day into the above template in place of the 1.90 lb./day we used initially and you see that your cost of gain went from $0.53 to $0.47. I’ll show you how to translate that into dollars per head a little later. Ionophores like Rumensin and Bovatec are a little trickier to deliver, but are worth the extra effort. Kansas research has shown ionophores to improve daily gains by 0.15 lbs./day on steers. Not as much as an implant, but nothing to sneeze at either. Plug in 2.3 lb./day in place of the 2.15 lbs./day and now our cost of gain is $0.44 rather than $0.47. So with those two growth enhancers we decreased cost of gain by about $0.09/lb. or about $20.52/head. The cost of those growth enhancing devices together would be about $2.90/head, so that’s about a 700% return on your investment…not bad. The real key to profiting from grass cattle to understand how the market values growing calves. What a person must understand before they get into the grass cattle business is that there are three ways the market values grass cattle: 1) The spread between the futures and cash markets 2) The spread between different weight classes (weigh-value spread) 3) The spread between steers and heifers. Understanding how those spreads work and understanding that they change constantly (several times during a trading session and during the week at local auction markets) will help you to see how to take advantage of the weight-value spreads in relation to the futures market. Before we get into a discussion on capitalizing on under-valued cattle in the market, let’s first look at how you calculate expected returns. We will use the template in Table 2: The important thing to understand here is that row (I) is the futures price we hedged these cattle at and it is effectively the locked-in the price we will receive for these cattle less basis and commissions. 23

Now that you see how these returns are calculated, let’s look at how we can identify cattle that are under-valued in the marketplace and capitalize on them. Scenario 1: We will start by looking at 3 classes of steers out of Hub City Livestock Inc. in Aberdeen, SD. Class 1: Buy steers, medium 1, 668 lbs. @ $120.45 Class 2: Buy steers, medium 1, 745 lbs. @ $115.77 Class 3: Buy steers, medium 1, 842lbs. @ $110.39 We’ll say that we are buying these cattle for grass beginning May 15 and we’ll cash out in mid-September, so we have a 120 day grazing season. We’ll lock these cattle in on the SEP 10 futures at $112.23. Before you look at the analysis, which set of cattle do you think will pencil best? Table 3 shows our comparison of these classes of cattle:

Table 3. Cost and return profiles for three classes of grass cattle. Class 1 Class 2 Weight In 668 Weight In 745 Price paid $1.2045 Price paid $1.1577 Total Price $804.60 Total Price $862.48 Total days on grass 120 Total days on grass 120 Grass cost/day $0.72 Grass cost/day $0.72 ADG 1.9 ADG 1.6 Operating Operating cost/head $45.00 cost/head $45.00 Total cost/head $936.00 Total cost/head $993.88 Weight out 896 Weight out 937 Breakeven $1.04465 Breakeven $1.0607 Price out $1.1223 Price out $1.1223 Profit/loss $69.57 Profit/loss $57.71 Table 4. Cost and return profiles for three classes of grass cattle. Weight In Price paid Total Price Total days on grass Grass cost/day ADG Operating cost/head

645 $1.2835 $827.85 120 $0.72 1.7

Total cost/head Weight out Breakeven Price out Profit/loss

$959.25 849 $1.1298 $1.1223 -$6.42

$45.00

Weight In Price paid Total Price Total days on grass Grass cost/day ADG Operating cost/head Total cost/head Weight out Breakeven Price out Profit/loss

Class 3 Weight In Price paid Total Price Total days on grass Grass cost/day ADG Operating cost/head Total cost/head Weight out Breakeven Price out Profit/loss

770 $1.1465 $882.80 120 $0.72 1.4 $45.00 $1,014.2 0 938 $1.0812 $1.1223 $38.51

842 $1.1039 $929.48 120 $0.72 1.3 $45.00 $1,060.88 998 $1.0630 $1.1223 $59.17

Weight In Price paid Total Price Total days on grass Grass cost/day ADG Operating cost/head Total cost/head Weight out Breakeven Price out Profit/loss

855 $1.0925 $934.08 120 $0.72 1.1 $45.00 $1,065.48 987 $1.0795 $1.1223 $42.22 25

You can see from this analysis that there are differences in profit potential for each class of cattle based on how they are valued in the market and how they are going to perform but in this example those differences are pretty subtle. Lighter cattle generally perform better and generally have the highest profit potential. But let’s look at a situation where there are some over valued cattle and some under valued cattle in the same cash market. Scenario 2: This next 3 classes of steers out of Ft. Pierre Livestock . Class 1: Buy steers, medium 1, 645 lbs. @ $128.35 Class 2: Buy steers, medium 1, 770 lbs. @ $114.65 Class 3: Buy steers, medium 1, 855lbs. @ $109.25 We’ll say that we are buying these cattle for grass beginning May 15 and we’ll cash out in mid-September, so we have a 120 day grazing season. We’ll lock these cattle in on the SEP 10 futures at $112.23. Table 4 shows the comparison of these classes of cattle: Now you can see that the weight-value spread between the 3 sets of cattle has changed. In this scenario, mid-and heavy-weight cattle are really under valued compared to their profit potential in the market. So in this scenario these mid-and heavy-weights are good buys and the lights are simply over valued compared to what the futures market is willing to pay for them in September. Scenario 3: Now let’s combine steers and heifers. This next 3 classes of steers and 3 classes of heifers are out of Bales Continental Commission in Huron, SD. Class 1: Buy steers, medium 1, 630 lbs. @ $129.12 Class 2: Buy steers, medium 1, 765 lbs. @ $115.75 Class 3: Buy steers, medium 1, 835lbs. @ $110.25 Class 1: Buy heifers, medium 1, 650 lbs. @ $118.25 Class 2: Buy heifers, medium 1, 745 lbs. @ $110.75 Class 3: Buy heifers, medium 1, 825lbs. @ $104.45 We’ll say that we are buying these cattle for grass beginning May 15 and we’ll cash out in mid-September, so we have a 120 day grazing season. We’ll lock these cattle in on the SEP 10 futures at $112.23. 27

Here is our comparison of these classes of cattle:

Table 5. Cost and return profiles for three classes of grass steers. Steers, Class 1 Steers, Class 2 Weight In Price paid Total Price Total days on grass Grass cost/day ADG Operating cost/head Total cost/head Weight out Breakeven Price out Profit/loss

630 $1.2912 $813.45 120 $0.72 1.7 $45.00 $944.85 834 $1.1329 $1.1223 -$8.86

Weight In Price paid Total Price Total days on grass Grass cost/day ADG Operating cost/head Total cost/head Weight out Breakeven Price out Profit/loss

765 $1.1575 $885.48 120 $0.72 1.4 $45.00 $1,016.88 933 $1.0899 $1.1223 $30.22

Steers, Class 3 Weight In Price paid Total Price Total days on grass Grass cost/day ADG Operating cost/head Total cost/head Weight out Breakeven Price out Profit/loss

Table 6. Cost and return profiles for three classes of grass heifers. Heifers, Class 1 Heifers, Class 2 Weight In Price paid Total Price Total days on grass Grass cost/day ADG Operating cost/head Total cost/head Weight out Breakeven Price out Profit/loss

650 $1.1825 $768.62 120 $0.72 1.5 $45.00 $900.02 830 $1.0843 $1.1223 $31.48

Weight In Price paid Total Price Total days on grass Grass cost/day ADG Operating cost/head Total cost/head Weight out Breakeven Price out Profit/loss

835 $1.1025 $920.58 120 $0.72 1.1 $45.00 $1,051.98 967 $1.0878 $1.1223 $33.28

Heifers, Class 3 745 $1.1075 $825.08 120 $0.72 1.2 $45.00 $956.48 889 $1.0759 $1.1223 $41.24

Weight In Price paid Total Price Total days on grass Grass cost/day ADG Operating cost/head Total cost/head Weight out Breakeven Price out Profit/loss

825 $1.0445 $861.71 120 $0.72 0.9 $45.00 $993.11 933 $1.0644 $1.1223 $53.99

In this analysis you can start to see what the market is valuing and what the market is not. Light-weight steers are seriously over-valued in this market either due to heavy demand or tight supply. Mid-and heavy-weight steers have some profit potential in them, but not compared to the heifers. This market does not appear to be very interested in heifers and has severely under-valued them creating enormous profit potential for the buyer that recognizes the lag in these values. Identifying these discrepancies in the cash market is a very fundamental principle of successfully profiting from quick turnarounds on growing cattle.

Can Early Weaning Fall-Born Calves Improve Profitability of Fall-Calving Systems in the Northern Plains? If you look back at the previous article on how calving date affects cow costs, one of the things that really stand out is the high cost of fall calving systems. Generally, the idea behind fall calving is to minimize exposure to weather during calving and to capture the calf market at the annual peak of the cycle. In the southern U.S., this is a brilliant idea, in the north, it can mean financial ruin. The big problem with late-summer and fall calving systems in the northern plains obviously is the winter. A really cold winter, even in Nebraska is much milder than a relatively mild winter in South Dakota, especially north of Interstate 90. Aside from the astronomical feed costs associated with feeding lactating cows in sub-zero temperatures, one of the challenges you really run into with fall calving system in the north is the fact that you have a really small window to calve in. A calf born after early October either isn’t going to make it, or is going to be permanently stunted. That’s been my observation. So, a cow herd that is scheduled to have an average calving date of August 5, realistically has only two estrus cycle with which to get bred because any calf bred in the 3rd cycle is going to be born after the 1st of October and isn’t going to amount to much. It simply get’s too cold, too quickly. In fact, given the high feed costs in a fall-calving herd, you’d be better off leaving her open because the dink calf she will have won’t even cover the cost of the extra feed you feed her during lactation. There are however, some real advantages for producers that do calve in the fall and I think some modifications to the production system can alleviate some of the cost concerns. One of these modifications is early weaning fall calves. Early weaning calves is not exactly rocket science, however, early weaning in October or November is a little out of the norm and when we conducted a research trial on this subject out at the SDSU Cow Camp Experiment Station in Miller, SD, we learned a few things. What we did was take 48 fall calving cows and divided them into 2 groups of 24 pairs, an early weaned group (EW) and a normal weaned group (NW). The average calving date in these groups was August 10. We weaned the EW calves on October 28th (73 days of age) and we weaned the NW calves on March 7th (207 days). Both groups were supplemented on fall smooth bromegrass pasture for 53 days prior to weaning the EW calves. 31

At weaning, the EW calves were divided again into 2 groups of 12 head. Group 1 (EW G1) was fed a bunk ration of corn silage, corn grain, ground prairie hay and a pelleted protein supplement. Group 2 (EW G2) was fed Purina’s AccuRation for 30 days before switching over to a similar bunk ration. NW calves were creep fed AccuRation while on the cow for the first 30 days of the trial. The EW cows were fed separately from the NW cows to monitor feed intake of both groups until the NW calves were weaned. Points of discussion:  Table 1 shows that the EW pairs on pasture before they were weaned were about 17% lighter than the NW pairs.  After 53 days of being fed a protein supplement, the EW pairs were only 9% lighter than the NW pairs. The EW pairs had gain a full body condition score and the NW pairs had lost about half of a body condition score.  Total cost of the supplementation was $9.54/head.  Table 2 outlines that the EW cows were fed a ration of 1.98% of their body weight and were able to maintain their weight over the 72 day post weaning period.  NW pairs were fed a ration of 2.64% of their body weight and lost nearly threequarters of a body condition score.  It cost 49% less to feed the EW cows compared to the NW pairs.  Table 3 shows that the EW G2 calves outgained the EW G1 calves by 36% in Phase 1 of the first 53 days following weaning.  The cost of gain on the EW G1 calves however, was 77% cheaper than the EW G2 calves.  Table 4 shows that when the EW G2 calves were taken off of AccuRation and fed a bunk ration, the EW G1 calves caught up to and surpassed them.

EW vs. NW 53 days on grass with Protein Supplement Wt Wt Net Wt Intake Total Cost 10/28/2009 12/21/2009 Change Head-1 Cow-1 -------------------------------lbs.---------------------------lbs---------$----1168.87 1243.87 75 106 9.54

NW 1405.74 1370.74 -35 106 9.54 Table 1. Pre-trial weight (lbs.), post-trial weight (lbs.), net weight change (lbs.), feed intake per head (lbs. head -1), and total cost per cow ($ cow-1), for early weaned fall calving cows and lactating fall calving cows fed crude protein supplement for 53 days on pasture.

Table 2. Pre-trial weight (lbs.), post-trial weight (lbs.), net weight change (lbs.), intake as a percent of body weight (%), feed intake per head (T head-1), and total cost per cow ($ cow-1), for early weaned fall calving cows and lactating fall calving cows on winter feed for 72 days. EW vs. NW Cow Feed Costs for 72 days Wt Wt Net Wt Intake % Intake Total Cost 12/21/2009 3/3/2010 Change Body Wt head-1 Cow-1 ----------------------------lbs-------------------- -----%----- -----T----- ------$-----EW 1243.87 1247.58 3.71 1.98 1.74 50.15 NW

1370.74

1316.48

-54.26

2.64

2.35

97.87

Table 3. Pre-trial weight (lbs.), post-trial weight (lbs.), weight gain (Gain) (lbs.), average daily gain (ADG) (lbs. day -1), feed conversion (lbs feed lb gain-1), total feed cost ($), and cost of gain ($ lb gain-1) for early weaned fall calves fed a total mixed ration and early weaned fall calves preconditioned on AccuRation for 53 days. Phase I Total Mixed Ration vs. AccuRation for 53 days Wt Wt Days on Feed Total Cost of 10/28/2009 12/21/2009 Gain Feed ADG Conversion Feed Cost Gain ------------------------lbs--------------------- ---days--- -lbs------lbs----------------$-----------EW G1 240.5 328.14 87.64 53 1.95 6.95 20.84 0.23 EW G2

213.45

350.15

136.7

2.52

5.86

76.26

0.56

Table 4. Pre-trial weight (lbs.), post-trial weight (lbs.), weight gain (Gain) (lbs.), average daily gain (ADG) (lbs. day -1), feed conversion (lbs feed lb gain-1), total feed cost ($), and cost of gain ($ lb gain-1) for early weaned fall calves fed a total mixed ration and early weaned fall calves preconditioned on AccuRation and switched to a total mixed ration for 72 days. Phase II TMR fed to both groups for 72 days Total Cost Wt Wt Days on Feed Feed of 12/22/2009 3/3/2010 Gain Feed ADG Conversion Cost Gain ----------------------lbs---------------- --days-- -lbs-----lbs----- -----------$---------181.0 EW G1 328.14 509.18 4 72 2.58 7.73 54.69 0.30 34

EW G2

350.15

491.81

141.6 6

2.02

10.59

64.09

0.45

Table 5. Cow feed cost ($), calf feed cost ($), and total feed cost ($) for early weaned (EW) fall calving cows supplemented on pasture for 53 days and fed for 72 days and early weaned fall calves fed a total mixed ration for 125 days (EW G1); Early weaned fall calving cows supplemented on pasture for 53 days and fed for 72 days and early weaned fall calves preconditioned on AccuRation for 53 days and switched to a total mixed ration for 72 days; and normal weaned cows supplemented on pasture for 53 days and fed for 72 days and normal weaned calves that were creep fed for 72 days. Total Feed Costs Cow Calf Total Feed Cost Feed Cost Feed Cost EW G1 $59.69 $75.53 $135.22 EW G2

$59.69

$140.35

$200.04

$107.41

$69.19

$176.60

 In Phase 2, the EW G1 calves gained 22% more than the EW G2 calves and had a 33% lower cost of gain.  Table 5 shows the comparison between the three treatment groups in terms of total cow and calf costs over the 179 days (6 months) of the trial.  Total feed cost for the EW cows was 44% less than total feed cost for the NW pairs.  Total feed cost for the EW G1 calves was 46% less than for the EW G2 calves and 8% more than the NW pairs.  Total feed cost for the EW cows and G1 calves was 32% less than for the EW cows and G2 calves and 23% less than for the NW pairs. Points to consider:  Preconditioning EW calves for nearly two months adds significant cost to the calves but didn’t return more in terms of weight gained.  Although undocumented, the EW G2 calves did seem to get sick less than the EW G1 calves, suggesting that preconditioning with a high concentrate at the time of weaning may have some ancillary benefits to the health of EW calves.  However, only 15-20 days of preconditioning may be needed to attain these benefits rather than the 50-60 days reported in this study.  I think early weaning could be a very viable opportunity for some fall-calvers to reduce feed costs and increase profit potential on their calves.

Economics of Replacement Heifers

The Value of Replacement Heifers It is always interesting to me to assess the value of replacement females in the market place to see how that translates into profit in the business. In recent times it seems, replacement females are grossly over valued in the market place and I often wonder how guys can pencil what they pay for heifers, young cows, middle aged cows and so on. So every two weeks or so I go through the sale reports and see what different classes of replacement females are bringing and do a net present value analysis to see how over valued or under valued they are in market place based on my best estimations of future productivity and financial efficiency. The NPV analysis takes into consideration that the value of a dollar today is less at some point in the future. So as we look at the value of a replacement female today and extrapolate out her financial productivity into the future, we must take into consideration that we make these extrapolations in todayâ&#x20AC;&#x2122;s value, which is more than that same value will be at that point in the future. Therefore we must discount todayâ&#x20AC;&#x2122;s values to represent what those values will be in the future. That's a really wordy explanation for an analysis that is really simple. In these analyses, we will discount at 7% and use a base cow cost/lb of weaned calf of $421.39with an annual 1.5% increase. The base cow cost we are using is based on the SDSU IRM database average for South Dakota. You can view the IRM database report in the 2009 SDSU Cow-Calf Business Report which can be viewed on my website www.ranchmanager.org. There are two ways in which we evaluate the net present value of heifers, the first is if we raise them from a calf and develop them into a breeding female. The second is if we went out on the cash market and purchased a female of breeding age. Table 1 shows the template for calculating a net present value analysis on a heifer raised as a calf and developed into a breeding female: The bottom line of a net present value analysis is that we need to determine the future value of the returns on these heifers (column 11). These discounted returns are the basis of how we determine what we can really pay for a set of heifers. The annual costs in column 2 are based on the cost of production for your operation for the current year. The future annual costs are simply increased by 2.9% per year to adjust for inflation.

The parity factor in column 3 is simply a factor to recognize that as a cow gets older, she is able to produce bigger calves and as she passes her productive prime, her production will start to decrease. So for a given set of heifers, simply multiply the average weaning weight of cow in her prime (5-7 years old) and multiply that by the parity factor for the given year to get average weaning weight in column 4. It is not an exact science and we don’t need it to be. We just need a representation of differences in production as the cow matures. Column 5 is the average weaning percentage for your herd. Obviously this is going to move up and down depending on the year, but we just need an average representation of weaning percentage so we can calculate adjusted or net weaning weight in column 6. Column 7 represents the average price you will receive for the calves at weaning from this set of heifers over their productive lifetime. Of course you don’t get the same price every year, but we just want an average price. I prefer to use the same average price every year so I’m not tempted to over value or under value calves. You can’t predict the market tomorrow, let alone 8 years from now, so I suggest using a 5-year average as a general rule so you can calculate gross return in column 8.

