By now you're surely sick of hearing about ethanol, about how it's impacting corn and calf prices and how it could easily re-shape the entire beef business.
After all, no matter how idiotic it is for the government to create an artificial corn market through subsidies for domestic ethanol production—tax credits and import tariffs—the pressure already exerted on cattle prices is too real.
Figure every 50-cent per bushel increase in the cost of corn takes about $12/cwt. off the price of a five-weight calf, according to Cattle-Fax; $6-$7 off a 750 lb. feeder. The resulting cash price doesn't mean a market crash, nor does it necessarily define unprofitable price levels, but it does mean ethanol policies have already robbed a significant amount of equity from the cattle business compared to what it would have been otherwise.
Moreover, the new reality of corn politics and economics shines a brighter light on cows and cowherd management. Though beef cows aren't typically viewed as a key corn consumer, as ethanol production buys more corn acreage, there are fewer acres left for the forage staples of cow-calf production, which means prices of these inputs will continue to rise as well.
That's bad news for average and low-return cow-calf producers. According to Cattle-Fax, average profits in the cow-calf sector were $2.33 per head—basically breakeven—from 1980 to 2000. Low-return producers lost about $54 per head during that time.
“Many breakeven producers have been successful at reducing costs, but at the expense of productivity, and they need to re-evaluate those areas to determine which areas have impacted productivity,” explains a Cattle-Fax report shared in February at the Cattlemen's College sponsored by Pfizer Animal Health.
Conversely, high-return producers earned $120-150 per head more than low-return producers, and about $65 more per head than average-return producers. Keep in mind this is for 1980-2000, before the last several years when about anyone with a live animal and a pair of fencing pliers could make cows pay.
Though these high-return producers exhibited superior profit performance, they were significantly below average in some key areas, says Cattle-Fax: annual cow costs; breakeven calf costs; feed costs; input costs; and general operating costs (Figure 1).
There's not much that can be done about interest costs other than working your way to lower debt levels. The other areas, though, continue to be ripe with profit possibility.
For instance, according to the Cattle-Fax, one way high-return producers achieve lower nutrition costs is by utilizing home-raised feed more efficiently and by procuring purchased feed at the most optimum time. These are also the folks most likely to find more efficient ways than traditional haying to preserve the nutrient value of the hay they've got.
In terms of herd health, the low-cost, high-return producers typically precondition calves and utilize specific vaccination protocols, says Cattle-Fax. These folks also tend to spend more money on genetics than high-cost, low-return producers.
Bottom line, the high-return crowd spends more money in areas that can return the most money, and they spend the least money on things that can't alter the return.
“Low-cost production and profitability is about more than keeping costs in check—it's about maximizing production relative to cost (more pounds weaned per cow exposed,”) emphasizes the Cattle-Fax report.
That's one area where high-return producers strive for above-average performance. It's not just the money in the bank defined by those pounds, it's the difference in how much money you must have from them.
Look at it this way. According to Cattle-Fax, the breakeven price of a 550 lbs. weaned steer calf is $80/cwt. if you assume an annual cow cost of $350 and an 80 percent weaning rate. Increase the weaning percentage by 10 points, holding all else equal, and the breakeven price drops to $71/cwt. That works out to about to be about $50 difference in the revenue per cow.
“At higher cow costs, these differences widen even further,” explains Cattle-Fax. “If the annual cash cost to carry a cow is $450, the difference between weaning 90 percent and 80 percent is about $60 per calf.”
Compare that to the $6-$8/cwt. decrease in breakeven cost that Cattle-Fax says comes with increasing weaning weight from 550 lbs. to 600 lbs. while maintaining the same cow cost.
Increasing Opportunity and Challenge
Though still underutilized by the industry on average, these concepts are certainly nothing new.
Now, think of a world shaded by ethanol production. Ponder what the most efficient herds and cows might look like when $4 per bushel is the low for corn prices rather than the impending high. The value of management principles embraced by high-return producers is magnified even more.
As an example, the odds-on bet, at least in the short-run, is that feedlots will seek to dilute breakevens by placing older, heavier cattle on feed. On average that means cattle will be on feed for fewer days. In effect, that also means average feed yard occupancy rate will decline, which is also negative to breakevens.
This suggests that faster growth and greater feed efficiency on forage will be worth more.
Likewise, cattle with the ability to grade Choice with fewer days on feed will likely be sought after even harder than they have been. Since the only ways to increase grade are through management and genetics, and since there will be fewer days on feed to manage cattle as a group, it makes sense that genetics will also gain importance.
Although it seems logical that health risks at the feed yard will also decline because heavier, older cattle are being placed, it's going to take renewed focus on health management prior to the feedlot to get them there cost-efficiently.
The bottom line of all of this is that if you haven't made a profit when historically high prices have been sustained for a historically long period of time, you're in a heap of trouble. Even average-return producers will struggle harder to achieve breakeven status in the ethanol world. The high-return folks, though, are positioned to exploit the challenges of high grain prices rather than fall prey to them.