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Superintendent
David Davis
21262 Genoa Road
Linneus, MO 64653
Phone: 660 895-5121
FAX: 660 895=5122
Email: DavisDK@missouri.edu

Why Steers? Why Now?

Kevin Moore and Jim Gerrish

Many of you have probably talked to someone who just recently started retaining their own calves, overwintering them before backgrounding them on grass the next year. Maybe you know of somebody who buys lightweight calves in the spring and runs them on grass until fall, and they don't seem to be as depressed about cattle prices as the cow-calf producer. And likely you have read some article that suggested backgrounding profits may not be hurt too much by our currently low cattle prices. This article takes a look at the economics of backgrounding beef calves, and explains why during depressed calf and feeder prices, backgrounding can still offer the cattleman an opportunity to make a profit.

Making a profit backgrounding steers or heifers boils down to producing animal gains at a cost less than what you get paid for them. What you get paid is called value of gain, and it is not the price per pound at which you sell the animal. Value of gain is determined by three things:

1. The price per pound you paid for the steer
2. The price per pound you receive when you sell the steer, and
3. The amount of weight gained by the steer.

Value of gain is computed as:
    Sales Value (750 pounds X $0.70)         $525.00
    Beginning Value (450 pounds X $0.84)     $378.00
    Gross Returns                            $147.00

   Gross Returns/Weight Gain          =$147.00/300lb
                    or $0.49 per pound

Note that value of gain is $0.49 per lb, and not the selling price of $0.70 per lb. This is due to the fact that as the steer gains weight, generally the price per pound that the steer is worth goes down. So when you sell the initial 450 pounds that you bought at $0.84 in the above example, you only receive $0.70 for it. Thus you have lost $0.14 per pound on 450 pounds, or $63. This loss divided by the weight gain ($63/300 = $0.21) represents the difference between the selling price and the actual value of the gain you produce ($0.70 - $0.21 = $0.49 value of gain).

Tables 1 - 3 show the true value of gain for different combinations of buying and selling prices at different steer gain levels. Table 1 is for a steer gaining 315 pounds during the backgrounding phase. What is important is the effect of greater negative margins, or larger negative differences between purchase and eventual sales price. If you could sell a steer at the price per pound you paid for him, then you would not lose any money on the initial weight you sell back, so value of gain in this one case does equal sales (and purchase) price. If market conditions changed enough so that cattle prices moved higher during the summer, and you could sell the steer at more per pound than you gave for him, then value of gain is even higher than sales price due to the increase in value of the initial weight you bought.

But typically, calf prices peak in the spring as grass begins to grow and fall into the summer, with a little bump in late summer as fall forage growth occurs, and then back lower as winter approaches and the bulk of new calves are weaned and sold. Over the decade of the 1980's, 400 to 500 pound steer calves bought in April averaged $83.25 per cwt and 600 to 700 pound feeder steers sold in November averaged $71.22 per cwt. Thus an average of a 12 cent negative margin between 450 and 650 pound steers. From Table 1 you can see how quickly the negative margins begin to lower value of gain. Many producers choose to keep their own calves for backgrounding, feeling that not having to sell calves at lower prices in the fall and purchase higher priced calves in the spring compensates for the expense of feeding calves in the winter.

Table 1. Value of gain at various buying (500 lb steer) and
selling (815 lb steer) prices per lb
--------------------------------------------------------------
     Sell at:       $1.00 $0.90  $0.80  $0.70  $0.60    $0.50
--------------------------------------------------------------
Buy at $1.10    $0.84   $0.58  $0.32  $0.07   -$0.19    -$0.45
Buy at $1.00     1.00    0.74   0.48   0.22    -0.03     -0.29
Buy at $0.90     1.16    0.90   0.64   0.38     0.12     -0.13
Buy at $0.80     1.32    1.06   0.80   0.54     0.28      0.02
Buy at $0.70     1.48    1.22   0.96   0.70     0.44      0.18
Buy at $0.60     1.63    1.38   1.12   0.86     0.60      0.34
--------------------------------------------------------------

Tables 2 and 3 compare value of gain for lightweight cattle gaining 200 pounds versus heavier cattle also gaining 200 pounds. The influence of initial starting weight is apparent in comparing the values of gain in the two tables. The same negative margin (i.e. a 10 cent negative margin on 200 pounds of gain) is more costly when you have heavier cattle because the loss is spread across more initial pounds of animal. If the heavier calves only gain as much as the lighter ones, you have the same pounds of gain to spread this cost over, thus the negative margin costs you more per pound of gain. For example, a 10 cent negative margin on 700 initial pounds costs you $70 ($0.10 X 700 pounds). The same 10 cent negative margin on a 400 pound steer only costs $40 ($0.10 X 400 pounds). This difference of $30 shows up in Tables 2 and 3 as the difference in the value of gain for the two different weights of animals. The $30 added cost equals 15 cents per pound of gain ($30 / 200 pounds of gain = $0.15 cost per pound), which is the difference between the values of gain for lightweight versus heavier calves when negative margins are 10 cents per pound (i.e. buy at $0.80 and sell at $0.70, value of gain is $0.50 for light calves but only $0.35 for heavy calves).