Table 1. Net present value analysis for a heifer raised as a calf and developed into a breeding female. 1 Year 2009 2010 2011 2012 2013 2014 2015 2016 2017

2 Annual Cost $421.39 $434.03 $447.05 $460.46 $474.27 $488.50 $503.16 $518.25 $533.80

Parity 0 0 0.81 0.89 1.23 1.22 1.33 1.05 0.91

WW 0 0 525 550 575 600 625 650 625

5 % Wean 0 0 0.915 0.915 0.915 0.915 0.915 0.915 0.915

c4 x c5 6 Net WW 0 0 480.37 503.25 526.12 549.00 571.87 594.75 571.87

7 Price 0 0 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20

c6 x c7 8 Gross Return 0 0 $576.45 $603.90 $631.35 $658.80 $686.25 $713.70 $686.25

Value of cull cow

c8 -c2 9 Net Return $-421.39 $-434.03 $129.39 $143.43 $157.07 $170.29 $183.08 $195.44 $152.44

$650

10 Discount 0.935 0.873 0.816 0.763 0.713 0.666 0.623 0.582 0.544

0.544 Net return

c9 x c10 11 NPV of Return $-393.99 $-378.90 $105.58 $109.44 $111.99 $113.41 $114.06 $113.74 $82.93 $751.18

A B C D E F G H I J

SUM (C:I)

$353.6

C9 x c10

$331.78

(J+K)-A-B

$1104.78

L-A-B

Breakeven development cost/purchase price =

Table 2. Net present value analysis for a bred heifer purchased on the cash market. 40

1 Year 2010 2011 2012 2013 2014 2015 2016 2017

2 Annual Cost 0 $434.03 $447.05 $460.46 $474.27 $488.50 $503.16 $518.25 $533.80

Parity 0 0 0.81 0.89 1.23 1.22 1.33 1.05 0.91

WW 0 0 525 550 575 600 625 650 625

5 % Wean 0 0 0.915 0.915 0.915 0.915 0.915 0.915 0.915

c4 x c5 6 Net WW 0 0 $480.37 $503.25 $526.12 $549.00 $571.87 $594.75 $571.87

0 0 $576.45 $603.90 $631.35 $658.80 $686.25 $713.70 $686.25

c8 -c2 9 Net Return 0 0 $129.39 $143.43 $157.07 $170.29 $183.08 $195.44 $152.44

Discount 0 0 .935 .873 .816 .763 .713 .666 .623

Value of cull cow

$650

.623

7 Price 0 0 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20 $1.20

c6 x c7 8 Gross Return

Net return Breakeven development cost/purchase price =

c9 x c10 11 NPV of Return 0 $-1050 $120.99 $125.21 $128.17 $129.93 $130.54 $130.16 $94.97 $859.99 $404.95

A B C D E F G H I J K

SUM (C:I) C9 x c10

$214.94

(J+K)-A-B

$1264.94

L-A-B

Column 9 represents the net return calculated as gross return (column 8) minus the annual cost (column 2). Now we have a net return to discount into the future. The discount factors shown in column 10 are for a Present Value Interest Factor discounted at 7%. If you look up PVIF on the internet, you can easily find a table that gives you these discount rates. Now you have the net present value of the returns to these heifers for the next 7 years (her average productive life) in column 11. You will notice that the first 2 years of the NPV of returns is negative because for the first two years of development, you dump money in these heifers, but you wonâ&#x20AC;&#x2122;t get a positive return until you sell a live calf at age 3. If you add up all of the NPV of returns (A â&#x20AC;&#x201C; I) we have the total net discounted return that these heifers will generate in their lifetimes (J). Of course at the end of her productive life you are going to sell her so we will set an expected value for her as a cull cow and discount it for the fact that you will sell her 8 years into the future (K). To calculate the net return (L) simply take the total return (J) and add her discounted value as a cull cow (K). To back calculate her breakeven development cost (M), subtract the first two years of development costs (A and B) from her net return (L). In this example, if it costs more than $1100 to develop this heifer, chances are she will never make you any money and may even lose money. Table 2 shows the template for calculating a net present value analysis on a bred heifer purchased on the cash market: The only difference between this analysis and the last is that you bought heifers on the cash market rather than raised and developed them yourself. Therefore we just need to make a couple of adjustments to the template. First, there will not be any development costs on these heifers because you bought them on the cash market; therefore, you will simply put the purchase cost ($1050) as a negative value in column 11. Second, you need to adjust the discount rates (column 10) to reflect that the first year of discounting the return on these heifers will be 2010 instead of 2009. Be sure to adjust the discount rate of your cull value (column 10, row K).

Now you are prepared to conduct a net present value analysis on heifers to determine expected returns and breakeven cost or purchase price. You can plug this template into an MS Excel spreadsheet and enter the formulas and you will have a live NPV calculator. Now letâ&#x20AC;&#x2122;s analyze the examples in the templates we used: Analysis Raise and develop your own heifers, development costs are $772.89/head We assumed 7 years of productive life with an average net weaning wt. of 542# We will also assume that the average price for calves in this weight range over the next 7 years will run about $1.20/lb. We'll discount the net returns at 7%. We valued this heifer as a cull cow in 7 years at $650. Results These heifers will return you $331.78 over the 7 years of their lives. You invested $772.89/head into them, so your return on the investment is 43%. One of the most important functions of this calculation is the breakeven development cost. In this example, based on your cost of production, you must develop heifers for less than $1100 and to get any positive return, they will have to be developed for much less than that. Analysis Buy heifers on the cash market, you paid $1050/head. We assumed 7 years of productive life with an average net weaning wt. of 542# We will also assume that the average price for calves in this weight range over the next 7 years will run about $1.20/lb. We'll discount the net returns at 7%. We valued this heifer as a cull cow in 7 years at $650. Results 43

These heifers will return you $214.94 over the 7 years of their lives. You invested $1050/head into them, so your return on the investment is 20%. Since you are buying heifers, it is critical to know, that based on your production costs, you cannot pay more than $1265/head or you wonâ&#x20AC;&#x2122;t make a dime on them. Really, you would have to pay 20% less than the breakeven to turn a 20% profit. So in these two examples, you are much better off raising your own heifers than buying them. Although, if you were looking to buy heifers to expand the herd, now you know what you can afford to pay for them.

The Cost of Home-Raised Replacement Heifers We were discussing the value of replacement females in the market place the other day and I got to thinking, I should have posted the eastern South Dakota average cost of production of replacement heifers before posting that analysis. Well, maybe it doesn't make that much difference. Anyway, I am the Director of the South Dakota Integrated Resource Management Program for at SDSU. Every year our team holds workshops where producers can come and learn the fundamentals of analyzing records they keep in their business. The results are then formulated into a database and published as the SDSU Cow Calf Business Report every year, usually in June. The only thing a person has to be aware of when viewing this database is that 1) These are merely averages over a wide variety of producers and 2) The database is composed of largely eastern South Dakota operations. Nonetheless, it is still interesting and useful to know where your operation falls in relation to averages. So let's take a look at the average cost of replacement heifers for 2008 (the 2009 Cow Calf Business Report won't be published until June of 2010).

Item Transfer cost (from cow-calf enterprise)

Cost per head $510.00

Feed cost Grain Roughage Feed supplements Mineral

$157.07 $89.77 $5.39 $4.15

Summer pasture

$114.75

Total feed costs

$371.13

Operating costs Breeding (including cost of clean-up bulls) Veterinary Supplies Fuel & oil Repairs Trucking (open heifers) Marketing (open heifers) Operating interest

$37.95 $11.82 $3.89 $5.34 $3.88 $9.53 $39.56 $30.60

Total operating costs

$142.57

Total development cost

$513.70

Total cost (including value of heifer at weaning)

$1,023.70

Considering our analysis of heifer values in the market place last week, I think this data is very disturbing and actually quite frightening when the average cost of developing a commercial replacement heifer is not too much less than values we indicated weren't very profitable in the NPV analysis. I think there is a tremendous need to look at new, lower-cost strategies for developing these replacements as the investment into a new replacement is nearly more than the return she can generate in her lifetime. Now that's not to say that it costs everybody $1023 to develop a heifer. There certainly are some outfits that are doing it for substantially less, however there are a large number that are developing replacements for substantially more than $1023.

I think one of the biggest concerns managers face in terms of heifer development but rarely address is fertility. Especially fertility indicators when heifers are selected and bred for the first time. I have theory on the predictability of a young heiferâ&#x20AC;&#x2122;s productive economic efficiency based on estrus cycling during her first breeding season. My theories aren't as earth shattering as E=mc2 or the laws of thermodynamics, but they are interesting and I think are worth researching. I'll explain in more detail in the next few days.

The Value of Replacement Heifers: Part II A few more words on this topic for two reasons, 1) I like this topic and 2) I have received a lot of questions and interest about it. Just to be clear, in the previous discussions of replacement heifer value, I never meant to imply raising heifers was more appropriate than buying them from the market place. Nor was I advocating buying over raising them yourself, I was simply making a point (or trying to) that we can calculate the value of a replacement female based on the specs of an individual operation and determine her lifetime output in terms of dollars of profit. Therefore, since we can make this calculation, we can also determine what an individual operation can afford to invest in a replacement female based on her lifetime output. Since we are able to establish the investment threshold in a set of replacement females we can then determine if those replacements should be raised out of the herd or purchased from the open market. In this analysis however, we are going to work through it backwards based on herd size to determine the investment threshold to earn a fixed net income. Letâ&#x20AC;&#x2122;s look at an example: Rather than look at the analysis on a per head basis, letâ&#x20AC;&#x2122;s look at it on a whole herd basis, which may make some of the differences more apparent. We will look at the total herd net return of females in three different herd sizes: 250 head, 500 head, and 1000 head and at three different average levels of investment: $650/hd, $850/hd, and $1050/hd. We will discount the net returns over an average economic life of seven years. Herd Size Average investment in replacements $650/head $850/head $1050/head

250 head 500 head 1,000 head -----Net return per year over eight years----$24,984.37 $49,968.69 $99,937.38 $18,734.34 $37,468.69 $74,937.38 $12,484.34 $24,968.69 $49,937.38

There are a couple of points to consider: 48

1) Obviously there is an economy of scale which works against the smaller producers. Even though a $200 average increase in average investment in a replacement female affects both the 250 head herd and the 1000 head herd equally on a percentage basis (25% drop in net return for both), the 250 head herd is obviously more sensitive to fluctuations in average investments and costs because there are fewer head to spread the dollars over. 2) The relationship of investment to net return is not 1 to 1. In this example, a 38% increase in investment resulted in a 50% decline in net return. 3) Although it is equally important for any size herd to minimize average investment in replacement females, it is a critical control point for smaller herds. 4) If there were a list of three things, in order of importance that smaller herds need to focus most of their production and financial management on, the top of the list would be keeping average investment in replacements low. 5) There are few things an outfit can do that will have a bigger impact on their bottom line than this. 6) Knowing your raised replacements cost of development is critical to managing average investment.

Economics of Heifer Fertility 49

Probably one of the most over-looked aspects of heifer selection is fertility. Fertility in females has been research extensively and there are countless publications on heifer selection. There hasnâ&#x20AC;&#x2122;t been, at least to my knowledge any extensive data on the economics of fertility. In my previous article on heifer economics, I stated that I had a theory on the economics of fertility. Heifer longevity is strongly linked to overall fertility. Barring injury, the longevity of a heifer is largely determined by how quickly she breeds during the breeding season. An early breeding heifer will have an older, stronger calf, fewer health problems, and a longer post partum period for which she may breed again on her first cycle. A later breeding heifer on the other hand, has a younger calf to contend with and has a shorter post-partum period from which to recover before breeding season. Therefore, a female that breeds first cycle as a heifer has a tendency to always be a first cycle breeder throughout her productive life. A female that is a non-first cycle breeder as a heifer has a tendency to either catch back up for a year or two and then drop back to a later breeder or comes open within a couple years or simply comes open the next breeding season. Regardless of the order of events, my theory is that considering the amount of investment wrapped up in replacement heifers and considering the observations outlined above concerning non-first cycle breeding females, it make little sense to keep and continue to develop replacement females that donâ&#x20AC;&#x2122;t breed on the first cycle. The chances of a non-first cycle breeding female to have a long enough productive life to recoup the investment you have in her are so low, it makes little financial sense to invest in her in the first place. Typically, ranchers try to select heifers indirectly based on this theory in that they usually select the biggest, oldest, supposedly most fertile heifers out of the calf crop to keep for replacements. Even though fertility is highly heritable in terms of selection, we continue to exacerbate the problem by continuing to breed low fertility females for 60, 90, or even 120 days until they finally stick. Most will come open anyway within a couple of years, long before they have returned your investment in them. This theory is not a new idea by any means; you donâ&#x20AC;&#x2122;t see this phenomenon in wild animals as you rarely see late-born off-spring. In wild mammals, females are bred within a very short window of time and off spring are born generally within a two to three week window. This is because non-first cycle breeders never get a chance to pass on their low fertility genes, therefore, 96% to 98% of females are first cycle breeders. In cattle herds in the U.S., as much as 30% of a replacement heifer crop will be late breeders. So the real questions become: 50

1) Is there really a predictable pattern to female longevity based on whether she breeds first cycle as a heifer? 2) If there is a predictable pattern, can we model the economic losses incurred by continuing to invest in late-breeding heifers? 3) If we can model economic losses, does it make economic sense to eliminate these females before additional capital in lost when they come open before they return the investment in them? To answer some of these questions, an experiment was conducted using heifer breeding and calving data from ranches across South Dakota. This data set contains 1,954 heifers from 16 different ranches. Herd size ranged from 125 to 875 mature females. All heifers in the data set were sorted by whether they bred on their first estrus cycle (21 d) as a heifer or did not breed on their first estrus cycle as a heifer. Each heifer was then tracked throughout her productive life and the number of offspring she produced throughout her productive lifetime was tabulated. Any heifer in the data set that had not completed their productive life was not included. Probability of lifetime productivity and probability differences were then calculated. Once the probabilities of lifetime productivity were calculated, the data was entered in an economic model to test the economic relevance of the data set. In particular, we wanted the models to answer two questions: 1) Is it more profitable to keep all heifers that an operator can get bred regardless of which estrus cycle she breeds? 2) Is it more profitable to keep only heifers that breed on their first estrus cycle? The reason for modeling this data set is that even though the probability of production is significantly higher for females that breed first cycle as a heifer, we need to know if this really makes any economic difference to a cow outfit and if it does, how much of a difference does it make. In other words, if it does make a difference, is it enough of a difference to justify developing new selection and management criteria for heifer management in commercial cow outfits. In the model, 100 heifers are modeled from development through 7 years of their productive life. Seven years was used because on average, 7 years of production are required from a beef heifer to recover her development costs which, were established as $850 per head in this model. Pregnancy percentage used in the economic model was modeled from the results of the data. Total net return of the system was then calculated. In the second model, the same approach was used, however only the heifers that bred first cycle were modeled. The heifers that did not breed on the first cycle were sold 51

and only the heifers that bred first cycle were kept as replacements. Total net return of the system was then calculated and compared to model 1. A third model was then developed to analyze the economic return of females that did not breed on their first estrus cycle as a heifer. Points of discussion: Table 1 shows the lifetime productivity of females that bred on their first estrus cycle as a heifer was 33.9% greater than females that did not breed on their first estrus cycle as a heifer. Table 1. Lifetime productivity of females that bred on their first estrus cycle as a heifer and females that did not breed on their first estrus cycle as a heifer. Lifetime productivity No. of calves First cycle breeders

4.37

Non-first cycle breeders

2.89

Probability difference

33.9%

This indicates that females that breed first cycle as a heifer will be 33.9% more productive over their lifetimes than females that do not breed first cycle as a heifer Table 2 shows that 75.5% of females that did not breed on their first estrus cycle as a heifer had come open

Table 2. Percentage of females that produced â&#x20AC;&#x153;xâ&#x20AC;? number of calves over their productive lifetime that bred on their first estrus cycle as a heifer and females that did not breed on their first estrus cycle as a heifer and the probability difference. % heifers that had x number of calves over their lifetime 1 2 3 4 5 6 -----------------------------------------------------------%------------------------------------------------------------------

10+

First estrus cycle breeders

24.7

19.6

7.8

9.5

6.7

3.3

4.5

5.0

12.9

Non-first estrus cycle breeders

38.7

21.0

14.8

5.0

5.7

3.6

1.4

2.1

1.1

0.7

Probability difference

36.2

6.7

47.3

47.4

14.9

8.3

68.9

53.3

78.0

94.4

Table 3. Cumulative probability of a female to have 3, 6, or 10 or more calves in her productive life based on whether she bred on her first estrus cycle as a heifer or did not breed on her first estrus cycle as a heifer and the probability difference. Probability of a heifer to have x calves or more 3

10+

-----------------------------------%--------------------------------First estrus cycle breeders

54.2

30.2

12.9

Non-first estrus cycle breeders

34.4

8.9

0.7

Probability difference

36.5

70.5

94.4

before they produced three calves and 89.8% had come open before they had 6 calves. Table 3 shows that a female that does not breed first cycle as a heifer only has a 34.4% chance of producing 3 calves and an 8.9% chance of producing 6 calves. Conversely, a female that breeds first cycle as a heifer has a 54.2% chance of producing 3 calves and a 30.2% chance of producing 6 calves. A female that does not breed first cycle as a heifer only has a 3.9% chance of producing 8 or more calves. Whereas a female that breeds first cycle as a heifer has a 22.4% chance of producing 7 or more calves (Table 2). When more than 7 calves is where the money is made in ranching, that means that a first cycle breeding heifer has a 70.5% greater chance of paying for herself and producing a profit than a non-first cycle breeding heifer. Furthermore, a female that does not breed first cycle as a heifer only has a 0.7% chance of producing 10 or more calves. Whereas a female that breeds first cycle as a heifer has a 12.9% chance of producing 10 or more calves. In other words, a first cycle breeding heifer has a 94.4% greater chance of producing 10 or more calves than does a non-first cycle breeding heifer. Well that’s all good and grand, we have established that females that breed on their estrus first cycle as a heifer will on average be better producers than females that don’t breed on their first estrus cycle as a heifer. The real question is however, does this really mean anything in terms of economics? Let’s take a look: Table 4 shows the longevity model of 100 replacement heifers over 7 years of the group’s productive lifetime. Table 5 shows the economic model of these 100 replacement heifers based on 92% pregnancy rate for the group and a 58% pregnancy rate for heifers that breed during their first estrus cycle. In this model, using pregnancy rates generated from the analyzed data, you see that net income for the system is $7,830 for the group after seven years. So the question becomes, if you take into consideration the poor longevity of females that do not breed first cycle as a heifer, how much economic efficiency do you sacrifice if you continue to develop the females that did not breed on their first estrus cycle as a heifer? Table 6 demonstrates the economic model where 100 heifers were developed and bred, but only the 58 heifers that bred on their first estrus cycle were kept. Any heifers that were non-first estrus cycle breeders, or did not breed at all were sold and their income was credited to the development cost of the heifers that were kept. 54

From Table 6 you see that economic efficiency increases dramatically when only heifers that bred on their first estrus cycle are kept as replacements. In this model, net return for using only first-cycle bred heifers was 42.3% greater than net return when all heifers that bred were kept as replacements. This means that females that do not breed first cycle as a heifer represent a tremendous negative net return to the system. Their probability of longevity is so low, that they really arenâ&#x20AC;&#x2122;t worth keeping around in a commercial cow-calf system. To demonstrate this point, Table 7 shows the economic model of net return for the 42% of females that did not breed first cycle as a heifer. Over the 7 years of their economically productive lives, these females lost -$5,746.76. So the bottom line is that female longevity appears to be reasonably predictable by whether or not a female breeds during her first estrus cycle as a heifer. That being the case; the economic models show that longevity of females is strongly correlated to profitability over their economically productive lifetime. Thus, females that do not breed during their first estrus cycle as a heifer are predisposed to a negative net return and therefore should not be kept as replacements unless some intrinsic value exists in these females that would allow them to cash flow over their economically productive lifetime (i.e., seedstock).

