On a cow-calf operation the end line of the financial statement basically boils down to: “What did I sell my calves for? What did it cost me to produce those calves?”
As producers we are often very good at cutting costs, and not so good at adding or establishing value. Many operations sell calves at weaning or after a relatively short backgrounding period. Even those that grass their yearlings may be one step removed from the rail price of cattle, yet the carcass price of cattle is important, in that it influences bidding on live cattle.
I have run a couple of example scenarios to display this point. The scenarios use a blend of grid information from various processors and feedlots, so while the results are based in reality they are a blend of economics from across the industry. The example is based on mainstream beef production, and it is important to note that there are many programs that reward different types of cattle.
Let’s start with a scenario where a herd with 100 cows sells 50 steers at weaning averaging 625 pounds. The average price paid for the calves is the expected slaughter price, minus the cost of weight gain. If the expected price is $1,200 per calf and the cost to finish the calf is $400 then the maximum possible price is $800. If the cost of feed is $600, then the bid will be reduced to $600. But what if the price is not the price?
Let’s start at the tail end. If a feedlot rails 50 steers at 1,250 pounds and they dress 60 per cent, then each steer will produce a 750-pound carcass. If the rail price is $1.50, then each steer will gross $1,125 or a total of $56,250 for the load.
Let’s now assume that instead of being average, every steer graded AAA marbling and yield grade 1. Based on an average premium from various grids, we can comfortably add nine cents to the carcass price, bringing it to $1.59. The result is now $1,192.50 per steer, or a $3,375 bonus on the load. If the calves further qualify for a branded program there may be an added bonus of up to four cents, creating another $1,500 improvement.
Conversely, if we assume the load graded A and were all yield grade 3, we can drop the price down to $1.38, or $1,035 per calf. This is a hit of $4,500 on the load when compared to the base price of $1.50. This figure does not include any cattle hitting steeper discounts such as carcass weight discounts or off grades such as being devoid of marbling or dark cutting.
While this makes it clear that not all cattle have the same value, let’s continue to work backwards. In the interest of simplicity and preserving my mathematical skills, let’s work off of the assumption that the calves all convert and gain at the same rate and cost in the feedyard. If this logic follows through we arrive at the conclusion that one type of calf should be worth more at weaning than the other.
Since 625 is exactly one half of the finished weight of 1,250, it should be safe to assume that the value of the calf should max out at half of the premium or discount. This makes the AAA Y1 calf worth 5.4 cents per pound more valuable than the base calf, and when meeting a branded program worth 7.8 cents more than the base calf. The A Y3 group are worth 7.2 cents less than the base calf and 15 cents less than the top calves.
Obviously, we know that calf prices factor other things such as differences in feeding cost, health status, age of the calves, transport costs, interest rates and risk management. However it is abundantly clear that some calves are worth more than others and that this influences the price primary producers receive for their calves.
Finding the target
It is important to place context on the fact that the driving force behind