USDA’s July Cattle on Feed report was released on Friday July 19th. These monthly reports estimate inventory in US feedlots with one-time capacity exceeding 1,000 head, which represent more than 80% of total on-feed inventory in the United States. The July report is also a quarterly report that includes data on the steer-heifer mix in feedlots. This brief article will walk through last week’s report and some of the implications of it.
Total on-feed inventory declined during the month of June with July 1 inventory estimated at just over 11.2 million head. This trend is normal as on-feed numbers tend to decline seasonally from winter to late summer. Compared to 2023, July 2024 inventory was actually about 0.5% higher. On the surface this seems odd given the recent declines in the size of calf crops, but I maintain that cheap feed and higher slaughter weights are largely the reason for this as cattle are being fed longer.
Feedlot placements have been the most interesting number to watch in recent months. For the month of June, placements were down almost 7% from last year. This contrasts with placements being 4% higher year-over-year for the month of May. These last two months illustrate why it is sometimes hard to look at things purely on a monthly basis. If I instead calculate feedlot placements for the first 6 months of 2024, as compared to the first 6 months of 2023, total placements have been down by 3.2%. This likely tells the feeder cattle supply story a bit better.
Since USDA will not be publishing a July Cattle Inventory report this year, the July steer-heifer mix on feed is especially important as it provides some perspective on heifer retention. Heifers accounted for 39.6% of on-feed inventory in July, which was actually higher than the previous estimate from April. If retention were occurring, one would expect the heifer percentage to be in the low-mid 30% range, so this continues to suggest that expansion is not on the near horizon.
Everyone who buys or sells feeder cattle regularly understands that in most markets, the price per pound decreases as cattle get heavier. This can create a challenge for pricing cattle in situations where weight is not known with certainty. Final weight is uncertain in forward contracts, internet sales, and when cattle are sold off the farm but hauled to another location to determine pay weight. In these situations, cattle are often sold with a base weight, and the price is adjusted downward as the weight of the cattle exceeds that base weight. As an illustration, let’s consider a backgrounder that sold cattle via an internet auction with an advertised base weight of 800 lbs. and a price slide of $8 per cwt. Let’s further assume that the cattle sell for $240 per cwt in the auction and will be hauled to a weigh station the following week to determine the pay weight.
If those steers were to weigh exactly 800 lbs, no price adjustment is needed. The pay weight is 800 lbs. and the price is $240 per cwt for a total of $1,920 per head. However, if the cattle weighed 850 lbs., the price is adjusted downward because they are 50 lbs. above the base weight. With an $8 per cwt slide, the price would be adjusted downward by $4 per cwt (50 lbs. is half of a cwt). With a pay weight of 850 lbs. and an adjusted price of $236 per cwt, the per head total is $2,006. Price slides can get much more complicated than this, but this simple illustration captures the process well enough for this discussion. As long as the price slide is not so large as to actually result in a lower value per head, the seller is typically happy to have more lbs. to sell. In the previous example, the cattle sold for $86 more than they would have had they weighed right at the base weight.
Now, I want to focus this discussion on the difference between the artificial price slide used to adjust the price for cattle weighing above the base weight and the actual market price discount as cattle get heavier. The table below illustrates this point in relatively simple terms. Suppose the market price for an 800 lb. steer is $240 per cwt and the market price for an 850 lb. steer of the same type and quality was $235 per cwt. This would imply that the actual price discount in the feeder cattle market was $10 per cwt and the market value of those 850 steers would be $1,997.50 per head (850 lbs. x $235 per cwt). If a seller advertised that group of steers with a base weight of 800 lbs. and a $10 per cwt price slide, the price slide and the market discount for weight would match perfectly. The final price would be the same even though the pay weight exceeded the base weight. This scenario is shown in the middle row of the table below, but this will not be the case when differences exist between the market discount for weight and the price slide.
If the artificial price slide is less severe than the market discount as cattle get heavier, then the seller is actually better off if the pay weight exceeds base weight because the lower artificial price slide would result in a smaller price discount due to the additional lbs. This is illustrated below with the $8 per cwt price slide and note that the final price is higher for these steers. Previous research has found evidence that sellers tend to underestimate weights in these situations (Brorsen et al., 2001). Conversely, if the market discount is greater than the price slide, the seller would actually receive a lower final price than had they advertised the cattle with the higher base weight to begin with. Note that the $12 per cwt price slide below, which exceeds the market discount, results in a lower final price. In situations such as this, sellers have no incentive to overestimate weight (Burdine et al., 2014).
In theory, price slides used for selling cattle with weight uncertainties should evolve with the market. But my experience has been that they are often slow to adjust, whereas market conditions change very quickly. The key point from this discussion is that a price slide is most efficient when it is roughly equal to the market discount as cattle get heavier. In those situations, there is no incentive for sellers to underestimate weight when selling cattle on a slide and there is little true penalty if they do. Buyers and sellers both need to understand the implications when prices slide and market weight discounts diverge, as this can have an impact on both parties.