Table 4. Replacement heifer longevity model of 100 replacement heifers through seven years of their productive life and pregnancy percentage assuming 92% initial conception rate and a 58% conception rate on first cycle breeding heifers. Year 1

Pregnancy %

Year 2

Pregnancy %

Year 3

Pregnancy %

Year 4

Pregnancy %

Year 5

Pregnancy %

Year 6

Pregnancy %

Year 7

Pregnancy %

Heifers that bred first estrus cycle

-----------------------------------------------------------------------------------Number of heifers---------------------------------------------------------------------------------------------------58.0 43.6 35.1 32.3 29.3 27.3 26.4 0 58 7 75 1 80 8 92 0 90 4 93 3 97

Heifers that did not breed first estrus cycle

42.0 0

25.7 5

20.3 4

17.3 3

16.4 6

15.5 2

14.9 7

Total number of heifers that bred

92.0 0

69.4 2

55.4 5

49.7 0

45.7 6

42.8 6

41.4 0

Table 5. Economic model of net returns for 100 replacement heifers through seven years of their productive life assuming 92% initial conception rate and a 58% conception rate on first cycle breeding heifers.

Number of heifers

Pregnancy %

Number calves born

Wean %

Number calves weaned

Averag e wean weight

Calf sale price

Gross return

Total expenses

Cull receipts

Net return

1st calf

100.0

92.00

86.48

450

$1.20

$46,699.20

$24,564.00

$0.00

$22,135.20

2nd calf

92.0

69.00

64.86

500

$1.20

$55,016.00

$40,250.00

$16,100.00

$14,766.00

3rd calf

69.0

54.51

53.64

550

$1.20

$45,543.97

$30,877.50

$10,143.00

$14,666.47

4th calf

54.5

48.51

47.74

550

$1.20

$35,704.14

$25,755.98

$4,197.27

$9,948.16

5th calf

48.5

44.63

43.92

550

$1.20

$31,703.10

$23,286.67

$2,716.78

$8,416.42

6th calf

44.6

41.78

41.11

550

$1.20

$29,130.74

$21,602.27

$1,999.55

$7,528.47

7th calf

41.8

40.11

39.46

550

$1.20

$27,215.68

$20,470.38

$1,169.74

$6,745.30

Total return

$7,830.03

Table 6. Economic model of net returns for the 58 replacement heifers that bred on their first estrus cycle as a heifer through seven years of their productive life assuming 92% initial conception rate and a 58% conception rate on first cycle breeding heifers. Number of heifers

Pregnancy

Wean

Number calves born

Number calves weaned

Average wean weight

Calf sale

Total

price

Gross return

expenses

Cull receipts

Net return

1st calf

100.0

58.00

54.52

450

$1.20

$29,440.80

$15,486.00

$0.00

$13,954.80

2nd calf

58.0

42.92

40.34

500

$1.20

$34,762.88

$25,230.00

$10,556.00

$9,532.88

3rd calf

42.9

34.77

34.21

550

$1.20

$28,286.27

$19,421.30

$5,708.36

$8,864.97

4th calf

34.8

31.78

31.27

550

$1.20

$22,729.08

$16,635.15

$2,092.87

$6,093.93

5th calf

31.8

28.79

28.33

550

$1.20

$20,787.23

$15,140.97

$2,090.82

$5,646.25

6th calf

28.8

26.95

26.51

550

$1.20

$18,789.56

$13,933.64

$1,289.73

$4,855.93

7th calf

27.0

25.87

25.45

550

$1.20

$17,554.33

$13,203.56

$754.49

$4,350.77

Total return

$13,575.53

Table 6. Economic model of net returns for the 42 females that did not breed on their first estrus cycle as a heifer through 7 years of their productive life assuming 92% initial conception rate and a 58% conception rate on first cycle breeding heifers. Number of heifers

Pregnancy %

Number calves born

Wean %

Number calves weaned

Average wean weight

Calf sale price

Gross return

Total expenses

1st calf

100.0

42.00

39.48

450

$1.20

$21,319.20

$20,653.50

$0.00

2nd calf

42.0

24.78

23.29

500

$1.20

$26,029.92

$16,695.00

$12,054.00

$9,334.92

3rd calf

24.8

19.82

19.51

550

$1.20

$16,343.70

$11,151.00

$3,469.20

$5,192.70

4th calf

19.8

16.85

16.58

550

$1.20

$13,024.84

$9,168.60

$2,081.52

$3,856.24

5th calf

16.9

15.84

15.59

550

$1.20

$10,994.44

$8,172.44

$707.42

$2,822.00

6th calf

15.8

14.97

14.73

550

$1.20

$10,330.77

$7,701.90

$609.82

$2,628.87

7th calf

15.0

14.37

14.14

550

$1.20

$9,751.23

$7,334.42

$419.11

$2,416.80

Total return

Cull receipts

Net return $665.70

-$5,746.76

Economics of Cow Efficiency

Economics of the weaning percentage measurement One of the most critical control points in business management is understanding and managing inefficiency. In ranching, the most critical measurement of inefficiency is weaning percentage. Weaning percentage is simply the ratio of the number of live calves weaned from the herd to the number of adjusted breeding females exposed during the breeding season. Weaning Percentage = Number of live calves weaned Total cows exposed during the breeding season The importance of weaning percentage from an efficiency standpoint is in the fact that for every cow that does not wean a live calf to take to the marketplace, the remaining cows that did wean a viable calf must cover the cost of those unproductive cows which ultimately increases total annual adjusted cow cost and thus, calf breakevens. According to the 2008 SDSU Cow Calf Business Report, the average weaning percentage in South Dakota is 86%. Of course annual weaning percentage tends to vary from year to year depending largely on the weather in March and April and many other factors, but on average, weaning percentage hangs right around that average. To clarify this point let’s look at an example. Our example outfit will consist of 350 black baldy cross cows. The weaning percentage of this herd, this year, was 87%, they had an unadjusted annual cow cost of $465.56, and an average weaning weight of calves that went to the sale barn was 525 lbs. The idea behind this analysis is to figure what the cost adjustment is for the cows that this outfit expended capital and operating costs upon, but didn’t wean a live calf. To calculate the cow cost adjustment, we will use the following formula: A) Cow cost adjustment = (Number of cows that didn’t wean a calf) x (Unadjusted annual cow cost) Number of cow that did wean a calf First, to calculate the number of cows that didn’t wean a calf, we use the following formula: B) Number of cows that didn’t have a calf = 59

(Total number of females in the herd) x (1-Weaning %/100) Number of cows that didn’t have a calf = (350) x (1-.87) Number of cows that didn’t have a calf = (350) x (.13) = 45 cows We know that of those 45 cows that didn’t wean a calf, some of them were sold at preg check time, some were sold after calving season, and some weren’t sold at all because if a cow has a calf and loses it prior to weaning, those cows are rarely sold as culls. What we need to do is figure the cost were are going to charge each non-productive cow. Let’s say that 33% of the 45 unproductive cows came open at preg check. Therefore they only accumulated about 33.33% of the total unadjusted annual cow cost because they were sold about 1/3 of the way through the production year. 45 unproductive cows x .3333 = 15 cows $456.56 x .3333 = $152.17/cow 15 cows x $152.17 = $2282.57 Another 33.33% of those 45 cows either sloughed their calf after preg check but before calving or lost their calf during the calving season. These cows were probably sold after calving season before cows went to grass, so their annual cost was only about 66.66% of the total unadjusted annual cow cost. 45 unproductive cows x .3333 = 15 cows $456.56 x .6666 = $304.34/cow 15 cows x $304.34 = $4565.14 The other 33.33% lost their calf sometime after the calving season but before weaning. They should be charged the full total unadjusted annual cow cost. 45 unproductive cows x .3333 = 15 cows 15 cows x $456.56 = $6848.40 So our cost structure will look like this: $2282.57 + $4565.14 + $6848.40 = $13696.11 So now our Cow cost adjustment formula looks like this: 60

Cow cost adjustment = (15 x $152.17) + (15 x $304.34) + (15 x $456.56 ) = $44.91/cow 305 Now we find that each cow that did have a weaned calf will be charged an extra $49.91 in addition to her own annual cost to cover for the 13% of cows that didnâ&#x20AC;&#x2122;t wean a calf. So the total adjusted annual cow cost = $456.56 + $49.91 = $506.47 If we look at that adjusted cost on a calf cost breakeven basis: 1) $456.56/525 lbs. = $0.87/lb. 2) $506.47/525lbs. = $0.96/lb. In essence, cow cost increased by 9.8% simply due to those cows that didnâ&#x20AC;&#x2122;t produce a live, weaned calf. But that is only the cash cost associated with lost calves, what about the loss in revenue? Consider that a live weaned calf brings $1.20/lb. on the cash market so gross revenue would be $630.00/head. With a unadjusted cow cost of $456.56, net revenue would be $173.44/head. If net revenue is multiplied by the number of cows that did not wean a calf and then divided by the remaining cows in the herd, you get an adjustment factor for the loss in revenue from cows that did not wean a calf: $173.44 x 45 = $7804.80 total lost revenue $7804.80 / 305 = $25.59 lost revenue value adjustment/cow If you add the lost value on to the total adjusted annual cow cost, you have the true value, per cow, of what it costs when you have unproductive cows in the herd: $456.56 + $49.91 + $25.59 = $532.06 total adjusted annual cost per cow On a breakeven basis: $532.06/525 = $1.01/lb As a business manager, you will primarily be interested in the total adjusted annual cow cost as this is the value you will use to determine true cost of production. 61

Understanding value however, is important to understand the true cost of having cows that fail to wean calves.

Economics of Cow Size As the optimum cow size debate rages on, I have become interested in whether cow size really makes that much difference from an economic perspective. Common sense and general knowledge of biology would suggest that you don't need to have a PhD to figure out that a smaller cow should eat less than a larger cow and therefore should have a lower annual feed cost. I don't think there is really much debate on this point either amongst academia or industry. Similarly, but less obvious, is the question of whether a larger cow will produce more pounds of weaned calf than a smaller cow. There are a few research papers out there that show it both ways. In some reports, smaller cows produced less total pounds of weaned calf than larger cows and in other reports they weaned about the same number of pounds. Unfortunately, many of these reports don't address the economic side of the issue. They simply report comparative weaning weights vs. cow size and proclaim that one is more profitable than the other (whether one is really more profitable can't really be determined from the data presented). And finally, the question that many have attempted to answer subjectively is whether cow size affects overall profitability and if it does, by how much? So the questions becomes not so much whether small cow A produces more or less pounds than larger cow B, but rather does smaller cow A convert dollars of feed fed into pounds of weaned calf more efficiently than larger cow B. Inevitably, I got tired of wondering about this so I began amassing a data set of cow weights and weaning weights. I have pulled data from reported literature, producers around the state, and at the SDSU Cow Camp Experiment Station. All-in-all I have about 1,750 pairs in the data set. So let's look at the first question, Do larger cows wean more pounds of calf than smaller cows? To look at this, what I did was take the data set and sort by cow weight and then grouped into the lightest 25%, the second lightest 25%, the heaviest 25% and the second heaviest 25%. So out of 1,685 pairs in this set, there are approximately 420 pairs in each weight class. I then the average cow weight in each weight class and divided it by the average weaning weight for that same class, giving a weight production ratio. Most academians don't like these weight ratios, and I tend to agree with them. The problem is that when you look at these weight ratios, you tend to make all kinds of assumptions about them with no real data to confirm or deny. So, when you look at a 63

cow weight to weaning weight ratio, it is just that, a ratio of weight produced by weight maintained. The first table shows that as cow weight increased, calf weaning weight also increased. So it seems that larger cows do tend to produce slightly larger calves on average. There is 114 lb. difference between the weaning weights of the lightest and heaviest groups of cows. Table 1. Average cow weight, calf weaning weight, and cow weight to calf weaning weight ratios for 2008 and 2009. Cow Calf wean Weight weight weight ratio 984 475 0.48 1144 494 0.43 1230 512 0.42 1364 556 0.41 1541 589 0.38 What is interesting though is to look at the ratio of cow weight to weaning weight. This ratio does not tell us anything about efficiency per se, but it does indicate that weaning weight does not necessarily increase at the same rate as cow size. If you look at data from the SDSU Cow Camp you see the same trend: Table 2. Average cow weight, calf weaning weight, and cow weight to calf weaning weight ratios for 2007, 2008, and 2009 at SDSU Cow Camp in Miller, SD. Cow Calf wean Weight weight weight ratio 1118.67 442.33 0.40 1258.67 486.67 0.39 1344.67 481.67 0.36 1456.33 483.33 0.33 The actual weaning weights did not increase as linearly as cows got larger as they did in the other data set, but the weight ratio shows approximately the same trend. Well, that's fine if larger cows produce slightly larger calves on average, but does it really make that much of a difference to the bottom line of a cow outfit. What I did to test this was to model the economic inputs and outputs of these pairs based on weight class

Table 3. Economic model to calculate net return per head based on cow weight and calf weaning weight for 2008 and 2009.

Input Cow weight Intake % Daily intake Summer pasture AU Months on grass AUM's $/AUM Total grass cost Winter feed Daily intake $/lb of feed Total DOF Total feed cost Feed supplements Mineral Total feed cost

984 0.025 24.6

1144 0.025 28.6

1230 0.025 30.75

1364 0.025 34.1

1541 0.025 38.525

0.984 6.00 5.90 $20.49 $120.97

1.144 6.00 6.86 $20.49 $140.64

1.23 6.00 7.38 $20.49 $151.22

1.364 6.00 8.18 $20.49 $167.69

1.541 6.00 9.25 $20.49 $189.45

24.60 $0.03 180.00 $143.91 $21.15 $23.81 $309.84

28.60 $0.03 180.00 $167.31 $21.78 $24.52 $354.25

30.75 $0.03 180.00 $179.89 $22.43 $25.25 $378.78

34.10 $0.03 180.00 $199.49 $23.10 $26.00 $416.28

38.53 $0.03 180.00 $225.37 $23.79 $26.78 $465.39

Table 3 (continued). Economic model to calculate net return per head based on cow weight and calf weaning weight for 2008 and 2009. Non-feed operating $70.00 $70.00 $70.00 $70.00 $70.00 Fixed costs $105.00 $105.00 $105.00 $105.00 $105.00 Total cost

$484.84

$529.25

$553.78

$591.28

$640.39

Output Pounds of weaned calf $/lb of weaned calf Gross return

475.00 $1.35 $641.25

494.00 $1.32 $652.08

512.00 $1.30 $665.60

556.00 $1.25 $695.00

589.00 $1.22 $718.58

Net return/head

$156.41

$122.83

$111.82

$103.72

$78.19

0.00%

21.47%

28.51%

33.68%

50.01%

% Difference

This model shows that in fact it does make quite a bit of economic difference between the smaller and larger cows as the smallest cows returned 50% more on a per head basis than did the largest cows even though the smaller cows weaned 19% less weight. The principle reasons for this is that smaller cows eat less and therefore have a lower annual feed cost. It's that simple. The larger cows weaned more pounds and grossed more on a per head basis, but the cost differentiation of getting there compared to a smaller cow with a lighter calf was larger. Therefore, the efficiency of feed fed to production was greater for the smaller cows. We see the same pattern in the cow herd out at the SDSU Cow Camp. The big thing here to understand is that from this data we cannot say that Rancher A has smaller cows than rancher B therefore rancher A must be more profitable. This is simply a misnomer that has no factual basis. In fact, this is so dependent on feed cost, that rancher B, with bigger cows could easily be more profitable than rancher A with smaller cows, simply because rancher B can produce cheaper feed.

Table 4. Economic model to calculate net return per head based on cow weight and calf weaning weight for 2007, 2008 and 2009 at SDSU Cow Camp in Miller, SD. Input Body weight 1118 1258 1344 1456 Intake % 0.025 0.025 0.025 0.025 Daily intake 27.95 31.45 33.6 36.4 Summer pasture AU 1.118 1.258 1.344 1.456 Months on grass 6 6 6 6 AUM's 6.71 7.55 8.06 8.74 $/AUM $20.49 $20.49 $20.49 $20.49 Total grass cost $137.45 $154.66 $165.23 $179.00 Winter feed Daily intake 27.95 31.45 33.6 36.4 $/lb of feed $0.03 $0.03 $0.03 $0.03 Total DOF 180 180 180 180 Total feed cost $150.93 $169.83 $181.44 $196.56 Feed supplements $21.15 $21.78 $22.43 $23.10 Mineral $23.81 $24.52 $25.25 $26.00 Total feed cost $333.34 $370.79 $394.35 $424.66

Table 4 (continued). Economic model to calculate net return per head based on cow weight and calf weaning weight for 2007, 2008 and 2009 at SDSU Cow Camp in Miller, SD. Non-feed operating $70.00 $70.00 $70.00 $70.00 Fixed costs $105.00 $105.00 $105.00 $105.00 Total cost $508.34 $545.79 $569.35 $599.66 Output Pounds of weaned calf $/lb of weaned calf Gross return

442 $1.38 $609.96

486 $1.33 $646.38

441 $1.38 $608.58

483 $1.33 $642.39

Net return/head

$101.62

$100.59

$39.23

$42.73

0.00%

1.02%

61.40%

57.95%

% Difference

What we can say about this data set is that if rancher A currently has 1500 lb. cows and works towards a more moderate cow size through breeding and culling management, rancher A can improve profitability pretty dramatically. Let's look at a model of this concept: This model illustrates that if we fix land area and stocking rate, all other things equal, as would be the case with an individual cow outfit that changes cow size, how profitability changes. In this model I fixed land area at 5,000 acres with a fixed stocking rate of 0.75 AUM's/acre. By changing from a cow size of 1541lbs. to an average cow size of about 1000 lbs., profitability increases by about 68%. The big difference here is that on a fixed amount of land, you can run 36% more 1000 lb. cows at the same fixed stocking rate than you can 1541 lb. cows. Again, you see the same pattern using the data collected from the SDSU Cow Camp: Here, we are running on less acres and a higher stocking rate, but it is fixed across all weight groups. What is really striking is that the difference in profitability between the largest group and the smallest group is about the same as the other, totally unrelated data set at 68%!!

