Fall is decision time for cattle producers, and evaluating inputs and determining the best use of available resources can be a challenging but important process, said Scott Clawson, Oklahoma northeast area economics specialist in a market commentary.
Many operations have a set plan every year. They have developed a specialized skill set for managing their production system, and everything from forages to equipment have been tailored over time for efficiency and profit potential.
At the same time, it’s important to take stock of the inputs available, look at the current feed and hay prices and determine where the best options are in the market, and one of the most important ways to evaluate options is to look at Value of Gain and Cost of Gain.
DOING THE MATH
VOG is simply calculating what the difference in value is for a calf from the beginning of a grazing/feeding period to the end on a per-pound basis, Clawson said. Calculating VOG only requires simple math. The important part is how the results are used.
There are some pieces of information in the calculation that need to be considered carefully for a correct interpretation of the results, he said.
–What do the figures say? Is it possible to break even?
In other words, can steers be grown from (for instance) 550 to 750 pounds for less than $220 or $1.10 a pound?
If the answer is yes, producers need to dig a bit deeper to ensure that total costs are covered and to find what returns are expected, Clawson said.
If that additional weight cannot be added for $220, further evaluation is needed, he added.
–How is an expected sell value found?
This calculation is completed in several different ways. One way is when both prices are taken at a single point in time.
For example, a market report from a sale shows the sale price for 500-pound steers compared to the price for 750-pound steers will show a simple spread.
But while simple, there may be another approach, Clawson said.
If the cattle are targeted for sale in a given time period, say March, the Mar feeder cattle futures contract price can be used as a price predictor. Say it is $1.27 a pound.
But that can’t be taken at face value. An average basis needs to be determined, and the Livestock Marketing Information Center shows a 2011-2015 average basis, using Oklahoma City cash prices, of $1.11. So, the $1.27-per-pound futures-derived simple VOG is changed to just over $.50 a pound, which drastically changes the outlook.
This is just one piece of the decision-making process, Clawson said. However, it can be very useful in vetting some ideas on what to do.
A 100% accurate price-predicting tool is not available, but having a sound understanding of costs and a realistic view of animal performance is crucial to success, he said.
CASH CATTLE MARKETS LOWER
Cash cattle markets Wednesday traded $2 to $3 lower at $103 to mostly $104 per cwt on a live basis and at $162 to mostly $163 dressed. Further trading was expected at similar prices through Friday.
The USDA’s choice cutout Wednesday was $2.53 per cwt higher at $190.75, while select was up $0.36 at $179.94. The choice/select spread widened to $10.81 from $8.64 with 127 loads of fabricated product sold into the spot market.
The CME Feeder Cattle Index for the seven days ended Tuesday was $136.68 per cwt, down $0.13. This compares with the Sep settlement Wednesday of $135.17, up $0.35, and the Oct settlement of $128.02, up $1.17.