While COVID-19 commands the news space, and cattle back up all the way to the cow/calf producer, Agricultural Economist Elliot Dennis urged producers to figure if the cost of adding weight to feeder cattle was worth it.
In a letter to Extension agents from the Livestock Marketing Information Center called In The Cattle Markets, Elliot said each producer would have to figure whether the Value Of Gain equaled or was greater than the Cost Of Gain.
“Having available feed resources and a market VOG of $1.05 per cwt is of little importance if the operational COG is $1.20 per cwt,” He said.
And it may be enticing to think that bigger cattle bring more per head, the increased value may not be as large as expected, Elliot said. This usually is because the COG is less than the price of feeder cattle and the price per pound of heavy feeder cattle often is discounted relative to light-weight feeders.
HAS THE PRICE/WEIGHT RELATIONSHIP CHANGED?
Looking at the price/weight relationship of Plains feeder steers for the first four months of the year, Elliot calculated that in January this relationship was similar to the 10-year average.
From January through April, the relationship shifted gradually downward, he said, showing that there was merely a vertical shift downward in the price/weight relationship rather than a structural change. And, other than in Texas where buyers were discounting heavier feeders, feeder prices are low, they are within what would be considered a statistically acceptable bound.
In 2015, when feeder cattle prices were very high, in some cases at or above one standard deviation from the historical 10-year average, feed resources and drought, along with the low point in the cattle cycle pushed prices above one standard deviation from the historical average. Elliot said the current situation is similar/counter to 2015 and is leading to low prices.
So, since the market structure hasn’t changed, it is a much better situation for producers, he said, because if the market structure had changed, the VOG would be random.
VOG RELIES ON BASIS
Calculating the VOG is one common way to assess how much the market is willing to pay for putting on weight, Elliot said. It relies on historical basis patterns and feeder and corn nearby and deferred futures contracts. But results can vary from place to place.
Using the Beef Basis Stock VOG tool, he calculated the VOG for steers weighing 500 pounds on April 27, gaining 2.0 pounds a day and potentially sold at different weights and dates throughout the fall at selected locations.
Of the locations selected, Kansas has the highest and most consistent VOG at $1.21 per cwt, Elliot said. But adding an extra 30 pounds does not pay the same given the time of year and sale weight.
Know your operation and hedge profits, he said.
CATTLE, BEEF RECAP
Cattle traded this week at $94 to $100 per cwt on a live basis, down $1 to $5 from last week’s $95 to $105. Dressed-basis trade took place at $150 per cwt, versus last week’s $148 to $160.
The USDA choice cutout Thursday was up $10.18 per cwt at $367.56, while select was up $10.25 at $350.16. The choice/select spread narrowed to $17.40 from $17.47 with 97 loads of fabricated product sold into the spot market.
There were 15 steer contracts tendered for delivery against the Apr futures contract on Thursday.
The CME Feeder Cattle index for the seven days ended Wednesday was $118.74 per cwt, down $0.09. This compares with Thursday’s Apr contract settlement of $119.17, down $0.37 and the May contract settlement of $117.10, down $1.45.