Table 5. Economic model to calculate total net return within a fixed area and a fixed stocking rate based on cow weight and calf weaning weight for 2008 and 2009. Input Cow weight 984 1144 1230 1364 1541 Intake % 0.025 0.025 0.025 0.025 0.025 Daily intake 24.6 28.6 30.75 34.1 38.525 Summer pasture AU 0.984 1.144 1.23 1.364 1.541 Months on grass 6.00 6.00 6.00 6.00 6.00 AUM's 5.90 6.86 7.38 8.18 9.25 $/AUM $20.49 $20.49 $20.49 $20.49 $20.49 Total grass cost $120.97 $140.64 $151.22 $167.69 $189.45 Winter feed Daily intake 24.60 28.60 30.75 34.10 38.53 $/lb of feed $0.03 $0.03 $0.03 $0.03 $0.03 Total DOF 180.00 180.00 180.00 180.00 180.00 Total feed cost $143.91 $167.31 $179.89 $199.49 $225.37 Feed supplements $21.15 $21.78 $22.43 $23.10 $23.79 Mineral $23.81 $24.52 $25.25 $26.00 $26.78 Total feed cost $309.84 $354.25 $378.78 $416.28 $465.39

Table 5 (continued). Economic model to calculate total net return within a fixed area and a fixed stocking rate based on cow weight and calf weaning weight for 2008 and 2009. Non-feed operating $70.00 $70.00 $70.00 $70.00 $70.00 Fixed costs $105.00 $105.00 $105.00 $105.00 $105.00 Total cost $484.84 $529.25 $553.78 $591.28 $640.39 Output Pounds of weaned calf $/lb of weaned calf Gross return

475.00 $1.35 $641.25

494.00 $1.32 $652.08

512.00 $1.30 $665.60

556.00 $1.25 $695.00

589.00 $1.22 $718.58

Net return/head

$156.41

$122.83

$111.82

$103.72

$78.19

0.00%

21.47%

28.51%

33.68%

50.01%

% Difference Fixed Area Acres SR Total AUM's Total head Total net return % Difference

5,000.00 5,000.00 5,000.00 5,000.00 5,000.00 0.75 0.75 0.75 0.75 0.75 3,750.00 3,750.00 3,750.00 3,750.00 3,750.00 318 274 254 229 203 $49,705.63 $33,669.58 $28,408.61 $23,763.94 $15,857.53 0.00% 32.26% 42.85% 52.19% 68.10%

Table 6. Economic model to calculate average total net return within a fixed area and a fixed stocking rate based on cow weight and calf weaning weight for 2007, 2008 and 2009 using data collected at SDSU Cow Camp in Miller, SD. Input Body weight 1118 1258 1344 1456 Intake % 0.025 0.025 0.025 0.025 Daily intake 27.95 31.45 33.6 36.4 Summer pasture AU 1.118 1.258 1.344 1.456 Months on grass 6 6 6 6 AUM's 6.71 7.55 8.06 8.74 $/AUM $20.49 $20.49 $20.49 $20.49 Total grass cost $137.45 $154.66 $165.23 $179.00 Winter feed Daily intake 27.95 31.45 33.6 36.4 $/lb of feed $0.03 $0.03 $0.03 $0.03 Total DOF 180 180 180 180 Total feed cost $150.93 $169.83 $181.44 $196.56 Feed supplements $21.15 $21.78 $22.43 $23.10 Mineral $23.81 $24.52 $25.25 $26.00 Total feed cost $333.34 $370.79 $394.35 $424.66

Table 6 (continued). Economic model to calculate average total net return within a fixed area and a fixed stocking rate based on cow weight and calf weaning weight for 2007, 2008 and 2009 using data collected at SDSU Cow Camp in Miller, SD. Non-feed operating $70.00 $70.00 $70.00 $70.00 Fixed costs $105.00 $105.00 $105.00 $105.00 Total cost $508.34 $545.79 $569.35 $599.66 Output Pounds of weaned calf $/lb of weaned calf Gross return Net return/hd % Difference Fixed Area Acres SR Total AUM's Total head Total net return % Difference

442 $1.38 $609.96 $101.62 0.00%

486 $1.33 $646.38 $100.59 1.02%

441 $1.38 $608.58 $39.23 61.40%

483 $1.33 $642.39 $42.73 57.95%

1,310 1.25 1,638 123 $12,493.08

1,310 1.25 1,638 108 $10,911.40

1,310 1.25 1,638 102 $3,982.94

1,310 1.25 1,638 94 $4,004.65

0.00%

12.66%

68.12%

67.95%

Economics of Buying Aged Cows as Replacements It is always interesting to me to assess the value of replacement females in the market place to see how that translates into profit in the business. In recent times it seems, replacement females are grossly over valued in the market place and I often wonder how guys can pencil what they pay for heifers, young cows, middle aged cows and so on. So every few weeks or so I go through the sale reports and see what different classes of replacement females are bringing and do a net present value analysis to see how over valued or under valued they are in market place based on my best estimations of future productivity and financial efficiency. The NPV analysis takes into consideration that the value of a dollar today is less at some point in the future. So as we look at the value of a replacement female today and extrapolate out her financial productivity into the future, we must take into consideration that we make these extrapolations in todayâ&#x20AC;&#x2122;s value, which is more than that same value will be at that point in the future. Therefore we must discount todayâ&#x20AC;&#x2122;s values to represent what those values will be in the future. That's a really wordy explanation for an analysis that is really simple. In these analyses, we will discount at 7% and use a base cow cost/lb of weaned calf of $421.39with an annual 1.5% increase. The base cow cost we are using is based on the SDSU IRM database average for South Dakota. You can view the IRM database report in the 2009 SDSU Cow-Calf Business Report which can be viewed on my website www.ranchmanager.org Let's look at the latest.... April, 2010 Analysis Buy bred heifers, pay $1150/hd Assume 8 years of productive life with an average net weaning wt. of 542# We will assume that the avg. price for calves in this weight range over the next 7 years will run about $1.20/lb. We'll discount the net returns at 7%. We will value this heifer as a cull cow in 8 years at $650. Analysis 75

Results Table 1 shows a lifetime net return = $114.94/head and a breakeven cost of $1264.94/head. Discussion If you buy heifers right now for $1250 or more, those

Table 1. Net present value analysis of bred heifers purchased for $1,150 per head. c4 x c5 c6 x c7 c8 -c2 c9 x c10 1 2 3 4 5 6 7 8 9 10 11 Net Annual Wea % wean Gross Net Discount NPV of Year cost Parity n wt. Wean wt. Price return return rate return 200 9 $0.00 0 0 0 0.00 $0.00 $0.00 -$0.00 0.935 $0.00 A 201 0 $434.03 0 0 0 0.00 $0.00 $0.00 $434.03 0.873 $1,150.00 B 201 1 $447.05 0.81 525 0.915 480.38 $1.20 $576.45 $129.40 0.935 $120.99 C 201 2 $460.46 0.89 550 0.915 503.25 $1.20 $603.90 $143.44 0.873 $125.22 D 201 3 $474.28 1.23 575 0.915 526.13 $1.20 $631.35 $157.07 0.816 $128.17 E 201 4 $488.51 1.22 600 0.915 549.00 $1.20 $658.80 $170.29 0.763 $129.93 F 201 5 $503.16 1.33 625 0.915 571.88 $1.20 $686.25 $183.09 0.713 $130.54 G 201 6 $518.26 1.05 650 0.915 594.75 $1.20 $713.70 $195.44 0.666 $130.17 H 201 7 $533.80 0.91 625 0.915 571.88 $1.20 $686.25 $152.45 0.623 $94.97 I $859.99 Value of cull cow

$650.00 Net return

0.623

Breakeven development cost/purchase price =

SUM (A:I)

$404.95 K $114.94 L J-K L-A$1,264.94 M B 77

heifers will either breakeven or bleed a lot of red over the 7 years of her life. If these heifers are bought for less than $1250, they will net a positive return over their productive life. I'd say these heifers are valued about right. But what about young cows you might ask? Let's look... Analysis Buy 3-4 year old young cows, pay $1210/hd Assume 6 years of productive life with an average net weaning wt. of 542# We will assume that the avg. price for calves in this weight range over the next 6 years will run about $1.20/lb. We'll discount the net returns at 7%. We will value this heifer as a cull cow in 6 years at $650. Results Table 2 shows a lifetime net return = <$41.16>/head and a breakeven cost of $1170/head. Discussion This set of 4 year old cows are going lose $41.16/hd over their productive life. They are simply over-valued at the market place. This analysis shows that 4 year old cows need to be bought at less than $1170/hd to turn a profit over their lifetime. Analysis Buy 6 year old cows, pay $1190/hd Assume 4 years of productive life with an average net weaning wt. of 542# We will assume that the avg. price for calves in this weight range over the next 5 years will run about $1.20/lb. We'll discount the net returns at 7%. We will value this heifer as a cull cow in 6 years at $650. Results 79

table 3 shows a lifetime net return = <$281.68>/head and a breakeven cost of $910/head. Discussion This set of 6 year old cows are going lose $281.68/hd over their productive life. They are simply over-valued at the market place. This analysis shows that 6 year old cows need to be bought at less than $910/hd to turn a profit over their lifetime. There are always over-valued items and under-valued items in any market place. With these types of analyses, we hopefully can find the under-valued and turn them into profit.

Table 2. Net present value analysis of buying 4 year old cows for $1,210/head. c4 x c5 c6 x c7 c8 -c2 c9 x c10 1 2 3 4 5 6 7 8 9 10 11 Net Annual Wea % wean Gross Net Discount NPV of Year cost Parity n wt. Wean wt. Price return return rate return 200 9 $421.39 0 0 0 0.00 $0.00 $0.00 201 0 $434.03 0 0 0 0.00 $0.00 $0.00 $1,210.00 201 1 $447.05 0.81 525 0.915 480.38 $1.20 $576.45 $129.40 0.934 $120.86 201 2 $460.46 0.89 550 0.915 503.25 $1.20 $603.90 $143.44 0.873 $125.22 201 3 $474.28 1.23 575 0.915 526.13 $1.20 $631.35 $157.07 0.816 $128.17 201 4 $488.51 1.22 600 0.915 549.00 $1.20 $658.80 $170.29 0.762 $129.76 201 5 $503.16 1.33 625 0.915 571.88 $1.20 $686.25 $183.09 0.712 $130.36 201 6 $518.26 1.05 650 0.915 594.75 $1.20 $713.70 $195.44 0.666 $130.17

Value of cull cow

$650.00 Net return

0.622

BE Development cost/purchase price =

A B C D E F G H I

$764.54

SUM (A:I)

$404.30 -$41.16

K L

J-K

$1,168.84

L-A-B

Table 3. Net present value analysis of buying 6 year old cows for $1,190/head. c4 x c5 c6 x c7 c8 -c2

c9 x c10 82

1 Year 200 9 201 0 201 1 201 2 201 3 201 4

% Wean

6 Net wean wt.

Annual cost

Parity

Wea n wt.

Price

Gross return

Net return

Discount rate

NPV of return

$421.39

0.00

$0.00

0.00

$0.00

$1,190.00

$434.03

$447.05

0.81

525

0.915 480.38 $1.20 $576.45 $129.40

0.934

$120.86

$460.46

0.89

550

0.915 503.25 $1.20 $603.90 $143.44

0.873

$125.22

$474.28

1.23

575

0.915 526.13 $1.20 $631.35 $157.07

0.816

$128.17

$488.51

1.22

600

0.915 549.00 $1.20 $658.80 $170.29

0.762

$129.76

F G H I

Value of cull cow

$650.00 Net return

0.622

BE Development cost/purchase price =

$504.01

SUM (A:I)

$404.30 -$281.69

K L

J-K

$908.31

L-A-B

Cost of Production

What Does Grass Really Cost? I think most cattlemen have come to realize that grass is not free, by any stretch of the imagination. Especially if you have tried to rent grass in the northern plains in the last several years. The increase in grass rental (and land value) has been increasing at a rate of 15-22% per year over the last several years. This drastic increase in value and associated rental rates has outpaced the rest of the country by at least 20%. That being said, most operators still have no idea what grass truly costs a cow outfit (or stockers for that matter). Digging into the SDSU Cow-calf Business Report from 2008, this data set can give us at least average costs of grass. You can view the entire report at: www.ranchmanager.org Look under the "Enterprise Analysis" tab on the left, select "Cow-calf Business Reports" Again, a couple of things to remember: 1) These are only averages, some grass is cheaper, some is more expensive depending on where you are. 2) This data set is heavily influenced by eastern South Dakota operators. Results Table 1 shows the average cost of grass on deeded acres on an acre and AUM basis. You can see that the average cost of deeded pasture runs about $23.57 per acre and $20.49 per AUM. If you translate that into cost/pair/day it equals about $0.95/pair/day and $0.58/steer/day…and if that didn’t make you just about vomit, take a look at the average cost of rented pasture… Table 2 shows the average cost of rented pasture is running about $44.62 per acre or about $38.80 per AUM. If you translate that into cost/pair/day it equals about $1.81/pair/day and $1.03/steer/day. I think a lot of guys assume that the cash rental rate is the cost of the grass, but that isn’t true because there are a lot of other costs associated with running cows on rented grass. On average the cash rent on grass in this data set is only about $26 per AUM, but there are a lot of other costs that go along with it.

The good news is that the 2008 costs are down slightly from 2007 and it looks like 2009 costs will be down from 2008. It wasnâ&#x20AC;&#x2122;t but 8 years ago that I rented pasture for a set of cows and I thought the $0.35/pair/day it cost me at the time was highway robbery. I guess those days are gone. Believe it or not, $20 AUM grass does pencil and so does $40 AUM grass. The major point here is that a person wonders how in the heck can an operator rent grass and make it pay? Letâ&#x20AC;&#x2122;s look: If an operator runs 80% of his cows on deeded ground that on average costs him $20.49/AUM and runs the other 20% on rented ground that runs $38.80/AUM. The average cost of his grass spread over the whole herd is still only $24.15/AUM, which pencils pretty nicely, especially if he had to sell the other 20% if he could rent the grass. The cost of the really expensive rented grass is dispersed over 100% of the herd, 80% of which were running on deeded ground that costs half as much to graze. This concept is what is running the value of agricultural real estate through the roof. So the big can get bigger and the young canâ&#x20AC;&#x2122;t get in the door.

Table 1. Deeded pasture cost summary for cow-calf operations in eastern South Dakota for 2008 (n=41). Cost per Item acre Fertilizer $0.78 Fuel & Oil $3.01 Repairs $1.56 Miscellaneous $1.15 Total operating costs

$6.50

Fixed costs Hired labor Insurance Utilities Property taxes Interest Miscellaneous

$0.93 $1.12 $1.88 $5.66 $6.61 $0.87

Total fixed costs

$17.07

Total cost

$23.57

Average yield per acre (AUM/A) Cost of production ($/AUM)

1.15 $20.49

Table 2. Rented pasture cost summary for cow-calf operations in eastern South Dakota for 2008 (n=33). Cost per Item acre Fertilizer

$0.32

Fuel & Oil

$1.97

Repairs

$0.52

Land cost

$36.77

Miscellaneous

$2.78

Total operating costs

$42.36

Fixed costs Hired labor

$0.43

Miscellaneous

$1.83

Total fixed costs

$2.26

Total cost

$44.62

Average yield per acre (AUM/A) Cost of production ($/AUM)

1.15 $38.80

The Cost of Grazing and Haying Annual Forages Last week I posted some very general stuff on annual forages, which is the first time I have done that in the last several years. I haven't recommended annuals for forage in the last couple of years simply because rising fertilizer costs had wiped out most or all of the saving associated with these forage types. Now, as you are aware, the price of fertilizer has come down by over half which has made these types of forages very feasible and cost effective again. Last summer, when I was able to lock in fertilizer for about $450/T, we established some non-replicated demonstration trials with BMR Forage Sorghum and Piper Sudangrass to look at cost of production, grazing performance, and cost of gain. We also established Hybrid Pearl Millet to look at cost of production and cost per ton of hay. We did not graze the Hybrid Pearl Millet. It is critical to first understand the BMR trait in forage sorghums before we look at this analysis. Traditionally, warm-season annual forages such as sudangrass have been extremely high yielding forages, but typically aren't that useful for grazing situations due to poor quality, poor digestibility, and lots and lots of wastage in grazing situations. Then the sorghum hybrids were developed which generally were a little leafier, better quality and better digestibility, but comparatively, they are more useful for raw yield than forage quality. More recently the BMR trait in sorghums has been refined to create forage sorghum varieties with high digestibility, high forage quality and outstanding animal performance. However, total yield of sorghums that contain the BMR trait tend to yield less than conventional varieties. But the questions still remained, how cost effective are forages that contain the BMR trait? Well, let's take a look... Results Typically you can expect a little closer to 5 tons of yield/acre on this variety of forage sorghum, but with the cool temps and untimely rainfall at Miller last summer, yield suffered a bit. But even though yields were down, cattle still gained 2.37 lb/day. If you compare that to the cost of production of forage, you get a cost of gain of $0.65 per pound of gain. If you are looking to put cheap gain on calves, this BMR forage sorghum will get the job done. 89

Now if you are more interested in cost in terms of cow feed where gain doesn't matter all that much, this demonstration shows that you could put cows on this sorghum in the late summer/fall and feed them for about $0.31/head/day. Not bad!! The cost of production for sudangrass is amazingly cheap with a cost per ton of $11.56 and cost per AUM of $4.52. However, our demonstration shows that Piper sudangrass isn't all that effective for grazing growing steers. Even though the cost of production is really cheap, the gain on those calves was pretty poor. As I said before, sudangrass has lots of yield but pretty low forage quality and with a cost of gain for calves of $1.01 per pound of gain, sudangrass might not be the best choice for growing cattle. Cows on the other hand are another matter altogether. When we aren't that concerned about gain, we could feed a group of cows for about $0.21/head per day. WOW! That is probably cheaper than grass for a lot of guys. Table 3 shows the cost of production for a hybrid pearl millet crop in our demonstration. This analysis includes the cost of cutting and baling. Again, we didn't graze the millet so I don't have any cattle performance data for you. But it any event, the millet yielded about 4.5 tons/acre with a cost of production of $23.88 per ton. Pretty reasonable when you consider that the average cost of producing a ton of grass hay in eastern SD runs about $70/ton!! That's a lot more than I thought it was, but that is what my database shows. Theoretically, if you turned cows out on this hybrid pearl millet you could feed them for about $0.43/head/day. I think these demonstrations show that these types of forages have all kinds of uses and the type of forage you should plant really depends on what you want to use it for. Some work good for hay, some for growing calves, and I think all of them are good feed stock for cows...and talk about a reasonable cost!!

