Selling vs. Backgrounding 2014 Calves

By Warren Rusche

So far 2014 has been one for the record books when it comes to the cattle market. Increased cattle values combined with less expensive feed have dramatically changed the outlook for cow/calf profitability compared to the last few years.

These market place changes should trigger at least an examination of retained ownership plans. After all the net returns from selling calves at weaning will be some of the highest ever for most herds. The question then becomes whether there is an opportunity to capture additional profits by retaining ownership, or is the best strategy to sell at weaning and take the profits immediately?

Table 1 shows the returns for backgrounding calves from 550 to 750 pounds using a range of values at weaning (or purchase) and at selling. The costs for individual operations will vary depending on feed values and yardage costs, however for the purpose of this discussion the cost of gain is assumed to be $0.70 per pound.

Table 1. Profit or Loss Backgrounding from 550 to 750 pounds
 

Based on this analysis the margin between the initial price and sales prices significantly affects the profit and loss. Risk management, either through price insurance products, futures and options, or cash contracts needs to be strongly considered when deciding whether or not to retain ownership. Price volatility has increased along with price levels this year. A geopolitical or economic issue halfway around the globe could lead to net losses.

Another often overlooked factor is how retaining ownership might affect feed supplies and carryover. This year hay and feed supplies are generally adequate going into fall. The same was true in the fall of 2011; but by 2012 feed inventories were critically short for many ranchers due to drought. It is important that producers make sure the potential rewards for retaining ownership justify the additional risk.

It is also important producers don’t automatically assume the risk is too great and that calves shouldn’t be retained. As shown in Table 1 substantial profits are possible, depending upon the buy-sell margin and the expected costs of gain.