Base weight
Sale Price
Pay Weight
Price Slide
Final Price per cwt
Final Value per head
800
$240
850
$8 per cwt
$236
$2,006.00
800
$240
850
$10 per cwt
$235
$1,997.50
800
$240
850
$12 per cwt
$234
$1,989.00
References:
Brorsen, B. W., N. Coulibaly, F. G. C. Richter, and D. Bailey. 2001. “Feeder Cattle Price Slides”. Journal of Agricultural and Resource Economics. 26: 291-308.
Burdine, K.H., L. J. Maynard, G.S. Halich, and J. Lehmkuler. 2014. “Changing Market Dynamics and Value-added Premiums in Southeastern Feeder Cattle Markets”. The Professional Animal Scientist. 30:354-361.
Dairy farmers in the Southeast, Appalachian, and Florida Federal Milk Marketing #7 (FMMO #7) orders are ultimately paid on the amount of skim milk and butterfat they produce. Growing demand for dairy products like cheese and butter have increased butterfat values and their impact on milk prices over time. For some perspective, Figure 1 contains the historical Uniform Butterfat Price for the Southeast Federal Milk Marketing Order from 2000 to 2024. There has been significant volatility, and the impact of COVID is pretty clear, but the general upward trend is evident – butterfat has become increasingly valuable over the last 24 years.
In the interest of painting a complete picture, Figure 2 contains the Uniform Skim Price for FMMO #7. As with the butterfat series (Figure 1), volatility is clearly present. One can see strong skim milk price levels in 2007, 2014, and 2022, but one can also see multiple times when skim milk prices were south of $10 per cwt. The slight upward trend over time in skim milk price is not as evident as the trend in butterfat prices.
Because butterfat only represents a small percentage of the milk that is produced, it is easy to underestimate its significance on milk price at the farm level. To emphasize, for the month of March 2024, the uniform skim milk price was $11.23 per cwt and the butterfat price was $3.2099 per lb. When uniform milk prices are calculated by the orders, they are done so by assuming 3.5% butterfat levels. With that 3.5% butterfat assumption and a $3.2099 butterfat value per lb, each cwt of milk yields a butterfat value of $11.23 (3.5 lbs @ $3.2099 per lb). At the same time, the skim milk value from a cwt of milk was calculated to be $10.84 (96.5 lbs @ $11.23 per cwt). Combining the butterfat and skim values results in a uniform milk price of $22.07 per cwt for the month of March. This calculation can be seen in the first row of Table 1. Note that even at 3.5%, the butterfat value represents just over half of the uniform milk value.
This uniform milk price does not represent the price that an individual dairy producer would receive as that would be impacted by any premiums and/or deductions, as well as how their location differential compares to that of the base zone. Readers should use the specific prices with caution as they are just used for illustration. But, the difference in milk price as butterfat increases is very telling. Note that each additional 0.25% increase in butterfat results in an increase in milk value of $0.77 per cwt. Table 1 also illustrates the same milk price calculation for butterfat percentages from 3.5% to 5.0%. At 5%, milk price exceeds $26 per cwt, and butterfat accounts for over 60% of that value. Given the value differences calculated in Table 1, it is clear why increasing butterfat has been a focus of many dairy farmers in recent years. It is important to note that Table 1 looks only at price and does not consider the potential for increased expenses that may be associated with increasing butterfat.
Table 1. Uniform Skim Milk and Butterfat Price and Their Impact on Milk Value
% Butterfat
Skim Milk Value
Butterfat Value
Milk Price
% of Value from Butterfat
3.50%
$10.84
$11.23
$22.07
50.9%
3.75%
$10.81
$12.04
$22.85
52.7%
4.00%
$10.78
$12.84
$23.62
54.4%
4.25%
$10.75
$13.64
$24.39
55.9%
4.50%
$10.72
$14.44
$25.17
57.4%
4.75%
$10.70
$15.25
$25.94
58.8%
5.00%
$10.67
$16.05
$26.72
60.1%
Estimated from March 2024 Uniform Price Computations for FMMO #7. Uniform Skim Milk Price was $11.23 per cwt and Uniform Butterfat Price was $3.2099 per lb.
(March 2024, Southeast Federal Milk Marketing Order)
Input prices have been a major topic of discussion over the last couple of years. As I write this, we are enjoying some extremely high cattle prices. But those high prices have been at least somewhat offset by increases in production costs. This has been true of feed, fertilizer, fuel, machinery, labor and many other inputs. On the heels of USDA’s Prospective Plantings report, it seemed to be a good time to discuss recent trends in feed prices and the impact they have on feeder cattle values.