Table 1. Cost profile for BMR forage sorghum used in grazing performance demonstration at SDSU Cow Camp in 2009. Cost per Item acre Operating costs Seed $20.70 Fertilizer $26.23 Fuel & oil $4.86 Repairs $1.69 Operating interest $0.61 Miscellaneous $0.35 Total operating costs $44.44 Fixed costs Hired labor Insurance Utilities Property taxes Interest Depreciation Miscellaneous Total fixed costs

$4.56 $1.01 $1.66 $7.22 $9.52 $11.60 $0.86 $36.43

Total cost

$80.87

Average yield per acre Tons AUM's Cost of production ($/ton) ($/AUM) Crude protein (%)

4.37 11.2 $18.50 $7.22 12.6

Average weight of steers when trial began Average daily gain of steers (lb/day) Days on trial Total gain (lb)

2.37 52 123.24

Cost of gain

$0.65

726

Table 2. Cost profile for Piper sudangrass used in grazing performance demonstration at SDSU Cow Camp in 2009. Cost per Item acre Operating costs Seed $15.00 Fertilizer $16.23 Fuel & oil $4.86 Repairs $1.69 Operating interest $0.61 Miscellaneous $0.35 Total operating costs

$38.74

Fixed costs Hired labor Insurance Utilities Property taxes Interest Depreciation Miscellaneous

$4.56 $1.01 $1.66 $7.22 $9.52 $11.60 $0.86

Total fixed costs

$36.43

Total cost

$75.17

Average yield per acre Tons AUM's Cost of production ($/ton) ($/AUM) Crude protein (%)

$11.56 $4.52 9.2

Average weight of steers when trial began Average daily gain of steers (lb/day) Days on trial Total gain (lb)

731 1.42 52 73.84

Cost of gain

$1.01

6.5 16.6

Table 3. Cost profile for hybrid Pearl millet hay crop demonstration at SDSU Cow Camp in 2009. Cost per Item acre Operating costs Seed $21.60 Fertilizer $16.23 Fuel & oil $14.86 Repairs $7.69 Operating interest $1.23 Miscellaneous $2.11 Total operating costs

$63.72

Fixed costs Hired labor Insurance Utilities Property taxes Interest Depreciation Miscellaneous

$6.56 $1.01 $1.66 $7.22 $11.29 $14.88 $1.12

Total fixed costs

$43.74

Total cost

$107.46

Average yield per acre Tons AUM's Cost of production ($/ton) ($/AUM) Quality analysis Moisture (%) Crude protein (DM basis) TDN (DM basis) RFV (DM basis)

4.5 11.5 $23.88 $9.34 14.7 16.2 63.4 94.0

Could Sorghum Silage Replace Corn Silage for Beef Cow Feed? I was calculating our cost of production for the corn silage we grow out at SDSU Cow Camp in Miller, SD the other day and it really grabbed me that corn silage isn’t as competitive on a cost basis as it used to be. It is still the cheapest forage feedstuff we have, no doubt about it, but when our cost runs $33.12/T, I realized we are going to have to start to do something a little different. Don’t get too excited if you currently grow silage for your cows, we have fairly poor soils right where we are at and corn doesn’t yield very well, even in good years, so we have fewer tons to spread fixed costs over than most. If you look at the average cost of growing corn silage East River from 2008, you can see that I am dealing with a little different situation than most. The 2009 data is currently being tabulated, but isn’t available yet: In any event, even at $27/T, the average cost of corn silage is running about 37% higher than it was even 4 years ago. I expect the 2009 data will show that the cost has come down a little from 2008 as fertilizer prices have stabilized and fuel is a little cheaper. But still this is a problem that may need some attention. The point is to show you an analysis I did in response to the fact that I don’t feel we can afford to grow corn for silage for cattle feed any longer at our location. Last October I toured Richardson Seed Company in Vega, TX with the guys from Millborn Seeds in Brookings, SD. The Richardson outfit was a mecca of sorghum research. Not many universities or private companies do much research with sorghums anymore, but there was some real cutting edge stuff these guys were working on. To make a long story short, the information I gathered led me to wonder if corn silage varieties could be replaced with sorghum varieties. I think there is some real potential here considering the following: 1) The seed is cheaper 2) It requires much less fertilizer 3) It requires much less water 4) It yields about the same 5) The new BMR trait varieties put forage quality on par with corn 94

Of course there are a couple of down sides: 1) It’s not round-up ready 2) Short-season varieties still run about 115 days (a 90-day would be nice, but I’m not sure there is one available) When you look at the projected cost comparison it really starts to look attractive and a person might be able to overlook the down sides. So when you compare the average cost of conventional corn silage to projected costs of sorghum silage, I am seeing a possible decrease in cost of 42%. Not bad. I will be growing some test plots out at Miller this summer to test yield, quality, cost of production, etc. I’ll let you know what I find out. The variety I will be using for the test is the MS7000 variety from Millborn Seeds in Brookings. You can copy and paste this link into your web browser if you want to look at the spec sheet on it http://www.millbornseeds.com/documents/pasture_MS7000.pdf

Table 1. Mean cost of production for corn silage for cow-calf operations in eastern South Dakota for 2008 (n=22). Cost per Item acre Operating costs Seed $57.41 Fertilizer $61.24 Chemical $28.76 Crop insurance $21.98 Fuel & oil $51.68 Repairs $38.28 Custom hire $41.51 Hired labor $0.47 Operating interest $4.76 Miscellaneous $4.11 Total operating costs

$310.20

Fixed costs Hired labor Insurance Utilities Property taxes Interest Depreciation Miscellaneous

$26.34 $4.12 $5.22 $8.59 $8.36 $28.38 $6.12

Total fixed costs

$87.13

Total cost

$397.33

Average yield per acre (T)

14.57

Cost of production ($/T)

$27.27

Table 2. Projected cost for sorghum silage production in eastern South Dakota. Cost per Item acre Operating costs Seed $15.00 Fertilizer $16.23 Chemical $12.25 Crop insurance $9.85 Fuel & oil $21.68 Repairs $11.28 Custom hire $41.51 Hired labor $0.23 Operating interest $1.56 Miscellaneous $2.01 Total operating costs

$131.60

Fixed costs Hired labor Insurance Utilities Property taxes Interest Depreciation Miscellaneous

$16.31 $4.12 $5.22 $8.59 $8.36 $28.38 $6.12

Total fixed costs

$77.60

Total cost

$209.20

Average yield per acre (T)

13.22

Cost of production ($/T)

$15.82

Economics of Creep Feeding Calves There are only three things that matter when it comes to the effectiveness of creep feeding calves: 1) Feed conversion, 2) Cost of gain 3) Price slide in the market place One and two you can control, number three you can’t do much about and you can’t predict it either, although it has a big impact on whether creeping calves pays. Feed conversions Knowing the feed conversion of different feeds used in a creep feeding program is important so you can calculate cost of gain. The problem is I figure you probably don’t know what the conversions are and neither do I. What I can tell you is that from trials we’ve run out at SDSU Cow Camp, Purina’s AccuRation has a feed conversion that runs about 6:1 (6 pounds of feed will generate 1 pound of gain). Many other feeds run about 8:1 – 10:1. Cost of gain To calculate cost of gain, simply take the cost/pound of the feed ingredient and multiply it by the conversion rate. That will give you the cost per pound of gain. Example 1 So, if I take AccuRation for example, it runs about $290/T. So if I take $290/2000 lbs. per ton = $0.145 per pound. Now if I take that times a 6:1 feed conversion ($0.145 x 6lbs/lb of gain) = $0.87 per pound of gain. Example 2 98

Let’s look at a mix of ½ corn and ½ soybean hulls that runs $180/T $180/2000 lbs per ton = $0.09 per pound At an 8:1 conversion you get $0.09 x 8 lbs per lb of gain = $0.72 per pound of gain The following table has cost of gain based on several different feed conversions up to $220 per ton. Above that you’ll just have to calculate it yourself. So, to calculate the returns to creep feeding your calves, take a look at the following example:

Table 1. Cost of gain ($/lb of gain) calculated based on Cost of creep feed ($/ton delivered) and creep feed conversions. Creep feed conversions Cost of creep feed 4 6 8 10 12 16 18 -------------------------------------------------cost of additional gain, $/lb $/ton delivered gain----------------------------------------100 $0.20 $0.30 $0.40 $0.50 $0.60 $0.80 $0.90 120 $0.24 $0.36 $0.48 $0.60 $0.72 $0.96 $1.08 140 $0.28 $0.42 $0.56 $0.70 $0.84 $1.12 $1.26 160 $0.32 $0.48 $0.64 $0.80 $0.96 $1.28 $1.44 180 $0.36 $0.54 $0.72 $0.90 $1.08 $1.44 $1.62 200 $0.40 $0.60 $0.80 $1.00 $1.20 $1.60 $1.80 220 $0.44 $0.66 $0.88 $1.10 $1.32 $1.76 $1.98 240 $0.48 $0.72 $0.96 $1.20 $1.44 $1.92 $2.16 260 $0.52 $0.78 $1.04 $1.30 $1.56 $2.08 $2.34 280 $0.56 $0.84 $1.12 $1.40 $1.68 $2.24 $2.52 300 $0.60 $0.90 $1.18 $1.50 $1.80 $2.40 $2.70

100

Table 2. Example creep feed return on gain calculations based on 75 day creep period, $180/T feed, and a 8:1 creep conversion. 1 2 No creep Creep Calculations A Weaning weight 525 675 B Creep feed used (lbs) 1200 C $/lb at weaning $1.26 $1.15 D Calf value $661.50 $776.25 AxC E Value/lb of added weight $0.76 G/(A2 - A1) F Feed cost/lb of added weight $0.72 Table 1 G Gross value of added weight $114.75 D2 - D1 H Cost of added gain $108.00 (A2 - A1) x F I Return/head from creep feeding $6.75 G-H

101

Table 3. Creep feed return on gain calculation template. 1 No creep A Weaning weight B Creep feed used (lbs) C $/lb at weaning D Calf value E Value/lb of added weight F Feed cost/lb of added weight G Gross value of added weight H Cost of added gain I Return/head from creep feeding

2 Creep

Calculations

AxC G/(A2 - A1) Table 1 D2 - D1 (A2 - A1) x F G-H

102

In this example, the calves that were creep fed netted $6.75 more per head than did the calves that weren’t creep fed. It is important to remember of course, there is a big difference between gross and net. Intuition tells you that the heavier calves should have netted way more than $6.75/head when compared to the non-creep fed calves, but that price slide on the heavier calves negated much of the value gained through the supplemental feeding. Remember though, we’re just estimating the slide, if you catch the slide at $8/cwt rather than the $11/cwt we used in this example, now the return per head jumps to $27 per head. So, as you might be asking yourself, how do you know how much calves will gain from a particular feed? In short, you don’t and I don’t either. But there are a couple of guidelines to go by: 1) Our trials show that Accuration generally delivers a pretty consistent 2.5 lbs per day on calves less than 500 lbs. It can vary a little, but not much. 2) Our trials also show that pretty much any commonly used concentrate feed that is not 100% corn will deliver at least 1.7-2.0 lbs per day gain on calves less than 500 lbs. You might get more than 2.0 but usually not less, all things being equal. It’s not an absolute, but those are some guidelines to follow. The other thing to consider is the price slide as your calves gain extra weight. As I said before, there isn’t anything you can do about the slide, it is an inherent value discovery mechanism in the market. But you do need to accurately represent the slide in your analysis or you will accidentally pencil the projected return wrong. As a general rule, you can expect a $10 per cwt slide for every 100 lbs of additional weight. Sometimes it’s more, sometimes it’s less, but that’s what it is on average. To calculate your projected returns from creep feeding, use the following blank template. You can view the article I just wrote on this subject by copying and pasting the following link you’re your web browser. http://agbiopubs.sdstate.edu/articles/ExEx2071.pdf

103

Economics of Protein Supplementation One of the principal costs associated with wintering cows is protein supplementation. Winter range, harvested forages, and crop residues for the most part, contain plenty of energy to meet the needs of gestating cows during the winter. The protein content of these energy sources however, tends to be fairly low which reduces intake of low protein forages as rumen microbes are not supplied with enough protein to effectively break the roughage down to access the energy. The feed products typically used to supplement ruminant livestock can be broken down into: 1) natural vs. non-natural protein sources 2) Low labor vs. high labor delivery methods These two classifications cover most of the feed supplements on the market. Natural proteins consist of things like alfalfa or soybean/cottonseed/sunflower meals, etc. Non-natural proteins are made from urea. Typically, natural proteins used in supplementing beef cows are more efficient and usually lower cost than urea-based supplements. However, natural protein sources typically require more labor and equipment to deliver than urea-based products. In essence, you get charged a convenience factor with certain types of protein supplements. The other thing you have to watch for with protein supplements is sticker shock. Some supplements can seem very expensive on a per ton basis, but in reality are very cheap on a per pound of crude protein basis. Therefore, it is essential that you know how to calculate the cost of protein on a per pound of protein basis. Example: To calculate cost per pound of crude protein for a feed supplement use the following formulas: A) Conversion from one ton of product to pounds of protein = 2000 lbs. x % crude protein If we take soybean meal as an example, SBM contains about 46% CP and costs about $300/ton: Pounds of protein = 2000 lbs. x .46 = 920 lbs. 104

B) Then we convert cost per ton to cost per pound of CP by dividing cost per ton by pounds of CP: Cost per pound of protein = $300/ton = $0.32 per lb. of protein 920 lbs. of protein You can do this with any type of protein supplement. Table 1 shows the cost comparison of common protein supplements on a cost per pound of protein basis. Table 1. Cost comparison of common protein supplements on a cost per pound of crude protein basis. Product Cost/lb. of CP Alfalfa $0.30 Distillers grains $0.25 Soybean meal $0.32 Cottonseed meal $0.27 Sunflower meal $0.44 Commercial range cake $0.68 Crystalyx tubs $1.87

105

Modeling Cost of Gain for Feeder Cattle Marketing Probably one of the most important aspects of feeding and marketing feeder cattle is the ability to model production costs, price break points and value spreads. When a person has the ability to model these aspects of the cattle feeding business, the risks typically associated with cattle feeding become pretty manageable. Probably the most important aspect of determining the production costs of feeding cattle is to have the ability to at least semi-accurately model cost of gain. Moreover, it is similarly important to understand the difference between feed cost of gain and total cost. They aren’t the same thing because feed cost of gain is a function of feed cost and weight gain. However, total cost factors in production costs that do not necessarily track with the weight gain of the animal, therefore these costs are typically modeled as operating costs. Furthermore, there are always fixed costs associated with a cattle feeding operation that include labor, infrastructure, utilities, and depreciation. These costs are generally termed fixed costs or yardage. Either way, these costs account for the capital investment in the labor and facilities needed to feed cattle. As we look at modeling cost of gain, operating costs, and yardage; we need to remember the fact that these typically are moving targets as these costs are constantly changing and typically are a function of the number of head being processed and fed at a facility in relation to the total investment in the facility. Therefore, one must take into account the fact that with every turn of cattle through the facility, these values are going to have to be recalculated and adjusted to reflect the actual changes in these costs over time. Let’s look at some examples of modeling these costs. We’ll start with feed cost of gain. The most difficult part of modeling cost of gain is balancing the ration over time. Once the ration is balanced however, extrapolating that over time and attaching a cost to it is pretty simple. Example: Let’s assume we have a set of 640 lb. steer calves that we are looking to bring in off the cash market. We will feed these cattle to finish in this example with a target weight of 1350 lbs, so we will put on 710 lbs. of weight on these calves.

106

Obviously as cattle grow, we need to adjust the ration to keep them performing at the highest level of economic efficiency as possible (which may not mean the highest ADG possible, but we will get to that later). Therefore, we will need evaluate cost of gain over a phased ration. This sounds complicated but it really isn’t, we will simply balance the expected rations over the receiving phase, the grow phase and the finish phase and calculate cost of gain from that. Receiving phase – 30 days Feed Protein Corn Roughage DDGS Other feed Total Growing phase – 114 days Feed Protein Corn Roughage DDGS Other feed Total Finishing phase – 71 days Feed Protein Corn Roughage DDGS Other feed Total

Expected performance = 2.5 lbs./day $/hd/day $0.00 $14.40 $11.15 $3.90 $1.12 Expected COG = $30.57 $0.40/lb. Expected performance = 3.5 lbs./day $/hd/day $0.00 $102.60 $27.25 $24.22 $2.09 Expected COG = $156.16 $0.39/lb. Expected performance = 3.5 lbs./day $/hd/day $0.00 $97.98 $7.31 $19.52 $2.32 Expected COG = $127.13 $0.51/lb.

We expect to have these cattle on feed for 215 days to reach the target weight of 1350 lbs. So as we project the expected feed costs per head, we can easily calculate cost of gain: 107

Receiving phase – $30.57/hd divided by 30 days divided by 2.5 lbs. day = $0.40/lb of gain Growing phase – $156.16/hd divided by 114 days divided by 3.5 lbs./day = $0.39/lb of gain Finishing phase – $127.13/hd divided by 71 days divided by 3.5 lbs./day = $0.51/lb of gain However, when we calculate cost of gain in a phased ration, we need to calculate a weighted cost of gain rather than costs of gain for each phase. By calculating a weighted cost of gain we can get a weighted average of cost of gain over the three phases of the ration and build a model around this single cost of gain value. This is simple to do: First, we need to calculate the percentage of total days on feed, each phase is fed: Receiving phase – 30 days / 215 total days on feed = .14 Growing phase – 114 days / 215 total days on feed = .53 Finishing phase – 71 days / 215 total days on feed = .32 Now we can weight the average: Receiving phase – $0.40/lb of gain x .14 = 0.056 Growing phase – $0.39/lb of gain x .53 = 0.207 108

Finishing phase – $0.51/lb of gain x .32 = 0.163 Now add up those values to get the weighted cost of gain: Wtd. COG = 0.056 + 0.207 + 0.163 = 0.426 or $0.426/lb of gain over the entire feeding period. Now let’s look at operating costs: Operating Costs Veterinary Supplies Fuel Repairs Custom hire Trucking Marketing Operating interest Total

$/hd $8.50 $8.60 $5.68 $7.10 $2.03 $19.90 $3.65 $29.94 $85.40

In this example, each steer is going to generate $85.40 of non-feed operating costs. That seems like quite a bit, but if you break it down across all of the weight gained it looks like this: Operating costs per lb of gain – $85.40 / 710 lbs. of gain = $0.12/lb of gain Now let’s look at yardage: Yardage Hired labor Farm insurance Utilities Interest Depreciation Miscellaneous Total

$/hd $14.00 $5.00 $5.00 $9.00 $18.00 $7.00 $58.00

109

Again, $51.00 of yardage costs per head seems like a lot, but when we put it on a per pound of gain basis it looks like this: Yardage costs per lb of gain â&#x20AC;&#x201C; $58.00 / 710 lbs. of gain = $0.08/lb of gain Now if we add up the costs for feed, operating costs, and yardage, we see a cost of gain of: Projected Cost of Gain â&#x20AC;&#x201C; $0.426/lb COG Feed + $0.12/lb COG Operating costs + $0.08/lb COG Yardage = $0.626/lb of gain Now we have successfully modeled projected cost of gain for this model.

