By Alfredo Dicostanzo
Looking back at late November of 2014, when the negotiated fed steer price reached an all-time high, $172.06/cwt, makes one wonder why—today, at fed steer prices at least $10/cwt higher, margins are still narrow. A 1,550-lb fed steer is worth $155 more today than one finished in late November 2014.
While cattle placed against current live cattle marketing might have a wider margin for profit, cattle placed in October of 2023 will have a narrower margin of profit. Why?
Although US cattle inventories declined, and one factor effecting this decline, widespread drought, is also a factor this time, cattle feeding margins are not as wide as in the previous period of low cattle inventories.
Much has changed since 2014!
Although labor rates are subject to many nuances, using a standardized report such as the ISU Custom Rate Survey should reflect relative conditions prevailing in the field. Hourly wages reported for farm work in the 2015 ISU Custom Rate Survey averaged $14.20 while the survey indicated that average hourly wages were $21.75 in 2023. This is an increase of $1 per hour in wages for every year since 2016. If it takes one individual to feed and manage 1,000 head of cattle (installed capacity), and that individual works 2,000 hours per year, labor cost for each 1,000 head of cattle (installed capacity) increased $15,100 ($15/head or $0.04 per head daily) during that time.
Interest rates have been hiked by the Federal Reserve since early 2022 to slow down the economy to reduce inflation thus preventing a recession. The effects of higher interest rates on operating costs are significant. As feeder calf prices increase, in response to smaller supplies, the amount of money needed to purchase a feeder calf has increased further compounding the effects of higher interest rates. A $1,000 loan amortized over six months at 4.5% carries $26 of interest while a $1,500 loan amortized over the same period at 8.5% carries $75 of interest: a difference of nearly $50.
Other changes in petroleum production and distribution, adopted to change our reliance on fossil fuels, are affecting cattle feeding margins. A gallon of diesel fuel cost $3.80 in September of 2014 while it cost $4.50 in September of 2023. If one assumes that one hour of operation by most diesel engines in tractors or other equipment consumes four gallons of diesel, then the cost of each operating hour in the feedlot increased $2.80. Making a broad assumption that each labor hour in the feedlot is represented by one fuel-burning hour, yearly fuel costs increased $5,600 or $5.60 per head of installed capacity ($0.015 per head daily).
Lastly, but not least, corn grain prices surged from $3.77/bu in 2014 to $6.90/bu in 2022 and are now closer to $5.00/bu. If we assume that it takes about 50 bushels to finish a steer, then the cost of feeding a steer increased $60 since the last time fed cattle prices were high.
If we assume a 210-day feeding period, and apply the estimates above to current labor, interest rates and feed costs, we account for $122 of the $155 difference (78%) in value between a steer marketed in 2023 and one marketed in 2014.
What does this mean to the cattle feeder or rancher?
In the short term, protecting assets from risk has become a primary focus of managing feedlots.
What are the needs of cattle as we get into winter?
Do we have all the bedding we need? This is particularly true of ranches who are hoping to capitalize on the value of a feeder calf selling as a yearling after 3 to 6 months of backgrounding. Extreme cold or wet and cold days place a demand on maintaining body heat by cattle.
Creating a bed pack, particularly in an area sheltered from the wind, is a great way to keep cattle comfortable and making gains expected given the diet offered. Feeders or ranchers should plan on using up to 4 lb of bedding daily (prorated for the season) during inclement weather. If no concrete surface is available, bed packs are best made on a south-facing slope and planning from 12 to 36 square feet per head.
The initial bedding delivery will likely require more than the prorated 4 lb daily but less bedding will be needed in subsequent deliveries. If the bed pack is not wet by precipitation, ensuring that additional bedding is added when the surface is still dry but begins to get sticky or seep will help maintain a bed pack mound. As soon as rain or snow falls on the pack, it must be removed, and dry bedding added to start a new pack. On pasture or large yards, this is a good time to relocate the bed pack to a different but wind-protected location.
Under extreme wet conditions, simply placing bales (straw, stalks or even hay) out for lightweight, stressed calves is a strategy that has saved cattle.
What can be done to prevent death in cattle during the first 60 days on feed or the last 90 days on feed?
As indicated above, with so much at stake, astute operators do not hesitate to make emergency responses to inclement weather. It is less expensive to remove a used bed pack than to recover losses from treating or losing cattle to disease.
Similarly, next year, when these cattle are nearing the finished end point, what strategies or feed additives are available to ensure late-term death does not occur, particularly after the first heat event of the year? Developing a list of high-risk finishing cattle that takes into consideration thriftiness and background to be sold prematurely, if necessary, may be one way to prevent late-term death. It would be based on identifying cattle that recovered from respiratory or digestive disease (including an identified bout with acidosis) while in the grow or finish yard and/or health and performance history of contemporaries from the same source.
At 30 to 50 days prior to harvest of the lot, visual inspection of the lot accompanied by review of individual data should be used to market cattle deemed “in need of marketing” for various reasons (previous issues with respiratory, digestive or foot and leg problems). Consideration should also be given to incorporating feed additives that demonstrate promise in maintaining gut integrity, particularly when cattle are exposed to heat stress.
Margins can also be improved by increasing the value of the product. Extra value may be found in cattle of high quality that might return greater gross revenue if marketed through the grid.
For individuals marketing cattle at the end of a feeding period, grid marketing represents an excellent method of capturing greater value at sale time. It is important to study the nuances of every grid offered by packers. Because the drivers are marbling and muscling, heavy cattle that yield carcasses that marble in the upper two thirds of USDA Choice or Prime receive hot carcass premiums from $5/cwt to $15/cwt. This represents from $45 to $135/head more. In the current marketing environment, these premiums hold even when discounts for heavy or USDA YG 4 carcasses would work against them.
In the long term, interest rates may fall again. We hope this happens soon! However, labor cost and scarcity of labor are not going away. Similarly, because policies to discourage fossil fuel use may be here to stay, fuel prices may never return to levels previously seen.
Source : unl.edu