Keys to measuring profitability in the feedlot

2009-01-19T00:00:00Z 2011-01-11T20:34:38Z Keys to measuring profitability in the feedlotBy A. DiCostanzo, University of Minnesota Beef Team Minnesota Farm Guide

Factors affecting feedlot profitability are defined by those related to economic (outside the feedlot) or management (within the feedlot) conditions.

Economic factors include purchase and sale prices, feed prices (usually a function of corn prices) and interest rate. Manage-ment factors include those that affect average daily gain (ADG) and/or feed efficiency (FTG).

Management factors are largely dependent on genetics, nutritional background of the cattle, nutritional management (e.g., feeds used, mixing and delivery method), weather and health.

Any feedlot operator is actually performing two functions in the process of taking cattle from a given weight to a slaughter weight endpoint. These functions are: 1) purchasing and marketing cattle; and 2) adding value (gain and eating quality) to cattle purchased. When viewed separately, these functions demonstrate the complexity of a feedlot operation; yet, they simplify integration of economic and management factors into the profit equation.

Feedlot operators purchase light, “unfinished” cattle at a given price. After a finishing period of weight gain, these cattle are marketed as “finished.” Feedlot operators in the U.S. usually purchase feeder (unfinished) cattle at higher prices than they market finished cattle.

The difference between purchase price and sale price is called price spread or price margin. Feed, nonfeed [death rate, transportation, shrinkage, medicine and veterinary costs, interest and yardage (fuel, overhead, custom hire, labor, etc.)] and indirect costs are calculated over the entire feeding period and spread over the entire gain (in pounds).

These costs are then expressed as dollars per hundredweight ($/cwt) gain and considered cost of gain. The difference between sale price and cost of gain is known as feeding margin.

Profit or loss calculation.

Adding or subtracting price margin and feeding margin on a per head basis permits calculation of profit or loss. The advantage of separating these functions into a margin for each permits in-depth analyses of factors that affect profits.

In addition, this allows a separation of the operator's expertise in purchasing and marketing cattle from their expertise and skills in cattle feeding and management of feeds and health.

Generally, economic factors have a strong influence on price margin. Factors that affect cattle prices are those indicators of supply (beef cow inventories, carcass weights, feedlot marketing totals, imported beef and live cattle totals, and beef production) and demand (beef disappearance, beef consumption, and beef exports), external factors such as price of feed (corn and soybean meal) and effects of weather on crops in the U.S. and other countries leading in grain production.

Factors indicative of increased beef supply have negative impacts on price. Both beef cow inventories and beef production reflect beef supply. However, because the beef industry has a long generation interval, beef production lags behind beef cow inventory, and peaks reflected by beef cow inventories occur about two to three years ahead of peak beef production.

Additionally, other factors modulate beef production irrespective of cow inventories such as carcass weights, and placement rates of both steers and heifers. Steer prices reflect both beef supply and demand.

Since the early 2000s, improved demand helped sustain higher cattle prices in spite of increased beef production. However, due to drought during the middle years of the current decade, beef cow numbers have remained at all time lows.

In addition, attractive fed prices have pushed heifer feedlot placements up. These situations permitted some opportunities for profit as the first decade of the 21st century nears the end. However, increased corn prices driven by the demand for corn for ethanol production since the fall of 2006 pushed feedlot profitability down in spite of record fed steer prices.

In contrast, factors inherent to cattle (genetic and nutritional background), and nutritional and health management in the feedlot define the efficiency with which gains are made. In this regard, many feedlot operators are likely to spend a lot of time fretting over whether they have the right amount of nutrients in their diets, or whether the implant program they have chosen is the most appropriate.

However, managing feedlot cattle for efficiency entails close control of the most minute details such as procuring, storing, loading, mixing and delivering diets that are consistent from beginning to end of the load, and preventing waste (shrink) at various points (storage, loading, and delivering).

The most basic needs for record keeping to determine profit are to collect information on: sale price, purchase price, sale weight, in weight, out weight, dry matter intake, average daily gain, feed efficiency (the ratio of feed DM required per lb gain), interest rate, veterinary cost, death loss, yardage, and bedding use.

Other items to keep track of are: implant use, supplement cost, home-raised feed use and cost.

Of these items, sale price and purchase price have the greatest impact on profit, followed by ration cost. From a performance perspective, feed conversion has the greatest impact on profit, followed by average daily gain.

In 2006, Land O' Lakes close-out data for 800 lb and heavier feeders, reported corn prices at $2.20/bu fed cattle price at $86/cwt, and feeder price at $105/cwt. Profit recorded during this time period was $21/head. A year later, at almost 50 percent higher corn price ($3.28/bu), similar feeder prices ($105/cwt), profit was similar ($21/head) because fed cattle price averaged $5/cwt higher. Thus, a $5/cwt change in fed price offset $1/bu change in corn price between 2006 and 2007.

Equivalent values for profit determinants are relationships between factors that affect profitability (DiCostanzo et al., 1996), and help point cattle feeders to areas where changes need to be applied to offset expected market or performance changes.

Approximate equivalent values of profit determinants are:

$1.75/cwt purchase price = $1.00/cwt sale price

$1/cwt sale price = $5/ton feed (dry basis)

$5/ton feed (dry basis) = 5 points interest rate

5 points interest rate = 0.35 lb FTG

0.35 lb FTG = 0.75 lb ADG

Equivalent values for profit determinants revealed that a change in sale price of $5/cwt offset a change in diet cost of $25/ton (dry matter basis). The approximate effect on diet cost of changing corn price $1/bu is $28/ton (dry basis).

Thus, equivalent values for profit determinants are accurate estimates of expected changes in profit when changes in determinants occur.

With the expectation of slightly lower feeder prices (likely $5/cwt), and drastically lower (up to $10/cwt) lower fed prices, feed prices need to be lowered at least $50 to $65/ton during 2009 for profits to remain unchanged.

At corn prices only $1 to $1.25/bu lower, diet costs will only decrease $25 to $35/ton. Thus, close inspection of potential losses through shrink, poor mixing, inaccurate feed deliveries, water trough access, facilities and bedding management, and close monitoring on health will be necessary in 2009 to prevent feedlot profits from slipping in the red.

Copyright 2015 Minnesota Farm Guide. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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