110

Developing Return Prediction Models for Cattle Finishing Enterprises Previously, we looked at modeling cost of gain for feed, operating costs, and yardage. Once we have successfully modeled these costs, we need to develop a Value Return Prediction model that includes cost of gain so we can accurately predict the value returns on cattle before we even bring them into the yard. The value of developing and using these types of value prediction models is to help identify price break points and value spreads in the market. We’ll talk about that a little later. Let’s put a Value Return Prediction Model together: Here we will develop a total model based on purchase price and weight, feed costs, operating costs. Yardage, and expected returns. Let’s assume that we are looking to bring in a set of 640 lb steers at $117.60 off the cash market in AUG 10. We have already looked at calculating cost of gain, so we don’t need to repeat that discussion. In this first model, I have provided the itemized cost of gain values for you to look at, but subsequent models will only show an aggregated cost of gain value. We will contract that these cattle on the MAR 11 at $102.75/cwt. We will expect a negative basis of 2.75/cwt. So our actual expected price received for these cattle will be $100.00/cwt. A Weight in B Value in per lb. C Total value per head Receiving phase – 30 days Feed Protein Corn Roughage DDGS Other feed D Total Growing phase – 114 days Feed Protein Corn Roughage DDGS Other feed E Total Finishing phase – 71 days

640 $1.176 $752.64 AXB Expected performance = 2.5 lbs./day $/hd/day $0.00 $14.40 $11.15 $3.90 $1.12 Expected COG = $30.57 $0.40/lb. Expected performance = 3.5 lbs./day $/hd/day $0.00 $102.60 $27.25 $24.22 $2.09 Expected COG = $156.16 $0.39/lb. Expected performance = 3.5 lbs./day

111

H I J K L M N O P Q R S T U V W

Feed Protein Corn Roughage DDGS Other feed

$/hd/day $0.00 $97.98 $7.31 $19.52 $2.32

Total Operating Costs Veterinary Supplies Fuel Repairs Custom hire Trucking Marketing Operating interest Total Yardage Hired labor Farm insurance Utilities Interest Depreciation Miscellaneous Total Total Expenses Breakeven Weighted COG Finish weight Death loss Total gain Weighted ADG DOF Returns Futures contract price Basis Actual price out Gross out Commissions Net return

$127.13 $/hd $8.50 $8.60 $5.68 $7.10 $2.03 $19.90 $3.65 $29.94 $85.40 $/hd $14.00 $5.00 $5.00 $9.00 $18.00 $7.00 $58.00 $1,209.90 $0.90 $0.62 1350 0.8 710 3.35 215 $1.0275 -$0.0275 $1.0000 $1,350.0000 $17.50 $122.6000

Expected COG = $0.51/lb.

C+D+E+F+G+H I/L

K-A

L*T U-I-V

Now we can calculate breakevens and the expected return for these cattle, so when we actually go and buy the cattle, we know approximately where we need to be on the buy and the sell to make them work.

112

In this example, we are running a breakeven of $0.90/lb, so we know we have a little latitude to work with on both sides of the transaction. If we get them bought a little higher than anticipated, sold a little lower than anticipated, or more likely, run into a very wide negative basis, we have some room to work. If we look at a condensed model for quick calculations, it would look something like this: A B C D E F G I J H K L M N O P Q

Weight in Value in per lb. Total value per head Weighted ADG DOF Weighted COG Death loss Finish weight Total gain Total Expenses Breakeven Futures contract price Basis Actual price out Gross out Commissions Net return

640 $1.18 $752.64 3.35 215 $0.62 0.8 1350 710 $1,192.84 $0.88 $1.0275 $0.0275 $1.0000 $1,350.0000 $17.50 $139.6600

AXB

I-A (J * F) + C H/I

I*N O-H-P

This is the exact same model as the previous, itemized model, it is just structured a little different since it doesnâ&#x20AC;&#x2122;t have all of the itemized costs in it. Just recognize that the weighted cost of gain and weighted average daily gain is calculated using the methods we have discussed previously. Now that we have a value Return Prediction Model, we can easily go through and look at various classes of cattle, buy values and sell values to determine the highest profit potential cattle.

Developing Return Prediction Models for Backgrounding Calves Developing Value Return Models for backgrounding feeder calves or the calves on the ranch is no different than developing these models for finishing out fat cattle. 113

The only real difference is adjusting cost of gain to reflect the target ADG and making a calculation adjustment in the model to reflect the fact that when dealing with fat cattle we have a target end weight that we are shooting for and the gain model is built around that. When we background feeder cattle on short turns we are less concerned with a target end weight and more concerned with the number of days on feed it takes to maximize market value. So we adjust the end weight model by simply multiplying DOF by COG. Letâ&#x20AC;&#x2122;s say for example we are going to go grab some cattle coming off grass in SEP 10 on the cash market. Right now it looks like an 8 wt. heifer is going to run us about $107.00/cwt. The futures market on feeder cattle is running about $112.36/cwt. on the NOV 10. So if we can get some cattle bought within this price break and value spread and get them turned inside of 60 days, we stand to profit considerably. The real question is going to be the cost of gain on these cattle. We need to optimize ADG and COG rather than maximize it because most of the money to be made here is on the spread between the cash buy and the sell futures rather the weight gained. As long as we can manage the basis a little, we should be in good shape. If we try to maximize ADG, we will maximize COG and COG will wipe out most of the profit potential on these heifers because we arenâ&#x20AC;&#x2122;t feeding to a definite end point. We are just trying to capture a spread between the cash and futures market. So for this example, we will set a target ADG of 1.75 lbs/day which should give us a cost of gain around $0.52/lb. If we plug these values in the model, it will look like this:

A B C

Weight in Value in per lb. Total value per head

805 $1.07 $857.33

AXB 114

D E F G I J H K L M N

Weighted ADG DOF Weighted COG Death loss Weight out Total gain Total Expenses Breakeven Futures contract price Basis Actual price out

O P Q

Gross out Commissions Net return

1.75 60 $0.54 0.8 910 105 $914.03 $1.00 $1.1236 -$0.0275 $1.0961 $997.451 0 $17.50 $65.9260

(D * E) + A D*E (J * F) + C H/I

I*N O-H-P

So in this example, we will turn a $65.92/head profit on this turn of heifers. The real point here is that you can use these models to compare cash and futures prices to find the best value spreads on these feeder calves and then price the performance and days on feed to see if you can turn the spread into profit. Now, just to show what I’m talking about as far as optimizing ADG and COG rather than maximizing it on these types of transactions, let’s look at the exact same example, but now we are going to try to squeeze as much gain out of these heifers as we can within that 60 day window. So in this model we will set a target ADG of 3.0 lbs/day which will give us a COG of $0.82/lb of gain. Everything else is the same as in the previous example: Now you can that by maximizing ADG, the COG chewed up $8.69/head. So we didn’t really need to squeeze 3.0 lbs/day of performance out of these heifers because it ended up costing us an additional $8.69/head. This is why optimizing the gain on feeders is more important than maximizing it. If we roll into the next contract month with more DOF, then it might or might not pay to target higher performance and COG. You have to run the pencil and figure that out based on the contract futures price and expected basis.

A B

Weight in Value in per lb.

805 $1.07 115

C D E F G I J H K L M N O P Q

Total value per head Weighted ADG DOF Weighted COG Death loss Weight out Total gain Total Expenses Breakeven Futures contract price Basis Actual price out Gross out Commissions Net return

$857.33 3.0 60 $0.82 0.8 985 180 $1,004.93 $1.02 $1.1236 $0.0275 $1.0961 $1,079.6585 $17.50 $57.2335

AXB

(D * E) + A D*E (J * F) + C H/I

I*N O-H-P

116

Economics of Leasing vs. Buying Assets

How Much Can I Pay to Lease Grass? 117

As we have discussed several times throughout the course of the year, the cost of grass is quickly becoming a bigger issue for cow outfits than the cost of winter feed. The average cost per AUM on deeded acres was $23.57 according to the 2008 SDSU Cow-Calf Business Report and average cost of leased acres was $38.80 per AUM. These are staggering numbers when you compare grass cost costs to a mere 5 years ago. In any event, this is creating some real problems for those trying to enter the cow-calf business or trying to expand. So the real question is how do I figure out how much I should pay to lease grass? This is kind of a tricky question to get at because it really depends on one thing: how many acres of grass do you currently own. The reason that the number of acres you currently own is important is because of the economy of scale. The more acres you currently own, the more acres you have to dilute expensive grass leases across on an acre basis. In our current price-cost structure in the cow-calf business, a cow-calf pair can not pay for rented grass. Leased grass is simply too expensive and in too high of demand. So effectively, you have to dilute part of that lease cost across the extra cowcalf units you run on the leased grass and part of the lease cost across all of the other cow-calf units run on deeded acres. This becomes a real conundrum for young producers trying to get into the business either with their parents or on their own because they are going to have to either add enough value to their calves to cover their grass lease cost, or they are going to have to rely heavily on the deeded acres their parents own to dilute the cost of the leased grass. I donâ&#x20AC;&#x2122;t know that I have any earth-shattering advice for how to deal with this situation, but I can show you how to calculate the breakeven grass lease price you can pay on a set of cows. In our first example, we are going to look at a scenario where a person that is just getting started in the cow business is trying to rent grass to run 25 pairs. For this example we will put this person somewhere in west-central South Dakota on mixedgrass range where the stocking rate on summer grass runs about 12 acres to the pair. The first thing we have to figure out is the projected annual cow cost on these pairs without the cost of grass. The 2008 SDSU Cow-Calf Business Report shows that average annual cow cost runs about $353.45 per cow without any deeded acres of grass, so we will start with that for a cow cost. Next we need to adjust our cow cost for weaning percentage. Not every cow is going to get her calf to the weaning trap so we have to take into consideration that the 118

calves that do make it to the wean trap are going to have to cover the cost of the cows that didnâ&#x20AC;&#x2122;t get a live calf to weaning. You can see in the following table how that is calculated. Now that we have an adjusted cow cost, we are going to calculate this on a whole herd basis rather than on a per head basis so we will multiply the adjusted cow cost by the number of cows to get total herd cost. A B C

No. of cows Annual cost per cow less grass cost Weaning %

D E F

Adjusted annual cow cost Total cow cost Average weaning weight

G H I J K L

Total weaned weight Value of weaned weight Gross value Net value Total leased acres Breakeven lease price per acre

25 $353.45 92 B x ((100$381.73 C)/100)+B $9,543.15 D x A 525 (A x 12075 (C/100)) x F $1.25 $15,093.75 G x H $5,550.60 I - E 300 $18.50 J / K

Next we need to project what the average weaning weight on our calves is going to be. Obviously, that is pretty subjective, but we will just say that our calves will wean off at 525 pounds. So we get calculate total weight weaned by using the formula in row G. Remember, only 92% of our cows weaned a calf so we need to take that into consideration. Now we need to project a price per pound for those calves so we can estimate end value. As of right now, Hub City Livestock in Aberdeen, SD is reporting 525 weight calves at about $1.25 per pound. So if we multiply the price per pound in row H by the total weaned weight in row G we get the gross value of the calf crop in row I. Now we need to take the gross value of the calf crop in row I and subtract the total herd cost in row E. This gives us the net value of the calf crop in row J. Now that we have net value of the calf crop, we can calculate a breakeven grass lease price. For this example, let say we are trying to lease 300 acres to run these 25 cows on. So to calculate the breakeven lease price per acre, divide the net value of the calf crop in row J by the total leased acres in row K. 119

This value is the maximum price you can afford to pay per acre to breakeven on these cows. So obviously, to make any money, you will need to lease the grass for less than this price. As you can see, it will be pretty difficult, even in west-central South Dakota to find a grass lease for less than $18.50 per acre. I’m sure it can be done in some instances, but on the average, it will be difficult. That is why it is hard for a person to get a start in the cow business. There is no such thing as cheap grass anymore. Now let’s look at an example where a young person is trying to get into the cow business with their parents or an outfit is trying to expand their herd with some leased acres. Either way, the calculations are the same. In this example, let’s assume that the family already has a herd of 325 cows and that the young person wants to come back home and start a herd with 25 cows. In order to add another 25 cows to the herd, the family is going to need an additional 300 acres of grass to run on. So let’s figure out what the breakeven grass lease price for this outfit. The big difference between this example and the last example is that we need to use a cow cost that reflects the fact that this family does have deeded acres that need to be included as fixed costs. Therefore, our cow cost is now $421.39 per cow. We still need to adjust that cow cost for weaning percentage in rows C and D. but the rest of the calculations are the same as the previous example. Our breakeven lease price per acre for grass now is $173.42. The big difference here is that because the young producer is working with their family, the cost of the grass is split between the 25 new cows the young person brought in and the 325 cows already in the herd running on deeded acres.

A B

No. of cows Annual cost per cow including grass cost of deeded acres

350 $421.39

120

Weaning %

D E F

Adjusted annual cow cost Total cow cost Average weaning weight

G H I J K L

Total weaned weight Value of weaned weight Gross value Net value Total acres Breakeven lease price per acre

B x ((100$455.10 C)/100)+B $159,285.42 D x A 525 (A x (C/100)) x 169,050.0 F $1.25 $211,312.50 G x H $52,027.08 I - E 300 $173.42 J / K

It shouldnâ&#x20AC;&#x2122;t be too difficult to find grass that leases for less than $173.42 to turn a profit on these cows. In fact, this is a great way for the young person to build some equity in their herd because their parents herd can help offset some of the cost of the grass with minimal effect on their short-term bottom line. It works the same way for an outfit that is simply trying to expand their herd. That is why bigger outfits can afford to pay a lot for grass leases that a young person or someone trying to get into the cow business just canâ&#x20AC;&#x2122;t afford.

Is it Cheaper to Buy or Lease Equipment?

121

The decision of whether to buy or lease equipment for a ranching outfit is a tricky one at best. When you buy equipment, you pay a lot up front, you have higher annual payments, and you have maintenance and repair costs to deal with. However, you also get to claim depreciation on the machine and when it is paid off you at least have some level of equity in the machine, even if that value is just salvage. When you lease equipment, you pay a lower lease payment than the equivalent principal and interest payment if you bought it, you are only responsible for some of the maintenance and repair costs, and when the thing is worn out or a newer model comes on the market you can just turn the old piece in and lease a newer one. The downside of leasing of course is you don’t get to claim any depreciation and at the end of the day you have built no equity in anything (except hopefully your business). So the question becomes, how do I know if I should buy or lease a piece of equipment? Some of that is going to depend on what it is you are looking to buy or lease. Items with huge sticker prices, how quickly the item wears out or needs to be updated, etc. Since these types of working assets are tremendous expenses to any type of business, looking at the cost of owning or buying an asset versus the cost of leasing it is a tremendously important management decision that requires precise knowledge of what it is going to cost the business to own an assets and what it will cost the business to lease an asset. Furthermore, the decision making process becomes more complex when you are looking at replacing assets that you already own, which is probably a more common situation. Let’s look at an example: Let’s look at owning or leasing tractors. But instead of looking at buying or leasing a new machine, we are going to look at buying or leasing a new machine or keeping the old one that we have. Let’s assume we currently have a 1983 model John Deere 4230 and we are trying to decide to keep this machine running for a few more years or replace it with a new one. And if we replace it with a new one, should we buy the new one or lease a new one from the dealer. Keeping what we’ve got So to get this started, we first need to figure out what it costs per year to keep the old tractor running. In this example we are going to say that last year it cost us $4805.26 per year to own and operate this 1985 JD 4230. We use this tractor for about 250 hours last year to pull the feed wagon, run the baler, and things like that. That 122

comes to $19.22 per hour in costs. We really don’t need too much of an upgrade in horsepower so we will look at a JD 6330 as a replacement tractor. According to the dealer, a JD 6330 will cost us about $65,000 brand new and they would be willing to lease it for $10 per hour. So how does this analysis shake out? Well, since we have established what the cost of operating the old tractor is, we now need to take into consideration that the cost to keep it running in the future is going to increase. So we will estimate that on the average over the next 7 years the cost of keeping the old tractor running is going to increase by about 1.5% per year. Keep a 1985 JD 4230 running

Year 1 2 3 4 5 6 7 Salvage

Cost $4,805.26 $4,877.35 $4,950.50 $5,024.75 $5,100.12 $5,176.62 $5,254.26 $35,188.86 $12,500.00 $22,688.86

Discount Rate 1.060 1.124 1.191 1.262 1.338 1.419 1.504 0.627

Present Value $5,093.58 $5,482.14 $5,896.05 $6,341.23 $6,823.96 $7,345.62 $7,902.41 $44,884.99 $7,837.50 $37,047.49

The other thing we need to take into consideration is that even though we calculated the future cost of keeping the tractor running in today’s dollars, the future cost is actually going to be more because a dollar today is going to be worth less in the future because of inflation. So we need to discount the cost in today’s dollars to reflect what that value actually will be for each year into the future. To do this we use a simple discount factor from a Future Value Interest Factor Table (FVIF) which is shown below.

123

So we will use a future interest factor of 6% because when we compare this to borrowing money and buying the tractor, we will have to borrow the money at 6% interest. When we look at the FVIF at 6% for year 1, we see a factor of 1.060. So we will multiply the cost for year 1 of $4,805.26 by 1.060. That is the future value of the cost in next yearâ&#x20AC;&#x2122;s dollars. For year two, the factor is 1.124, so we multiply the year two cost by the year 2 factor and so on. Now we can simply add the present value for each year to get the total expected future operating cost value for the tractor for the next 7 years. The next thing we need to consider is the fact that the salvage value in todayâ&#x20AC;&#x2122;s dollars will actually be worth less 7 years into the future because of inflation. Therefore we need to discount the salvage value using a discount factor from a Present Value Interest Factor Table which is shown below.

