In the good ol' days many stocker/backgrounder operators simply knew if there was more than a dime of rollback, or slide, in cattle prices from start to finish weight, owning cattle wouldn't pay a profit.
Not any more, says Steve Swigert, an economic consultant with the Noble Foundation at Ardmore, Oklahoma. With all calf prices well above $1 per pound and feedlot cost of gain at $110-120, the value of gain has gone up so much you may be surprised how much slide you can tolerate.
The only way to know, Swigert says, is to calculate it.
The value of gain on calves is quite simply the total income you make from in-weight to out-weight. Subtract your cost of gain from that and you have a pretty good gross margin profit estimate.
First, let's clearly define value of gain using this example.
In the last week of March Oklahoma City prices for 550-pound feeder steers averaged $149.23. Prices for 844-pound steers were averaging $123.42. Let's assume for a moment that was the slide, meaning you could forward contract or lock in that price of $123.42 at the end of the gain period.
Here's how you would figure it.
-A 550-pound calf at $149.23 is worth $820.76. That's what you paid.
-An 844-pound calf at $123.42 is worth $1,041.66. That's the price at which you will sell it.
-Subtract the in-weight from the out-weight to find you gained $220.90.
-Divide that gross profit by the almost 300 pounds to learn your value of gain is right about $74 per hundred, or 74 cents per pound.
Depending on your true cost of gain, which must be subtracted from your total value of gain, you may or may not be able to make a profit with a $26 slide.
Swigert says historically when calf prices are below $1, the dime-slide rule works. When they rise above $1 per pound then you should calculate value of gain versus your real cost of gain.
It also pays to remember you are competing against feedlots both for cattle and for the ability to put gain on those cattle, Swigert says. High-priced corn has made grass much more valuable in recent years. The past few months feedlot cost of gain, using Cattle-Fax quick-index formula of .155 times the current price of corn, has stayed around $110 per hundred, he adds. This would be assuming average or better feedyard performance.
Here's an example:
Corn price of $7.25 X .155 = $1.12/pound or $112 /hundredweight.
Simply put, the higher is the price of corn, the higher is the cost of gain in feedlots, so the more your value of gain will be worth on pasture or in other backgrounding situations.
In turn, those higher values often make it possible to pay more for cattle than your gut tells you. A handy tool for figuring value of gain is Noble Foundation's online calculator.
Must use forward pricing
Remember to use your future price when calculating value of gain, Swigert warns. He says there are several ways to predict future prices. One way is to view the Feeder Cattle Futures price for the month closest to, but not before, your expected sale time.
In Oklahoma, Swigert says it is usually about $1 per hundredweight positive basis for steers placed at 700-800 pounds. However, in the past five years it has varied from negative 0.4 to just over $2 positive basis on a monthly average.