The price slide between feeder cattle of various weights are settings records in the extreme this year. Producers must analyze costs and breakevens carefully.
By: Tom Brink, Top Dollar Angus, Inc.
Anyone who has ever taken their children to a water park can attest to how much fun the slides can be. There’s a long afternoon of sun and laughter, with both kids and adults getting wet and riding the slides down into a pool. The exception, perhaps, is on those really big slides where fun verges on fear. The tallest, fastest, and steepest water slide in the world is located in Kansas City, Kan. At 17 stories high, the Verrückt slide (German for insane) is higher than Niagara Falls by almost 2 feet, and more than 15 feet taller than the Statue of Liberty. Speeds on the way down exceed 60 miles per hour.
How do waterslides relate to the cattle business in 2015? Price differences between feeder cattle and calves of varying weights, also termed “spreads” or “slides,” are setting records in the extreme. These slides are like nothing we have ever experienced before. They are big, steep, fast, and possibly a little dangerous. They may even leave stocker operators and backgrounders shocked and dismayed by the time they finish the ride on marketing day.
In the recent past, the typical stocker scenario went something like this: (1) Buy a 550-pound steer calf, (2) put on 200 pounds of gain using a forage-based diet, and (3) market a yearling steer at 750 pounds. The main objective was to put on weight for less than the market price of a 750-pound steer, which ultimately is the price received for the 200-pounds of added weight. Put the gain on for $60/cwt., sell the steer for, say, $120/cwt., and everything works out fine. Yes, there was always price depreciation to deal with on those original 550 pounds of purchased weight. However, when feeder price slides were of the historically tame variety, this loss was usually not of great concern.
Enter the Verrückt cattle slide of 2015. During January and February, the average price discount on a 750-pound versus a 550-pound steer was an off-the-charts $58.34/cwt. The typical 750-pound steer sold that much below a 550-pound steer calf ($215.28 versus $273.61/cwt.). Assuming the fairly likely scenario that the market structure remains essentially the same while those 200 pounds of gain are being added, the initial 550 pounds will devalue by a nearly unbelievable $321 per head. Rapid price descent from one weight group to the next heavier weight group equals rapid devaluation of the pounds initially purchased. The result is a big financial hole to dig out of for anyone adding weight to cattle this year. This is a slide that will take you down far and fast, and could rough you up along the way.
As shown in the table below, the discount on a 750-pound steer is three times larger in 2015 versus the 2005-2013 average. This means purchased pounds devalue three times faster as well.
The good news (this market does have some of that to offer, too) is that the 200 pounds being added is worth a lot of money. Using the price scenario above, 200 pounds of added weight priced at $215.28/cwt. amounts to a value add of $430.56 per head. That’s another very big number, and is fortunately more than enough to cover the devaluation of the initial pounds purchased and yield a gross margin of $109.71 per animal (before feed and other expenses). So there is hope, but it should also be recognized that those 200 pounds must be added efficiently and, for sure, at a low cost of per pound of gain. Simple math applied here says that each 100 pounds of added weight must cost no more than $55, or there is no chance of reaching a breakeven---short of the entire market trending higher. The market may, in fact, move higher or lower while the weight is being added. However, the salient point is this is a market structure affording very little room for error, little room for death loss, and no room at all for anything but a super-competitive cost of gain.
Harvested forage costs have generally come down over the past 24 months, which will help many stocker/backgrounders add weight cost effectively. National average non-alfalfa hay prices during January this year were down $10 per ton compared to January 2014 ($152 versus $162 per ton). Some important cattle states, like Nebraska, Colorado, Kansas, and Texas experienced even larger year-on-year declines in hay costs.
Grazing costs are another matter. The Federal grazing fee for 2015 has been set at $1.69 per animal unit month (AUM) for public lands administered by the Bureau of Land Management and $1.69 per head month (HM) for lands managed by the U.S. Forest Service. The comparable 2014 fee was $1.35. Flint Hills pasture rental rates hit a new high in 2013 at $23.70 per acre with full care provided. The unabated uptrend in lease rates for this important stocker region has been tracking along for nearly a decade and is almost certain to hit another new high this summer. Why? Most pasture rents are tied more to the absolute price of cattle than anything else. Land owners watch the cattle market too, and as prices go up, they expect to be paid more.
Obviously, producers will continue to grow cattle from calves into yearlings as always. The bigger question for 2015 is whether they can do so profitably. High prices may offer the illusion that profits are easy to come by, but reality is different. High cattle prices and relatively low grain prices have produced a feeder cattle market with the steepest slides in history. For stocker/backgrounders the best advice is hold on, keep both eyes open, and analyze your costs and breakevens carefully. This year’s “insane” price slide is certain to challenge even best managers in the business.