124

125

126

So we look under 6% at year 8 because we will sell the machine after 7 years of additional use. That factor is 0.627. So we multiply the salvage value of the tractor which we will say is $12,500 by 0.627 and we get what that value actually is 8 years from now. So if we take the total expected future operating cost value for the tractor for the next 7 years and subtract the discounted salvage value, we find that the future cost value to keep the tractor for 7 years and then sell it off is $37,047.49. Leasing Now let’s look at leasing a JD 6330 for $10 per hour from the dealer. The annual lease cost at $10 per hour for 250 hours per year will run $2,500 per year. Plus you will have fuel, maintenance, and some repairs over time. We’ll call that about $3,125 per year. So the total lease and operating expenses on the machine per year comes to $5,625. Again, we have to discount these costs using a Present Value Interest Factor to take into account the value of these costs in the future. We will use 6% again to keep the analysis comparable. Lease a JD 6330 Year 1 2 3 4 5 6 7

Cost $5,625.00 $5,625.00 $5,625.00 $5,625.00 $5,625.00 $5,625.00 $5,625.00 $39,375.00

$10/hr Discount Rate 0.943 0.890 0.840 0.792 0.747 0.705 0.665

Present Value $5,304.38 $5,006.25 $4,725.00 $4,455.00 $4,201.88 $3,965.63 $3,740.63 $31,398.75

Now we will add up the present values for each year to get the total future cost value of leasing and operating this tractor. So over 7 years it will cost us about $31,398.75 to lease this tractor. Buying If we consider buying this same tractor, let’s look at how that compares with leasing and keeping the old tractor for 7 more years.

127

First, the dealer quoted us a price of $65,000 on a new machine. But if we sold the old machine and used that towards the new tractor, we would need to come up with $52,500 to get it bought. So we go to the bank and borrow $52,000 at 6% interest for 7 years. So let’s amortize out the payments over 7 years by taking the loan amount and multiplying by the amortization factor from the table below ($52,500 x .17914). So our annual principal and interest payment over the 7 years will be $9,404 per year. Now let’s add in our operating costs of $3,125 per year so we get a total payment and operating cost of $12,529. Remember though, our costs in the future need to be discounted into the future so use the Present Value Interest Factor Table to discount the cost for each year. Buy a JD 6330 Year Cost 1 $12,529.00 2 $12,529.00 3 $12,529.00 4 $12,529.00 5 $12,529.00 6 $12,529.00 7 $12,529.00 $87,703.00 Salvage

$30,000.00

Total

$57,703.00

$65,000 @ 6% Discount PV 0.943 $11,814.85 0.890 $11,150.81 0.840 $10,524.36 0.792 $9,922.97 0.747 $9,359.16 0.705 $8,832.95 0.665 $8,331.79 $69,936.88 0.627

$18,810.00 $51,126.88

Now let’s add up the present values for each year to get the total future cost value of buying the tractor. So over the 7 years, it will cost $69,936.88 to own that tractor. But we will get some of this back when we sell or trade-in the machine after the seven years. So if we look at a salvage value of $30,000 in today’s dollars and discount 8 years in the future when we sell the machine, we’ll get back about $18,810 of value. So at the end of the term, we will have put $51,126.88 into owning this tractor. Summary

128

So in this example, it looks as though leasing this machine is going to be far and away the best option for the short-term. Looking at the loner-term however, the value of owning the machine is in the salvage value or trade-in value that you have built equity into. The challenge of course is the fact that in 7 years you will have to have the cash to trade this machine in for a new one or keep using it past its depreciable life. Using the machine past its depreciable life is ok, but reduces your equity further over time and will still have to be replaced eventually.

129

Economics of Share Agreements on Cows Share agreements on cows are probably not as common as they once were. However, running cows on shares is still a very important tool for some ranchers that need alternative financing, need to lower short-term investment, or are simply looking to expand on a short-term basis without a large investment. Furthermore, I see share arrangements on cows as a very good opportunity for young producers trying to get into the business who have access to some grass, infrastructure, and feed through their parents’ outfit, but don’t have the capital or equity needed to own the cows themselves. A share arrangement with an investor (or their parents) can create an opportunity for the young person to generate some “sweat equity” and get a herd of their own started. Theoretically, share arrangements on cows is pretty simple, however, in reality, in is a little more complicated, especially if the share agreement doesn’t address some of the situations that tend to come up in these types of arrangements. A typical share arrangement is one called an equitable share arrangement where the person that owns the cows and the person that runs the cows share calf income in the same proportion that they share the production costs. So if the owner provides 25% of the production costs and the rancher provides 75% of the production costs, then the owner of the cows should receive 25% of the income and the rancher should receive 75% of the income. Generally, this type of arrangement works pretty well because not only does each party get a proportional share of the net income, but the annual return on investment to each party is fairly equal. Let’s look at an example equitable share arrangement on a set of cows. This example is on a per head basis:

130

1 Total Costs

Owner

Working

of Cows

Rancher

Equations

Feed Cost Pasture

$141.42

$0.00

$141.42

Feed

$188.42

$0.00

$188.42

$33.47

$0.00

$33.47

Feed supplements Mineral Total Feed Cost

$23.81

$0.00

$23.81

$387.12

$0.00

$387.12

Operating Costs Breeding fees

$0.00

$23.12

$0.00

$23.12

Supplies

$4.78

$0.00

$4.78

Fuel & Oil

$6.13

$0.00

$6.13

Repairs

$2.58

$0.00

$2.58

Trucking

$5.62

$0.00

$5.62

Operating Interest

$7.01

$0.00

$7.01

$49.24

$0.00

$49.24

Hired Labor

$2.91

$0.00

$2.91

Insurance

$3.84

$0.00

$3.84

Utilities

$4.94

$0.00

$4.94

Veterinary

Total Operating Costs Fixed Costs

Interest

$8.71

$0.00

$8.71

Depreciation

$17.48

$0.00

$17.48

Depreciation on Cows

$35.71

$0.00

Depreciation on Bulls

$9.38

$0.00

Depreciation on Heifers

$0.00

Miscellaneous

$3.77

$0.00

$3.77

$86.74

$45.09

$41.65

$523.10

$45.09

$478.01

91%

Total Fixed Costs A

Total Cost

Weaning %

Percent Contribution of Cost

Average Weaning Weight

Average Market Price

Gross Income

Net Income

Share by contribution of cost

92% A2 / A1 and A3 / A1

600 $1.16 $696

D1 x E1

$172.90

F1 â&#x20AC;&#x201C; A1

$59.99

$636.01

(F1 x C2)+ A2 and (F1 x C3) + A3

As you can see from the worksheet above, the working rancher supplies all of the feed, non-feed operating costs, and fixed assets to the arrangement. The owner of 131

the cows supplies the cows and bulls and is charged the depreciation on the breeding stock. It may seem like the owner of the breeding stock is not contributing much to the arrangement but remember, we are only charging the depreciation of the breeding stock to the owner, we are not including the entire cost of the animal because eventually the owner will get the salvage value back, in cash, when the breeding animal is sold as a cull. When we calculate the percent contribution of each party to the arrangement, in this example we see that approximately 9% of the total cost is supplied by the owner of the cows and 91% is supplied by the working rancher. The real things you have to watch out for in these types of arrangements are to make sure that both the working rancher and the cow owner know what their actual costs are. Often times, both parties try to guess what their contribution is to the arrangement and somebody ends up getting the short end of the stick. In order to accurately calculate cost, gross return, and net return, we need to calculate these on a whole-herd basis. So we will use the same cost per head, but letâ&#x20AC;&#x2122;s look at a herd of 100 cows in a share arrangement:

Owner

Working

132

Total Costs

of Cows

Rancher

Equations

Feed Cost Pasture

$14,142.00

$0.00

$14,142.00

Feed

$18,842.00

$0.00

$18,842.00

Feed supplements

$3,347.00

$0.00

$3,347.00

Mineral

$2,381.00

$0.00

$2,381.00

$38,712.00

$0.00

$38,712.00

Total Feed Cost Operating Costs Breeding fees

$0.00

$2,312.00

$0.00

$2,312.00

Supplies

$478.00

$0.00

$478.00

Fuel & Oil

$613.00

$0.00

$613.00

Repairs

$258.00

$0.00

$258.00

Trucking

$562.00

$0.00

$562.00

Operating Interest

$701.00

$0.00

$701.00

$4,924.00

$0.00

$4,924.00

Hired Labor

$291.00

$0.00

$291.00

Insurance

$384.00

$0.00

$384.00

Utilities

$494.00

$0.00

$494.00

Interest

$871.00

$0.00

$871.00

Depreciation

$1,748.00

$0.00

$17.48

Depreciation on Cows

$3,571.00

$0.00

Depreciation on Bulls

$938.00

$9.38

$0.00

$377.00

$0.00

$377.00

$8,674.00

$3,580.38

$2,434.48

$52,310.00

$3,580.38

$46,070.48

91%

Veterinary

Total Operating Costs Fixed Costs

Depreciation on Heifers Miscellaneous Total Fixed Costs A

Total Cost

Weaning %

92%

Total calves

Percent Contribution of Cost

Average Weaning Weight

Average Market Price

A2 / A1 and A3 / A1

600 $1.16

Gross Income

$64,032.00

DxE

Net Income

$11,722.00

F-A

Share by contribution of cost

$5,519.41

$58,512.59

(F x C1)+ A1 and (F x C2) + A2

Now we can look at the cow owner and working ranchers share adjusted for weaning percentage. With a 9% share arrangement, it doesnâ&#x20AC;&#x2122;t appear that the owner of the cows is making much compared to the working rancher. Keep in mind the level of investment between these two partners. The owner of the cows has invested approximately $110,000 in the cow herd. So at a 9% share arrangement, his annual return is about 133

$1,054. Assuming this return is average, over the 7 years of this investment however, the owner of the cows with see a 6.6% return on his investment. Thatâ&#x20AC;&#x2122;s pretty good even by Wall Street standards. The working rancher though, has much more invested in his outfit in terms of land, equipment, etc. Even though the working rancher is receiving 91% of the annual income, his return on investment over the 7 years of this arrangement is only about 0.75%. But , if these two partners dissolved their agreement and the rancher went and bought the cows himself, assuming other costs stayed about the same, his return on investment over 7 years would only be about 1.3%. So the working rancher doesnâ&#x20AC;&#x2122;t gain a whole lot in owning the cows because he only is out about $1054 per year, and he doesnâ&#x20AC;&#x2122;t have to have the investment in the cows. The point here is that if a working rancher wants to team up with a young person to help them get started in the cow business, they can do it with fairly minimal loss of annual income because the owner of the cows is still paying the working rancher a fee for running the cows and the owner of the cows is building equity through their cow herd.

134

Economics of Marketing Decisions

Optimizing Cull Cow Value As you are probably aware, 15-30% of the income from the cow-calf enterprise comes from the sale of the cull cow. So it goes without saying that the more value you 135

we can milk out of a cull, the more initial development cost we can offset simply by optimizing value at the time of disposal. As I’ve talked about frequently in our discussions here, and will continue to discuss into the foreseeable future, this is a critical concept for cow-calf outfits. Optimizing the value of cull cows is certainly not news. However, understanding the economics behind optimizing value is worth taking a look at. For a refresher on some of the pertinent literature associated with the logistics behind feeding cull cows, check out this article written by Cody Wright from SDSU. http://beef.unl.edu/beefreports/symp-2005-20-XIX.pdf The real leverage point in economically feeding cull cows lies with understanding how slaughter cows are valued in the market place. As Dr. Wright described in his article, generally cows are valued based on overall supply/demand, age and flesh. The following market trend of slaughter cows at Sioux Falls is very telling, but not that surprising:

The window to maximize price comes roughly between March and August. Now, back to how slaughter cows are valued. Typically, the average price is based on the average cow, we’ll call her a 1150# @ $59.50/cwt. So she’s a little thin and gangly, but in pretty good shape. What is important to understand is that as this cow becomes fleshier, she is worth more, but only up to a point. After the price break threshold, she in effect 136

becomes discounted for being too fleshy. Example: Our average cow at 1150# @ $59.50 yields $684.25/head Now let’s say we take this 1150# cow and put her on feed for 60 days. She’ll gain about 3 lbs/day with a cost of gain of $0.75/lb. Now that we have put an extra 180 lbs. on her and she’s weighing about 1330lbs. she’ll probably valued somewhere around $65.50/cwt. So she will now gross 1330lbs. @ $65.50 yields $871.15 Using our Return on Feed Value calculator we see that with a $0.75 cost of gain, she nets about $51.90 more than she would have if we didn’t feed her.

A B C D E F G H I

Weaning weight Creep feed used (lbs) $/lb at weaning Calf value Value/lb of added weight Feed cost/lb of added weight Gross value of added weight Cost of added gain Return/head from creep feeding

1 No Feed 1150

Calculation Feed s 1330 1200 $0.595 $0.655 $684.25 $871.15 A x C $1.04

G/(A2 - A1)

$0.75

Table 1

$186.90 D2 - D1 $135.00 (A2 - A1) x F $51.90

G-H

So, if adding 180 lbs. to her before we sell her is good, then adding 350 lbs. to her is better right? Not so much. Here’s why: Once she has been fed to a fleshy appearance and she falls within the weight/value grid, any additional weight is paid for at the market place at the same price. Meaning, there is a price threshold where the market doesn’t pay additional 137

value. Example: Same average cow at 1150# @ $59.50 yields $684.25/head Now let’s say we take this 1150# cow and put her on feed for 120 days. She’ll gain about 3 lbs/day with a cost of gain of $0.75/lb. Now that we have put an extra 360 lbs. on her and she’s weighing about 1510lbs. she’ll still be valued somewhere around $65.50/cwt. So she will now gross 1510lbs. @ $65.50 yields $989.05 Using our Return on Feed Value calculator we see that with a $0.75 cost of gain, now she only nets about $34.80 more than she would have if we didn’t feed her.

A B C D E F G H I

Weaning weight Creep feed used (lbs) $/lb at weaning Calf value Value/lb of added weight Feed cost/lb of added weight Gross value of added weight Cost of added gain Return/head from creep feeding

1 No Feed 1150

2 Calculation s

Feed 1510 1200 $0.595 $0.655 $684.25 $989.05 A x C $0.85

G/(A2 - A1)

$0.75

Table 1

$304.80 D2 - D1 $270.00 (A2 - A1) x F $34.80

G-H

So we lost about $17.10/head because we fed her more feed than what the market was willing to pay for. So in effect our additional feed bill chewed up any margin made on the extra weight.

138

The other thing you have to watch out for is the spread between thin and fleshy. In our example the spread was about $6.00/cwt. That is pretty typical this time of year when supply is pretty tight, but towards fall when supply increases, not only will the value drop, but the spread will tighten. You have to take this into consideration. Letâ&#x20AC;&#x2122;s look at the exact same example, but now the spread will shrink to $4.00/cwt.

A B C D E F G H I

Weaning weight Creep feed used (lbs) $/lb at weaning Calf value Value/lb of added weight Feed cost/lb of added weight Gross value of added weight Cost of added gain Return/head from creep feeding

1 No Feed 1150

Calculation Feed s 1510 1200 $0.595 $0.635 $684.25 $958.85 A x C $0.76

G/(A2 - A1)

$0.75

Table 1

$274.60 D2 - D1 $270.00 (A2 - A1) x F $4.60

G-H

Just by shrinking the spread between thin and fleshy, our additional profit over not feeding these cows shrank from $37.80/head to $4.60/head. Now feeding these cows is probably not worth the hassle. As a general rule, putting 180-220 lbs. on an average cow is probably going to most effectively optimize her value. You can adjust rate of gain with what you feed her so you have some market time flexibility built in to your system to take advantage of price point thresholds and thin/fleshy spreads.

Identifying Value Spreads in the Cash Feeder Cattle Market One of the real places you can find value in the feeder cattle market, whether you are rancher or feeder is identifying value spreads. There are a couple of different mechanisms that can create value spreads. The first mechanism is finding value differences (or inefficiencies) between the cash market and the futures market. 139

There are always value spreads between the cash and futures because they basically are tied together but the futures market moves minute by minute on every trading day whereas there is a lag time before the cash market responds to a particular move in the futures market. Usually this lag is a couple days to a week depending how much variation is in the futures market at any given time. A person that is doing their homework can cash in big time on finding value spreads in this fashion. Let me show you show actual examples from earlier this year: Letâ&#x20AC;&#x2122;s say for example that a cattle backgrounder was thinking about buying a couple loads of steers coming off grass in September, 2010. As the buyer looked at potential marketing options, the buyer noticed that the NOV 10 futures on feeder cattle were trading at $112.80/cwt.. So if the buyer bought 8 wt. steers out of Aberdeen that week he was likely to pay about $114.52/cwt. With a target ADG of 2.0 lbs/day and a projected COG of $0.58/lb of gain, the model looked like this:

A B C D E F

Weight in Value in per lb. Total value per head Weighted ADG DOF Weighted COG

805 $1.1452 $921.89 2 85 $0.58

AXB

140

G I J H K L M N O P Q

Death loss Weight out Total gain Total Expenses Breakeven Futures contract price Basis Actual price out Gross out Commissions Net return

0.8 975 170 $1,020.49 $1.0467 $1.1280 $0.0150 $1.1130 $1,085.1750 $17.50 $47.1890

(D * E) + A D*E (J * F) + C H/I

I*N O-H-P

So with this type transaction, the cattle had the potential to profit $47.18/head. Thatâ&#x20AC;&#x2122;s a pretty healthy profit off of an 85 day turn of steers. So the real value spread here lies in the fact that there is only a negative spread of $1.70/cwt. between the cash and futures market. That is a really good spread. However, before the buyer actually went and bought the cattle, he checked in on LRP rates to see what insurance on a floor price would be. What he found was that on that day in September, he could buy a 13 wk policy that would mature in November for a floor price of $116.00/cwt for a premium of $3.06/cwt or $24.48/head on an 8 wt. steer. Buying this price floor insurance, he could cover against a drop in prices but could still cash in on a rise in prices above $116.00/cwt.

