The rebound in feed grain production this year, both in Western Canada and in the U.S., has led to sharply lower feed grain prices. This, together with strong fed-cattle futures prices for next spring, provides a strong argument for higher calf prices this fall. However, the amended U.S. country-of-origin labelling (COOL) rules, to become effective in November, have led to buying caution from Canadian feedlots and a sharp increase in feeders being exported to the U.S.
From May to September, Alberta elevator delivered barley prices have dropped by $115/tonne to around $165/tonne delivered to the Lethbridge area. For other Alberta locations, barley prices are generally lower by the trucking freight differential to the Lethbridge area. This feed price change obviously lowers the cost of feeding, but many may wonder how this affects calf value.
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“One method of estimating feeder cattle prices is to estimate what the animal is worth to a cattle feeder,” says Neil Blue, market specialist with Alberta Agriculture and Rural Development. “By using estimates of feed costs, feeding efficiency and other costs, together with an estimate of what a finished animal will be worth at the end of the feeding period, you can work backward to arrive at the value of the feeder. I have included an example of the process of how those numbers are used to arrive at the calf price estimate. In completing your own calculations, you will need to factor in discounts or premiums for quality as well as a discount for lower feeding efficiency when valuing heifers.”
Example
The feeder cattle purchase date (your sale) is Nov. 1, at a weight of 600 pounds. The example steer is assumed to gain an average of 3.3 pounds per day to finish near the first of June at about 1,300 pounds.
We then check a quote from the Chicago June 2014 live cattle futures, and find that quote at US$129.50/cwt.
Next, convert that futures price to an estimate of next June’s Alberta fed-cattle price (June 2014 Canadian dollar futures is approximately 96 cents U.S.). To convert the U.S. futures price to Canadian, divide the U.S. futures price by the exchange rate: $129.50 ÷ 0.96 = $134.90/cwt Canadian.
Next, adjust for basis, which is the difference between Alberta fed-cattle price and the U.S. fed-cattle futures price. Typically, the basis level used for this calculation is an average of actual basis levels from the past for that time of year. The five-year average fed-cattle basis for late May/early June is about minus $7/cwt, that is, a discount of $7/cwt from the “Canadianized” fed-cattle futures price. Note that the actual basis level at sale date is subject to significant fluctuation from that average. This can be calculated as: $134.90/cwt Canadian minus $7/cwt basis estimate = $127.90/cwt estimated Alberta fed-steer price.
At 1,300 pounds sale weight, this steer would be expected to have a value of about $1,670 at June 1. Using the 3.3 pounds of average daily gain, a barley price of $3.60/bushel, silage price of $45/tonne, some supplement, mineral and salt, and a feed conversion of about seven pounds of dry matter feed per pound of gain, the feed cost is estimated at 63 cents per pound of gain.
Other costs
Other feeding costs include veterinary and induction costs of $20/head, buying and selling costs totalling $25/head, yardage (overhead, labour and feed delivery cost) of 40 cents per head per day, an allowance for death loss of 1.5 per cent, and interest at 4.0 per cent (currently prime plus one per cent). These other costs total 25 cents per pound of gain. Together with the feed cost, the total estimated cost per pound of gain is 88 cents.
If the 600-pound steer gains 700 pounds to sell at 1,300 pounds, and using this estimated feeding cost of 88 cents per pound of gain, the cost of feeding this steer is 700 pounds X $0.88/pound, or $616. Using $1,670 as the value of the finished steer, and subtracting from this $1,670 value the $616 cost of feeding equals $1,054. At break-even, this implies that the 600-pound feeder steer on November 1 would be worth $1,054 ÷ 600 pounds, or about $1.75/pound.
Blue says there are many assumptions in these calculations, which is a reminder of the risks involved in cattle feeding.
“Other influences on feeder cattle bids are recent feeding profits or losses and perceived risk (i.e., feeding margins moving negatively) during the feeding period. The near-term risks relating to the amended mandatory country-of-origin labelling are likely to limit feeder cattle price potential.”