For some recent perspective, the US average corn price per bushel is tracked in the figure below from January 2020 through February 2024. It’s easy to see the low-price levels during COVID, price levels exceeding $7 per bushel during 2022, and the significant price decreases seen through the 2023 season. Corn tends to be the market leader and trends in corn price are typically representative of other feedstuffs. Corn prices have changed dramatically over the last year and will likely continue to do so in the coming months.
The demand for feeder cattle is derived from the demand for fed cattle. Anything that impacts the profitability of finishing cattle impacts the value of feeders. So, feeder cattle values are heavily impacted by the cost of taking those feeder cattle through finishing and feed prices are the most significant cost of doing that. I am also showing projected cost of gain from Kansas State University’s Focus on Feedlots monthly reports in the second chart. Note how closely projected cost of gain follows corn price per bushel. As corn price rises and feedlot cost of gain increases, this gets reflected in lower feeder cattle values – feedlots cannot pay as much for feeders. As corn prices decrease, lower feedlot cost of gain leads to higher feeder cattle values as feedlots place feeders in the lower cost environment. While there are a large number of factors behind the strength of feeder cattle prices over the last year, lower feed prices have been part of story.
Finishing costs also impact value of gain on feeder cattle, which is reflected in the market through value differences across cattle at different weights. When finishing costs are high, feedlots tend to bid less aggressively on smaller calves and lean towards placing heavier feeder cattle. This tends to result in higher prices for heavy feeders relative to calves. This is sometimes described as a tightening, or narrowing, of price slides. As this happens, the value of pounds that are added prior to feedlot placement increases, and more incentive is created for cow-calf and growing operations to sell heavier feeder cattle. As feed prices have fallen recently, this incentive has also changed a bit. By no means am I suggesting that incentives to sell larger feeders don’t exist, but I do think the value of gain on feeder cattle has decreased from where it was this time last spring.
As we open the final month of the year, most spring-calving cow-calf operations have weaned calves and have an opportunity to assess the productivity and profitability of their herds. To that end, I wanted to quickly review two measures that I feel are of utmost importance to a cow-calf operator. Neither measure carries a dollar sign, but both have serious implications for the revenue side of the profit equation. There is no shortage of measures and indices that can be helpful for cow-calf operators, but weaning rate and pounds of weaned calf per cow are two that I think are very important, but also relatively simple to understand and calculate.
Weaning rate is the percentage of cows exposed to a bull that wean a calf in a given year. If a farmer exposed 50 cows and weaned 45 calves, the weaning rate for that operation would be 90% (45 calves divided by 50 cows). There is a cost to maintaining and breeding cows whether they wean a calf or not, so limiting the number of cows that incur costs and fail to wean a calf is crucial. Holding all other things constant, herds with higher weaning rates will be more profitable than those with lower weaning rates. If weaning rate is an issue, farmers should work to determine if the issue is cows failing to breed, cows losing calves, or calf survival.
An easy way to think about weaning rate is that it converts revenue per calf to revenue per cow. Table 1 below provides a simple way to illustrate this concept. If one assumes that the average calf is weaned at 550 lbs and is worth $2.30 per lb (for simplicity think steer-heifer average), then the value of each calf is $1,265 at weaning. However, when discounted for cows that were maintained but did not wean a calf, the revenue picture on a per cow basis is very different. Each 5% change in weaning rate impacts revenue per cow by more than $60. That difference expands in strong calf markets and contracts in weaker calf markets, but the fact that weaning rate significantly impacts profit is undeniable.
The second measure that I wanted to briefly discuss is pounds of weaned calf per cow. This measure builds upon weaning rate by also including weaning weights. Pounds of weaned calf per cow can be calculated by dividing the total number of weaned lbs by the number of cows exposed to a bull or by multiplying the average weaning weight for the operation by the weaning rate. I like to think of pounds of weaned calf per cow much like a yield measure for a crop operation – production per unit. Weaned lbs are the production level, and cows are the unit. So this measures the lbs of weaned calf a cow-calf producer can potentially sell for every cow he or she maintains.
Table 2 shows pounds of weaned calf per cow for a range of weaning rates and weaning weights. Increasing the percentage of cows that wean a calf each year and / or increasing the weaning weight of calves are two of the primary ways that cow-calf operations can see increased revenues, with calf price being an important third factor. The wide range across the table speaks to how much this measure can vary across operations. This is not to say that a higher level of lbs of weaned calf per cow is always desirable because this measure does not incorporate any additional costs associated with higher weaning weights or other considerations of the operation. But, tracking and managing that number will have profit implications for the operation over time.
Table 1: Revenue per Cow as Weaning Rate Changes
Assuming 550 lb calves @ $2.30: $1,265 per calf weaned
Weaning Rate
Revenue per Cow
95%
$1,202.75
90%
$1,138.50
85%
$1,075.25
80%
$1,012.00
75%
$948.75
Table 2: Pounds of Weaned Calf per Cow by Weaning Weight and Weaning Rate