A B C D E

Weight in Value in per lb. Total value per head Weighted ADG DOF

805 $1.1452 $921.89 2 85

AXB

141

F G I J H K L M N O P Q

Weighted COG $0.58 Death loss 0.8 Weight out 975 Total gain 170 Total Expenses $1,020.49 Breakeven $1.0467 Futures contract price $1.1600 Basis $0.00 Actual price out $1.1600 Gross out $1,131.0000 Commissions/Premiums $26.75 Net return $83.7640

(D * E) + A D*E (J * F) + C H/I

I*N O-H-P

The buyer saw that his model was showing a profit of $83.76/head using the LRP insurance rather than the short hedge on the NOV 10 futures. So naturally, since there was a positive value spread of $1.50/cwt. the buyer decided to go with the LRP insurance. Now it getâ&#x20AC;&#x2122;s interesting because what actually ended up happening was the 8 wt. cattle were purchased on September 8, 2010 at Hub City Livestock in Aberdeen, SD for $113.89/cwt. Immediately, the buyer bought the LRP insurance policy for $116.00/cwt. The buyer fed the calves for 85 days as planned and turned them on November 17 for $113.26/cwt. So when it came time for the LRP insurance to pay out when the policy came due and had an actual ending value of $112.39 because the price was below the $116.00/cwt. floor price and it paid out an additional $0.87 basis. So the final transaction looked like this:

A B C D E

Weight in Value in per lb. Total value per head Weighted ADG DOF

805 $1.1452 $921.89 2 85

AXB

142

F G I J H K L M N O P Q

Weighted COG $0.58 Death loss 0.8 Weight out 975 Total gain 170 Total Expenses $1,020.49 Breakeven $1.0467 Futures contract price $1.1600 Basis $0.0087 Actual price out $1.1687 Gross out $1,139.4825 Commissions/Premiums $26.75 Net return $92.2465

(D * E) + A D*E (J * F) + C H/I

I*N O-H-P

So the final tally shows a profit of $92.24/head. Now you can’t really predict a positive basis like this. It really is just a bonus. You can see that in the first model using the LRP insurance, the basis was actually set a $0/cwt because there is no way to accurately predict a basis in these LRP contracts. So there is one way to asses value spreads in the market. The next way to find value spreads is to assess different weight classes and values of cattle. In any market, there are items that are over-valued and under-valued; as a buyer or seller, it your goal to find those value spreads and cash in on them. Let’s look at some examples of steers from the Fort Pierre cash market last Friday (November 19, 2010. Within this market, we can find huge differences between weight and value that don’t always match the traditional weight-price slide that is standard in any cash cattle market. Steers 520# @ $136.36 577# @ $130.47 611# @ $125.58 Futures Contract - JAN 11 - $118.275 So if we look at how these cattle work in our Return Value Model, we can start to see the value spreads: A B C D

Weight in Value in per lb. Total value per head Weighted ADG

520 $1.3636 $709.07 2.5

AXB 143

E F G I J H K L M N

DOF Weighted COG Death loss Weight out Total gain Total Expenses Breakeven Futures contract price Basis Actual price out

O P Q

Gross out Commissions Net return

A B C D E F G I J H K L M N

Weight in Value in per lb. Total value per head Weighted ADG DOF Weighted COG Death loss Weight out Total gain Total Expenses Breakeven Futures contract price Basis Actual price out

O P Q

Gross out Commissions Net return

A B C

Weight in Value in per lb. Total value per head

60 $0.65 0.8 670 150 $806.57 $1.2038 $1.1828 $0.0050 $1.1778 $789.092 5 $17.50 -$34.9795 577 $1.3047 $752.81 2.5 60 $0.65 0.8 727 150 $850.31 $1.1696 $1.1828 $0.0050 $1.1778 $856.224 3 $17.50 -$11.5876

(D * E) + A D*E (J * F) + C H/I

I*N O-H-P

AXB

(D * E) + A D*E (J * F) + C H/I

I*N O-H-P

611 $1.2558 $767.29

AXB 144

D E F G I J H K L M N O P Q

Weighted ADG DOF Weighted COG Death loss Weight out Total gain Total Expenses Breakeven Futures contract price Basis Actual price out Gross out Commissions Net return

2.5 60 $0.65 0.8 761 150 $864.79 $1.1364 $1.1828 $0.0050 $1.1778 $896.2678 $17.50 $13.9740

(D * E) + A D*E (J * F) + C H/I

I*N O-H-P

So we can see from these models that a short 60 day turn on these calves isnâ&#x20AC;&#x2122;t going to work very well, steers right now are way over valued for this type of transaction. However, letâ&#x20AC;&#x2122;s look at the exact same set of steers on a 120 day turn and a MAR 11 at $119.00/cwt. A B C D E F G I J H K L M N

Weight in Value in per lb. Total value per head Weighted ADG DOF Weighted COG Death loss Weight out Total gain Total Expenses Breakeven Futures contract price Basis Actual price out

O P Q

Gross out Commissions Net return

520 $1.3636 $709.07 2.5 120 $0.65 0.8 820 300 $904.07 $1.1025 $1.1900 $0.0050 $1.1850 $971.700 0 $17.50 $50.1280

AXB

(D * E) + A D*E (J * F) + C H/I

I*N O-H-P

145

A B C D E F G I J H K L M N O P Q

Weight in 577 Value in per lb. $1.3047 Total value per head $752.81 Weighted ADG 2.5 DOF 120 Weighted COG $0.65 Death loss 0.8 Weight out 877 Total gain 300 Total Expenses $947.81 Breakeven $1.0807 Futures contract price $1.1900 Basis $0.0050 Actual price out $1.1850 Gross out $1,039.2450 Commissions $17.50 Net return $73.9331

A B C D E F G I J H K L M N O P Q

Weight in 611 Value in per lb. $1.2558 Total value per head $767.29 Weighted ADG 2.5 DOF 120 Weighted COG $0.65 Death loss 0.8 Weight out 911 Total gain 300 Total Expenses $962.29 Breakeven $1.0563 Futures contract price $1.1900 Basis $0.0050 Actual price out $1.1850 Gross out $1,079.5350 Commissions $17.50 Net return $99.7412

AXB

(D * E) + A D*E (J * F) + C H/I

I*N O-H-P

AXB

(D * E) + A D*E (J * F) + C H/I

I*N O-H-P

So you can see in both sets of models, there is a distinct difference on how different weight classes of cattle are valued in the market place and finding these values is the goal before you even buy the cattle. If I were going to buy a few loads of steers, I wouldnâ&#x20AC;&#x2122;t tie up valuable yard space with 5 wt cattle because the are simply over valued

146

compared to 6 wt. cattle. Of course I am getting more return out of a 120 day turn on the MAR 11 than I am on a 60 day turn on the JAN 11, but that is beside the point. The point is that either way, right now 5 wt. steers are way over valued in the market compared to 6 wt cattle. Now if you are looking to finish these calves out, then you have an entirely different scenario to evaluate. The other value spread you tend to find is between steers and heifers. Heifers, at least right now, are so grossly undervalued in the cash market it is almost laughable, but Iâ&#x20AC;&#x2122;m not laughing too loud because there is a lot of money to be made here. Here are the 60 day turns on heifers for comparison: A B C D E F G I J H K L M N

Weight in Value in per lb. Total value per head Weighted ADG DOF Weighted COG Death loss Weight out Total gain Total Expenses Breakeven Futures contract price Basis Actual price out

O P Q

Gross out Commissions Net return

518 $1.2392 $641.91 2.5 60 $0.65 0.8 668 150 $739.41 $1.1069 $1.1828 $0.0050 $1.1778 $786.737 0 $17.50 $29.8314

AXB

(D * E) + A D*E (J * F) + C H/I

I*N O-H-P

147

A B C D E F G I J H K L M N

Weight in Value in per lb. Total value per head Weighted ADG DOF Weighted COG Death loss Weight out Total gain Total Expenses Breakeven Futures contract price Basis Actual price out

O P Q

Gross out Commissions Net return

A B C D E F G I J H K L M N

Weight in Value in per lb. Total value per head Weighted ADG DOF Weighted COG Death loss Weight out Total gain Total Expenses Breakeven Futures contract price Basis Actual price out

O P Q

Gross out Commissions Net return

575 $1.1934 $686.21 2.5 60 $0.65 0.8 725 150 $783.71 $1.0810 $1.1828 $0.0050 $1.1778 $853.868 8 $17.50 $52.6638 615 $1.1175 $687.26 2.5 60 $0.65 0.8 765 150 $784.76 $1.0258 $1.1828 $0.0050 $1.1778 $900.978 8 $17.50 $98.7163

AXB

(D * E) + A D*E (J * F) + C H/I

I*N O-H-P

AXB

(D * E) + A D*E (J * F) + C H/I

I*N O-H-P

148

Here are the 120 day turns on heifers for comparison: A B C D E F G I J H K L M N

Weight in Value in per lb. Total value per head Weighted ADG DOF Weighted COG Death loss Weight out Total gain Total Expenses Breakeven Futures contract price Basis Actual price out

518 $1.2392 $641.91 2.5 120 $0.65 0.8 818 300 $836.91 $1.0231 $1.1900 $0.0050 $1.1850 $969.330 0 $17.50 $114.924 4

O P

Gross out Commissions

Net return

A B C D E F G I J H K L M N O P

Weight in 575 Value in per lb. $1.1934 Total value per head $686.21 Weighted ADG 2.5 DOF 120 Weighted COG $0.65 Death loss 0.8 Weight out 875 Total gain 300 Total Expenses $881.21 Breakeven $1.0071 Futures contract price $1.1900 Basis $0.0050 Actual price out $1.1850 Gross out $1,036.8750 Commissions $17.50

AXB

(D * E) + A D*E (J * F) + C H/I

I*N

O-H-P

AXB

(D * E) + A D*E (J * F) + C H/I

I*N

149

Net return

$138.1700

A B C D E F G I J H K L M N O P Q

Weight in 615 Value in per lb. $1.1175 Total value per head $687.26 Weighted ADG 2.5 DOF 120 Weighted COG $0.65 Death loss 0.8 Weight out 915 Total gain 300 Total Expenses $882.26 Breakeven $0.9642 Futures contract price $1.1900 Basis $0.0050 Actual price out $1.1850 Gross out $1,084.2750 Commissions $17.50 Net return $184.5125

O-H-P

AXB

(D * E) + A D*E (J * F) + C H/I

I*N O-H-P

So I think you can see the point Iâ&#x20AC;&#x2122;m trying to make here, finding these value spreads in the cash market can make you a pretty decent living. Itâ&#x20AC;&#x2122;s all about getting them bought right, sold right, and optimizing your COG.

150

Sell Bawling, Backgrounded, Grassed Calves, or Retain? Probably the biggest marketing decision for ranchers and one of the biggest gambles is when you get the calves off the cow, what to do with them. For a lot of folks this is largely determined my forces outside of the decision making process, but I see a lot of opportunity in developing infrastructure, facilities and equipment that can bring some flexibility into your marketing decisions. Of course the biggest driver of a calf’s net value is cow cost and market price, both of which can be manipulated to some degree through management and an understanding of marketing. However, not having options to add value to calves is a real net income restrictor for a lot of outfits. One of the most important aspects of these types of decisions is to have the flexibility (financially) to do one, all or none of the options on the table. As a general rule, most outfits have these options whether they realize it or not. Sometimes it takes a little creativity, but it can be done. The real question however, is how to figure which of the options is the most profitable. That is the basis for this article. Let’s talk more about financial value modeling. Much like the other modeling exercises we have done, the models to identify marketing opportunities for ranchers are very similar; we are trying to determine value, value spreads, and to take advantage of inefficiencies in the market. Let’s look at some examples: Let’s say that a rancher has a 550 cow herd with a 90% weaning rate, keeps about 100 heifers, and has a $525 adjusted annual cow cost. So on the average; he has 395 calves that wean at 540 lbs to market annually that have an average breakeven per pound of $0.97/lb. So what strategy would yield this rancher the highest net for his calves? First let’s look at the net for selling them right off the cow as bawling calves. 151

If we take an average price for 540 lb steers of $136.00 and an average price for 520 lb heifers of $124.00 we see the following gross returns: Steers – 195 head x 540 lbs. x $136.00 = $143,208 Heifers – 95 head x 520 lbs x $124.00 = $61,256 To figure net return: Gross returns - $143,208 + $61,256 = $204,464 Gross expenses - $525 x 290 head = $152,250 Net return - $204,464 - $152,250 = $52,214 or $180.04/head Now let’s look at backgrounding them for 120 days against the MAR 11 with a target ADG of 2.5 lbs/day and a COG of $0.65/lb of gain. Steers A B C D E F G I J H K L M N

Weight in Value in per lb. Total value per head Weighted ADG DOF Weighted COG Death loss Weight out Total gain Total Expenses Breakeven Futures contract price Basis Actual price out

O P

Gross out Commissions

Net return

540 $0.9700 $523.80 2.5 120 $0.65 0.8 840 300 $718.80 $0.8557 $1.1900 $0.0050 $1.1850 $995.400 0 $17.50 $259.100 0

AXB

(D * E) + A D*E (J * F) + C H/I

I*N

O-H-P

152

Heifers A Weight in B Value in per lb. C Total value per head D Weighted ADG E DOF F Weighted COG G Death loss I Weight out J Total gain H Total Expenses K Breakeven L Futures contract price M Basis N Actual price out O P

Gross out Commissions

Net return

520 $1.0100 $525.20 2.5 120 $0.65 0.8 820 300 $720.20 $0.8783 $1.1900 $0.0050 $1.1850 $971.700 0 $17.50 $234.000 0

AXB

(D * E) + A D*E (J * F) + C H/I

I*N

O-H-P

If we look at how this pencils out we see that the steers return $259.10/head and the heifers return $234.00/head based on a short hedge on the MAR11. So by backgrounding these calves we have increased net return by 30.3% on steers and 22.9% for heifers. But lets also look at the possibility of backgrounding these calves at a cheaper COG and running them on grass over the summer against the AUG 11: Steers Grass Weight In Price paid Total Price

840 $0.85 $714.00 153

Grass days Grass cost ADG Operating Total Cost Weight Out Breakeven Price out Profit Heifers

120 $0.72 1.5 $20.00 $820.40 1020 $0.80 $1.20 $406.15

Grass Weight In Price paid Total Price Grass days Grass cost ADG Operating Total Cost Weight Out Breakeven Price out Profit

820 $0.87 $713.40 120 $0.72 1.3 $20.00 $819.80 976 $0.84 $1.20 $353.84

Backgrounding these calves and then running them on grass over the summer again makes a substantial increase in net return over selling these calves off the cow. Of course $120.25/cwt. feeder cattle on the AUG 11 helps, but that is the beauty of using these types of tools to protect your investments. By running these calves on grass over the summer we see a 55.55% increase in net return over selling steers off the cow and a 36.2% increase over backgrounding these steers and selling them. Running the heifers on grass over the summer nets 33.8% more than just backgrounding them and 49% more than selling them off the cow. Now letâ&#x20AC;&#x2122;s look at scenario where we background them, run them on grass over the summer and then retain ownership in a feedyard:

154

Steers A B C D E F G I J H K L M N O P Q

Weight in 1020 Value in per lb. $0.8000 Total value per head $816.00 Weighted ADG 3.5 DOF 120 Weighted COG $0.86 Death loss 0.8 Weight out 1440 Total gain 420 Total Expenses $1,177.20 Breakeven $0.8175 Futures contract price $1.0800 Basis $0.0050 Actual price out $1.0750 Gross out $1,548.0000 Commissions $17.50 Net return $353.3000

Heifers A Weight in B Value in per lb. C Total value per head D Weighted ADG E DOF F Weighted COG G Death loss I Weight out J Total gain H Total Expenses K Breakeven L Futures contract price

976 $0.8200 $800.32 3.2 140 $0.86 0.8 1424 448 $1,185.60 $0.8326 $1.0800

AXB

(D * E) + A D*E (J * F) + C H/I

I*N O-H-P

AXB

(D * E) + A D*E (J * F) + C H/I 155

M N O P Q

Basis Actual price out Gross out Commissions Net return

$0.0100 $1.0700 $1,523.6800 $17.50 $320.5800

I*N O-H-P

You can see in this scenario, the rancher actually lost money by retaining ownership in the feedyard; mostly because he had the opportunity to lock in a futures price of $120.00 as feeder cattle. Fat cattle, even at $108.00 canâ&#x20AC;&#x2122;t compete with that. I donâ&#x20AC;&#x2122;t want you walking away from this thinking that it never pays to retain cattle in a feedyard because more often than not it does. The point here is that when you build the Value return Models you can get a really good handle on what your marketing options are and how to make them work for you.

156

Economics of Efficiency

157

Average Daily Gain vs. Gain per Acre One of the concepts of the economics of grass cattle that is typically over-looked is understanding the difference between average daily gain (ADG) and gain per acre (G/A). I know you all understand the definition of each so I won't repeat it here but the practical application of this concept is important to potentially boosting profits. Average daily gain has been so engrained in our minds as the most important metric of grass cattle production that we contextualize every aspect in terms of ADG. If Steer Group 1 has a higher ADG than Steer Group 2, then clearly Steer Group 1 has outperformed Steer Group 2, right? And if Steer Group 1 has a higher ADG than Steer Group 2, then clearly Steer Group 1 is more profitable than Steer Group 2, right? I am going to challenge your conventional thinking on this. Let's take a look: Let's say for example that I have two, 300 acre pastures that are stocked at 2 acres/steer. In pasture 1, we will graze 150 steers in a season-long system from May 15 to October 15th. We buy these cattle weighing 500# for $135/cwt. for a total investment of $101,250. In pasture 2, we will use a double stocking system that grazes twice the number of animals for half the season. So the stocking rate is still 2 acres/steer. So we will graze 300 steers for 75 days on pasture 2 from May 15 to August 1. We also will buy these cattle weighing 500# for 135/cwt. for a total investment of $101,250. Research has shown that ADG in pasture 1 will be about 15% less than ADG in pasture 2 158

because later in the summer, pasture quality will decline substantially. So in a seasonlong system, half the time steers are grazing the forage quality is pretty good and the other half of the season, forage quality is not so good. Whereas, in the double stocked system when forage quality declines, steers are pulled and sold. So we will estimate that ADG in pasture 1 will be 1.8 lb/day and in pasture 2 ADG will be 2.1 lb/day. Over the 150 days of grazing in pasture 1, steers will gain 270# for a final weight of 770# and we'll sell those steers at todayâ&#x20AC;&#x2122;s price of $116/cwt for a gross return of $133,980. Over the 75 days of grazing in pasture 2, steers will gain 157.5# for a final weight of 657# and we'll sell those steers at todayâ&#x20AC;&#x2122;s price of $126/cwt for a gross return of $248,346. Weâ&#x20AC;&#x2122;ll assume $50/hd for operating costs. When we look at net return for each pasture, it will look like this:

If you make this comparison by only looking at ADG, it looks like pasture 1 in the seasonlong system should have outperformed pasture 2 by quite a bit; and it did on production of beef basis. But in reality, pasture 2 out performed pasture 1 by 18% on a net profit basis, even though pasture 2 gained 41% less weight per head. How can that be?? It is a function of gain/acre. Even though steers in pasture 2 gained less total weight per head than steers in pasture 1, there were twice as many of them in pasture 2 so the total return on the gain per acre and therefore, net profit is more for pasture 2. The other thing to consider is the inherent price slide in the cash market which you will capture with more animals that weigh less. 159

So your Return on the Gain/Acre is: Pasture 1: $186.88 Pasture 2: $195.84 Sounds too good to be true?? It is simply taking advantage of the principal of return on G/A rather than return on ADG.

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