There are no sure bets in the cattle business, but listen to this: Mike Murphy, an analyst for Cattle-Fax says members of that organization have averaged $64 per head profit 23 out of the last 23 years by purchasing cull cows in November, putting 1.5 lb. average daily gain on them for 95 days, then marketing them in February.
Likewise, a study conducted by Iowa State University's Iowa Beef Center (IBC) in 2002-2003 pegged the profit from feeding beef cull cows—aiming for premium white fat prices—at $52 to $89 per head.
Keep in mind, these are returns based on purchasing culls and feeding them. Producers who keep and feed their own cull cows can have even more leverage.
Various research from such sources as the National Animal Health Monitoring Service and state Standardized Performance Analysis programs indicate cull cows typically account for 15-20 percent of a cow-calf operation's annual revenue on average. Consequently, cow-calf producers exploiting the seasonal buy-sell opportunities have found a way to make their market cows account for an even larger portion of their annual receipts.
Upgrading as Prices Increase
Basically, cull feeding potential is so predictable because most cows in the industry are bred in the summer for spring calves. Most producers who find open cows in the fall ship them, so prices are lowest then and highest in the late spring when fewer culls are on the market. Plus, unlike feeder cattle prices, researchers at the University of Arkansas point out that cull cow prices increase as weight increases. Likewise, value increases as fat increases—as measured by Body Condition Score (BCS). So, producers can buy or transfer ownership between enterprises when prices are lowest, knowing that usually price per pound will also increase with weight and body condition.
Spun differently, by managing culls to gain weight and condition there is also the opportunity to improve slaughter grade. In basic terms, slaughter cows fall into one of four USDA Quality Grades based on weight and lean meat yield. The most valuable grade—Commercial—represents those with the highest dressing percent and body condition. The least valuable—Canner—are those with the lowest dressing percent and body condition (see Table 1).
“Most of the profit from feeding cull beef cows results from timely purchase of thin, healthy cows with the potential for large compensatory gain and an increase in carcass grade. Cull cows purchased at the low point of the price cycle (annual) and sold at the high point, in combination with a well managed winter feeding program, offers the greatest potential for profit,” says University of Arkansas (UA) researchers in a comprehensive fact sheet (FSA 3058). “It's important to monitor costs and cow body condition in order to manage the cull cow enterprise most effectively.”
Details in the UA fact sheet include information about how cull cow value is impacted by cow type, pregnancy status, breed or breed type, color, horn status, frame score, muscle thickness, fill, Quality Grade, hide brands, health, body weight and age.
Gauging the Potential
More specifically, researchers at Texas A&M University (TAMU) cite these considerations in evaluating the potential for keeping or buying cull cows to manage through the winter:
• “Adding weight to thin cows before sale is particularly valuable when cows are BCS 3 or lower at culling. High quality forage can efficiently replenish muscle mass on cows. However, extremely old cows may not gain as efficiently as younger cows and should probably be placed directly into the marketing channel when culled. For example, in a case study by Torrell et. al (Montana) 20 percent of the cows placed on feed were smooth-mouthed cows that generated an average loss of $2.93 per head, while solid-mouthed cows generated a positive $64.73 per head.”
• “Market crippled cattle directly to the packer if possible, without going through the usual marketing channels. Cows with other blemishes, such as bad eyes, should probably also be sold directly to a packer.”
• “Sell cull cows before they become fat (BCS 8-9). Fat cows are discounted for low lean yield, regardless of their potential to classify as Breaking Utility.”
• “Sell cows outside of seasonal lows. Cull cow prices are normally lowest in October and November. If possible, consider marketing between February and September when slaughter rates are lower.”
• “Consider cull cows as a valuable asset, and handle them as such. Bruising is a major problem with cull cows.”
• “Always be cautious and concerned about withdrawal times when marketing cows that have been treated with any medication requiring a withdrawal period.”
In order to assess the economic potential of feeding cull cows, TAMU researchers explain, “Feeding margin is defined as the sale price of the cattle (dollars per cwt.) less the cost of gain (dollars per cwt.), multiplied by the expected weight gain of the cattle. The marketing margin is calculated by subtracting the price of the cattle (dollars per cwt.) when the cattle would normally be sold from the expected sales price (in the future—dollars per cwt.), multiplied by the starting weight of the cattle. These two margins can be added together to calculate a net margin to determine the expected profitability.”
Expanding Stocker Options
Exploiting seasonal highs and lows in the cull cow market isn't just for cow-calf producers. Mike Murphy made the comment that opened this article to participants at the Mid-South Stocker Conference held earlier this year.
Besides the profit predictability, Murphy says the enterprise bears consideration by stockers because the timing of it means there is still time to purchase cattle for spring and summer grass programs.
Moreover, it illustrates the type of diversity stocker operators and backgrounders may need to consider as operating costs and price volatility increase.
As cyclical beef herd expansion takes place, profits will be tougher to come by. In fact, Murphy also pointed out that typically within the first two years of a cyclical transition—the part of the cycle the industry is currently in—there comes one of those gut-wrenching, back-breaking kinds of price wrecks that are tough to endure.
The risk this time around could be higher because prices are at historic highs, as are the price spreads between feeders and feds, and between feeder cattle and calves. That's before considering the growing range of prices paid for same-weight, same-class cattle.
At this stage of the game Murphy believes stocker management strategies should include: focusing on equity protection, managing inventories through average buying, looking for opportunities to manage risk through the futures market, and evaluating potential for retaining ownership beyond the stocker enterprise.
Whatever the enterprise and whichever the segment, Murphy emphasizes, “Return on equity is how we should be measuring our business.” When you do that, it's amazing just how lucrative the cattle business can be (Table 2).