“Trying to Add Value Through Backgrounding”
by Chris Reinhardt, feedlot specialist
The strong dollar is good for a lot of things, or so I’m told. However, the strong dollar also hurts our export markets because our product is automatically more expensive to buyers around the world simply because their currency loses its purchasing power vs. U.S. products. The U.S. beef industry saw beef exports climb out of the doldrums post-2001 and a dip after the recession in 2009 to record levels in 2011, 2012, 2013, and 2014. This led to record prices for boxed beef, fed cattle, and subsequently, feeder calves. Heady times indeed… Conversely, the U.S. dollar began a steady climb in value vs. other global currencies in mid-2014 and has increased in value by 20-25% over the past 18 months, resulting in a significant drop in beef exports; this has placed and will continue to place downward pressure on boxed beef value, fed cattle prices, and feeder calf prices. As expected, we are experiencing low calf prices this fall compared to recent years; we’ve already seen feeder cattle futures decline by 40% since the mid-2014 highs.
In the face of this challenge, producers can capture more value through backgrounding calves to heavier weights. While a rising tide floats all boats, the current receding tide is pulling all boats downward, and a falling yearling market next spring puts our hopes of making money backgrounding our calves in jeopardy. For example, if 575 lb steer calves are currently valued at $139/cwt (total value = $799), and 875 lb steers are valued at $109/cwt next February (total value = $953), then the price slide (or the “value of gain”) is $51/cwt ($953 – $799 ¸ 300 lbs). This $51/cwt is the value of weight put on each calf above their initial weight of 575 lbs.
Producers can only increase profit if they can feed calves for less than 51¢/lb of gain. With the current low cost of grain and abundance of forage, the feed-only cost of gain for developing calves is likely in the range of 40-50¢/lb. But once we add the costs for vaccines, implants, anti-parasiticides, morbidity treatment costs, and a risk of mortality, total cost of gain could be in the range of 60-65¢/lb of added gain. If the sale price is expected at $109/cwt, we’re looking at backgrounding as a losing proposition.
Obviously, none of these numbers are set in stone. You will need to work closely with your local extension professional and feed supplier to formulate diets and provide cost estimates and breakeven calculations. Also, work closely with your veterinarian when building your processing and treatment protocols.