Southern Ag Today

Author: Kenny Burdine

  • Understand the Implications of a Price Slide When Buying and Selling Cattle

    Understand the Implications of a Price Slide When Buying and Selling Cattle

    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$240850$8 per cwt$236$2,006.00
    800$240850$10 per cwt$235$1,997.50
    800$240850$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.

    Burdine, Kenny. “Understand the Implications of a Price Slide When Buying and Selling Cattle.” Southern Ag Today 4(21.3). May 22, 2024. Permalink

  • Butterfat Continues to be a Major Driver of Milk Value

    Butterfat Continues to be a Major Driver of Milk Value

    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

    % ButterfatSkim Milk ValueButterfat ValueMilk Price% of Value from Butterfat
    3.50%$10.84$11.23$22.0750.9%
    3.75%$10.81$12.04$22.8552.7%
    4.00%$10.78$12.84$23.6254.4%
    4.25%$10.75$13.64$24.3955.9%
    4.50%$10.72$14.44$25.1757.4%
    4.75%$10.70$15.25$25.9458.8%
    5.00%$10.67$16.05$26.7260.1%
    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)

    Burdine, Kenny. “Butterfat Continues to be a Major Driver of Milk Value.” Southern Ag Today 4(18.2). April 30, 2024. Permalink

  • Prospective Plantings, Feed Prices and Implications for Feeder Cattle Markets

    Prospective Plantings, Feed Prices and Implications for Feeder Cattle Markets

    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.

    Coming full-circle, planting intentions impact feeder cattle markets because they impact the supply of feedstuffs and that has feed price implications. Late March’s Prospective Plantings report suggested a significant shift was expected with nearly a 5% decrease in corn acreage from 2023. The report also projected a 6.3 million acre decrease in prospective plantings of all principal crops, which would seem to suggest there is potential for more acreage to be planted in 2024. CME© corn futures rose in response to the report on Thursday but were down a bit at the time of this writing. In reality, this is just the beginning and actual planted acreage will respond to this information, and many other factors, this spring. But it definitely suggests the potential exists for tighter corn supplies later in the year. USDA’s Prospective Plantings report can be found at https://downloads.usda.library.cornell.edu/usda-esmis/files/x633f100h/31980870j/fj237r16t/pspl0324.pdf.

    Burdine, Kenny. “Prospective Plantings, Feed Prices and Implications for Feeder Cattle Markets.” Southern Ag Today 4(15.2). April 9, 2024. Permalink

  • Two Key Productivity Measures with Profit Implications for Cow-calf Operations

    Two Key Productivity Measures with Profit Implications for Cow-calf Operations

    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 RateRevenue 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

     Average Weaning Weight
    Weaning Rate400 lbs450 lbs500 lbs550 lbs600 lbs
    95%380427.5475522.5570
    90%360405450495540
    85%340382.5425467.5510
    80%320360400440480
    75%300337.5375412.5450
  • Estimate and Manage Your Largest Cost as a Cow-calf Operator

    Estimate and Manage Your Largest Cost as a Cow-calf Operator

    As we move further into fall, winter feeding will move into the forefront of cow-calf operators’ minds. Most cow-calf operations have already begun feeding hay or will do so very soon.  Winter feed costs are likely the largest cost for a cow-calf operation and are impacted by the number of days an operation feeds hay, the cost of the hay (or other feeds) that is fed, and the efficiency of the feeding program. 

    The number of winter feeding days is largely a function of stocking rate and pasture conditions throughout the grazing season. At the national level, the percentage of pasture rated poor and very poor has been lower than last year, but higher than the average of the previous 5-year period. In the Southeast, pastures are generally in worse condition than last year and considerably worse than the 2017-2021 average. In my home state of Kentucky, a lot of cow-calf operations have been feeding hay for a while and will see a higher than normal number of feeding days this winter.

    Hay values are not always easy to estimate because most operations produce their own hay. Much of the hay market consists of private transactions, so there is limited public data on market price. Hay is also unique in the sense that there can be wide ranges in quality, as well as, value across regions due to the high costs associated with moving hay from one area to another. For these reasons, producers really have to put a value on the hay they feed based on what it cost them to produce it or what they paid for it, if purchased.

    Finally, feeding efficiency is sometimes the forgotten factor in winter feed costs because it can be hard to observe and quantify. There is always a loss associated with feeding as cattle don’t utilize 100% of the hay that is produced or purchased. This is typically a function of hay storage and feeding method and there is merit in looking for economical ways to limit losses at these two points.

    I use the table below in Extension programs as a way to discuss the variation in winter feeding costs based on hay values and losses associated with storage and feeding. Costs are expressed on a daily basis with the assumption of a 1,300 lb cow consuming 2.25% of her body weight each day. The number of hay feeding days can be multiplied by the daily costs to estimate hay cost per cow through the winter. 

    Over the last couple of years, hay values in my area have seemed to shift from the left half of the table to the right half and that has had a significant impact on the cost of wintering cows. For illustration, a $20 per ton increase in hay value leads to an increase of $0.34 per day at the 15% loss level and increases at higher loss levels. Similarly reducing storage and feeding losses from 30% to 15% results in a savings of $0.37 per cow per day when hay is valued at $100 per ton and increases as hay becomes more valuable. Having a feel for winter feeding costs can be a crucial first step in understanding cow-calf profitability and is definitely something that cow-calf operators should seek to manage.

    Winter Hay Cost Per Cow Per Day

      Estimated Hay Cost Per Ton
      $60 per ton$80 per ton$100 per ton$120 per ton
    Storage and Feeding Losses15%$1.03$1.38$1.72$2.06
    30%$1.25$1.67$2.09$2.51
    45%$1.60$2.13$2.66$3.19
    Assumes 1300 lb cow consumes 2.25% BW per day

    Burdine, Kenny. “Estimate and Manage Your Largest Cost as a Cow-calf Operator.” Southern Ag Today 3(45.3). November 8, 2023. Permalink