Table 2. Value of gain at various buying (400 lb steer)  and
selling (600 lb steer) prices per lb                  
---------------------------------------------------------
 Sell at:      $1.00  $0.90  $0.80  $0.70  $0.60  $0.50
---------------------------------------------------------
Buy at $1.10   $0.80 $0.50  $0.20  -$0.10 -$0.40   -$0.70
Buy at $1.00    1.00  0.70   0.40    0.10  -0.20    -0.50
Buy at $0.90    1.20  0.90   0.60    0.30   0.00    -0.30
Buy at $0.80    1.40  1.10   0.80    0.50   0.20    -0.10
Buy at $0.70    1.60  1.30   1.00    0.70   0.40     0.10
Buy at $0.60    1.80  1.50   1.20    0.90   0.60     0.30
---------------------------------------------------------

Table 3. Value of gain at various buying (700 lb steer) and
selling (900 lb steer) prices per lb
---------------------------------------------------------
 Sell at:      $1.00  $0.90  $0.80  $0.70  $0.60  $0.50
---------------------------------------------------------
Buy at $1.10   $0.65  $0.20  $0.25 -$0.70  -$1.15 -$1.60
Buy at $1.00    1.00   0.55   0.10  -0.35   -0.80  -1.25
Buy at $0.90    1.35   0.90   0.45   0.00   -0.45  -0.90
Buy at $0.80    1.70   1.25   0.80   0.35   -0.10  -0.55
Buy at $0.70    2.05   1.60   1.15   0.70    0.25  -0.20
Buy at $0.60    2.40   1.95   1.50   1.05    0.60   0.15
---------------------------------------------------------

Generally the market adjusts for light versus heavy cattle, with the drop in price per pound slowing as cattle get heavier (i.e. a larger negative margin exists between 4 and 5 cwt calves than between 7 and 8 cwt calves). This helps compensate for the influence of negative margin on heavy versus light calves, and also for the added costs of running heavier calves (i.e. greater initial cost, more pasture required per head, etc.). But the influence of negative margins must always be assessed when backgrounding profitability is being considered.

The reduction in negative margins is central to the profit potential that has remained in backgrounding enterprises even during todays' depressed cattle prices. The typical 12 cent negative margin (which resulted in a value of gain of $0.49) during the 1980's, will be much lower in 1996 as calves purchased cheap in the spring will bring a price not too much lower per pound this fall. For example, a 450 pound steer purchased for $0.65/lb, if he brings $0.60/lb this fall at 650 pounds, will have a value of gain of $0.4875, or just about as high as when cattle prices were more normal. Cattlemen who chose to overwinter and background calves and not sell last fall on such a down market, were probably reacting to narrowing negative margins as much as low prices. Backgrounding profits depend on value of gain and not just calf prices.

Table 4 gives projected backgrounding returns for alternative stocking rate strategies. Management- intensive Grazing (MiG) can be used very effectively when running steers, as it offers the opportunity for greater control over forage quality and availability presented to the animals. One essential question is how much to increase stocking rate, as individual animal performance if often reduced as more animals are stocked per acre. We have currently underway at FSRC, a stocking rate study to help answer just this question. It is an extremely important question, because as profit margins narrow, management emphasis shifts towards individual animal performance. As profit margins improve, gains per acre become more of the central focus in order to reach optimum economic returns. The economic climate in which the cattleman is operating (i.e. good prices or poor prices), does impact the level at which to stock ("intensity level") for greatest profit.

Table 4 examines the impact of stocking rate on gains per acre, gains per head and profits. The relationship between stocking rate and average daily gains (ADG) is preliminary, and based on current and past research at FSRC. Gain per head is declines, as stocking rate moves from .5 up to 2 steers per acre. But gains per acre improves from 252 pounds with .5 steers stocked per acre, to 504 pounds of beef produced per acre when stocked at 2 steers per acre. Using typical calf prices and production costs, and including the costs to develop an 80 acre, 24 paddock MiG grazing system, backgrounding offers competitive returns. The medium-high stocking rate comes out on top in Table 4, but you should do a similar analysis based on your own particular situation for costs, performance levels, etc. Good gains are critical to backgrounding profitability. So is cost of gain. But value of gain is what makes backgrounding profits resilient to lower cattle prices.

Table 4.  Profit (return to land, labor and management as used
here) projections for various  steer backgrounding scenarios.


Stocking rate (hd/A)     0.5       1.0       1.5       2.0       
ADG  (lb/hd/day)         2.4       2.0       1.6       1.2
Gain/acre  (lb/A)        252       420       504       504
Purchase weight (lb/hd)  400       400       400       400
Purchase price/cwt($/cwt)$83.60    $83.60    $83.60    $83.60
Purchase cost/head($/hd) $334.40   $334.40   $334.40   $334.40
Variable costs/head($/hd)$30.00    $30.00    $30.00    $30.00
Operating interest($/hd) $20.38    $20.38    $20.38    $20.38
Total cost/head ($/hd)   $384.78   $384.78   $384.78   $384.78
Sale weight (lb/hd)      904       820       736       652
Sale price/cwt ($/cwt)   $64.75    $66.75    $68.75    $70.75
Gross revenue/head($/hd) $585.34   $547.35   $506.00   $461.29
Net revenue/head ($/hd)  $200.56   $162.57   $121.22   $76.51
Net revenue/acre ($/hd)  $100.28   $162.57   $181.83   $153.02
Fence & water cost ($/A) $39.82    $39.82    $39.82    $39.82
Fixed costs ($/A)        $11.73    $11.73    $11.73    $11.73
Profit/acre ($/A)        $48.73    $111.02   $130.28   $101.47
Value of gain ($/lb)     $0.498    $0.507    $0.511    $0.504