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HUNTIN' DAYLIGHT -- PRE-CONDITIONED PAY-BACK

by: Wes Ishmael

Even with stocker and feeder calf prices surging along with record fed cattle and boxed beef prices, there's still an opportunity to maximize calf prices and net return with pre-conditioning.

In fact, although the jury is still out, preliminary data from various sources indicates there may be a sea change in the making. Used to be, when cattle numbers were plentiful, buyers could be pickier about what they would value and how much they would value different components. When it comes to pre-conditioning, though, it appears that even as cattle numbers tighten, buyers are still willing to pay for the opportunity to reduce their risk.

“I'd never say to expect a premium, but I would say if you're not pre-conditioning you're being discounted,” says Daniel Thomson, director of veterinary services for Cactus Feeders, the largest cattle feeder in the world with a one-time capacity of 540,000 head. They buy 25,000 head per week, yet even at that volume they're not willing to take whatever someone decides to send; cost risk associated with animal health runs too high.

In one study conducted by the company, they tracked 4,000 head of cattle through the feedlot for sickness, treatment, then scored the lungs of all of the cattle at harvest for lesions. Out of that group, 26 percent were pulled for respiratory treatment. Of those, 62 percent had lung lesions. That means 38 percent of cattle pulled for respiratory treatment showed no telltale lung lesions at harvest. Just as striking, of the remaining 74 percent of the group not pulled for respiratory treatment, 43 percent had lung lesions. “So, we (the industry) have a hard time seeing respiratory disease,” says Thomson.

Now, add that to the example Thomson gives of a recent single load of cattle arriving that represented cattle from 32 different sale barns and five states and it's easier to understand why buyers of feeder and stocker cattle are putting more emphasis on buying calves that are pre-conditioned first, or at least have some record of the health program they've received prior to sale.

Selling: True Cost and Return

Recently, Kevin Dhuyvetter, an agricultural economist at Kansas State University conducted an economic analysis that explores the value of preconditioning for different scenarios, from both the selling and buying side. Unlike some previous studies that either favor or caution against the practice, Dhuyvetter embarked on the project with a real-world assumption: “As long as pre-conditioning has been around (decades), if it worked it should have become industry standard. If it didn't, it should have left the scene by now. It has done neither,” he says.

The reasons adoption has been so slow, according to Dhuyvetter, include contradictory research on the subject, less than scientific research in some cases, and widely varying results from study to study. Any producers who have ever started feeling their way through a pre-conditioning process that works for their particular situation can attest to the fact results can shift significantly from year to year.

Bottom line, however, Dhuyvetter's study indicates that pre-conditioning can offer higher net returns to producers than not.

Across five scenarios that accounted for everything from cost of feed to price adjustments for increasing weights, pre-conditioning offered more net return in all but one case. On the high end, the practice returned an additional $17.73 per head. On the low end, pre-conditioning the same weight and sex calves for the same 45-day preconditioning period yielded a net loss of 51 cents per head. Although the net losers also received a $4/cwt. premium, the net returns ran negative due to the higher health cost, lower weight gain and higher marketing cost assumed in the particular scenario.

This variation underscores two key considerations for producers considering pre-conditioning, whether the markets are high or low.

First, if you don't market pre-conditioned calves to exploit that asset—just trade them through regular sales or intermingle them with cattle that aren't pre-conditioned, as an example—then it's likely the price-premium will be diluted at best, but most likely not even evident.

“From the perspective of a cow-calf producer pre-conditioning calves and then selling them, it appears that pre-conditioning is a management strategy worth considering as it can add value to the calf compared to simply selling calves at weaning. However, this added value is dependent on receiving a price premium for the calves. Thus, producers may need to change the way they market their calves if they choose to precondition them,” says Dhuyvetter.

Second, the profit potential of pre-conditioning should be calculated with budget projections and rational assumptions, using these best-guesses to direct decisions related to whether or not it's worth pre-conditioning a particular set of calves.

“First, a producers needs to decide what he wants to compare pre-conditioning to, as this will dictate how to proceed with the economic analysis,” suggests Dhuyvetter. “For example, if a producer plans to pre-condition calves for a short time (i.e. 45 days), and then sell them, the relevant comparison is likely pre-conditioning versus selling direct off the cow. On the other hand, if a cattle feeder is buying (or retaining) calves then the relevant comparison is the expected cattle feeding returns with and without pre-conditioning.”

No matter the point of comparison, Dhuyvetter says the process of projected budgeting is similar and should account for: purchase price, production performance (i.e. Average Daily Gain and death loss); costs and selling price.

Buying Risk Reduction

On the buying side of the fence, this study points to buyer willingness to pay $2-$5/cwt. for pre-conditioning, which isn't necessarily full price for the potential value it offers.

“Based on limited data, at feedlot level we expect $40-$60 worth of added value for pre-conditioned calves verses those that aren't,” says Dhuyvetter. “As the reputation and integrity of pre-conditioning programs increases, the premiums paid for these calves would be expected to increase and approach the full value of pre-conditioning.”

All told, while industry adoption of pre-conditioning has crawled along, Dhuyvetter believes it will become more entrenched as an industry standard in the future. For one thing, he points to increasing consolidation placing more cattle in fewer hands. He explains cattle operations today are 1.7 times as large as they were in 1964. For perspective in the same window of time, dairy operations are six times larger and pork operations are 11 times bigger.

Consequently, Dhuyvetter explains fewer decision makers are directing industry trends, which currently continue in the direction of managing cattle individually as part of larger more vertically coordinated systems, i.e. managing cattle from a lifetime perspective rather than managing for specific periods within each lifetime.

The caveat, of course, is the current lack of scientifically designed research studies providing facts to use in decision-making. Hopefully, this study is the first in a series by researchers that will bridge the gap.

Likewise, Dhuyvetter points out in the study summary, “Producers need to recognize there are many different ways to define pre-conditioning programs. Rather than worry about conforming to a specific one (unless required to participate in a particular sale), they need to identify what best fits within their management and resource constraints.”

As always, though, the money will ultimately decide. Dhuyvetter says, “I contend we'll see more pre-conditioning in the future, but only if it's profitable to do.”

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