What is the cost of feeding all of these light weight cattle?
By: Darrell Mark, SDSU Economics Adjunct Professor
Feeder cattle prices have reached lofty levels this year. The combined weighted average price for 500-599 lb steers in South Dakota was $260.48/cwt for the third week of June, almost $60/cwt higher than at the beginning of the year and more than $100/cwt higher than a year ago. Prices for 700-799 lb steers averaged $217.03/cwt, $43/cwt higher than the beginning of January and $72/cwt higher than a year ago. These higher prices have been driven by shrinking cattle supplies and generally good demand from feedyards with excess feeding capacity.
Recent cattle on feed reports have indicated that cattle feeders have been placing more lighter weight calves on feed as available supplies of feeder cattle have decreased. As discussed in last week’s article, placements of calves weighing less than 600 lb were 10% higher in May compared to a year ago. As a result of this trend towards placing lighter weight calves on feed, the value of gain for these light weight calves is quite high. For example, during the first half of June, 350 lb steer calves in South Dakota averaged $274.96/cwt or $962.36/head. Steer calves weighing 450 lb averaged $280.17/cwt or $1260.77/head. Thus, the market’s valuation for the additional 100 lb of weight was $298.41/cwt.
Similar calculations reveal that the market’s valuation for the next 100 lb of weight gain (from 450 lb to 550 lb) drops substantially to $156.64/cwt. Another 100 lb of weight (550 lb to 650 lb) currently costs $107.56/cwt at market prices. The market’s lowest valuation for cost of gain is from 650 lb to 750 lb: $70.88/cwt. Beyond that weight, the market’s value for weight gain increases to $103.21/cwt (750 lb to 850 lb) and then is $81.81/cwt for 850 lb to 950 lb.
Considering these market valuations for additional weight on feeder cattle is particularly useful in the context of actual feeding cost of gain. While cost of gain varies across feedyards due to differences in feed rations, purchasing and hedging decisions, and other production and performance variables, many feedyards currently would have a projected feeding cost of gain around $87-93/cwt for yearling placements. At an average feeding cost of gain of $90/cwt, the market value of incremental weight is higher for all weights except from 650 lb to 750 lb and 850 lb to 950 lb. In other words, for all weights (particularly lighter weight calves), feedyards are better off purchasing lighter weight calves and putting the weight on them rather than buying the additional weight at current market prices. The exception to that (at least during the first half of June) was that it would have been more economical to purchase a 750 lb steer instead of a 650 lb steer or a 950 lb steer instead of an 850 lb steer.
While these relationships do change as market conditions change, it does help explain why cattle feeders have been aggressively placing light weight feeder calves. Additionally, they are likely targeting better seasonal fed cattle prices in early 2015 by placing light weight calves rather than lower late-summer and early fall markets that heavy weight yearlings would have been placed against. Another consideration is that lighter weight feeder cattle cost fewer total dollars per head than heavier weight yearlings. At near record high feeder cattle prices and fewer outside investors interested in feeding cattle, a feedyard’s working capital needs are very high and the incentive is there to spend fewer dollars per head to obtain feeder cattle.
The information in this report is believed to be reliable and correct. However, no guarantee or warranty is provided for its accuracy or completeness. This information is provided exclusively for educational purposes and any action or inaction or decisions made as the result of reading this material is solely the responsibility of readers. The author and South Dakota State University disclaim any responsibility for loss associated with the use of this information. There is substantial risk of loss in trading commodity futures contracts and traders should consult their brokers for a full disclosure of these risks to determine whether such trading is suitable for them in light of their circumstances and financial resources.