As I was talking to Blake about this piece, he told me about something Gordon Hazzard had once written. He said it went something like:
“We are grass farmers, and we need to remember we are selling grass and water wrapped up in a cow hide.”
Blake’s take on this is “Grass makes us our money, but we have to have livestock to harvest the grass to make it worth anything. All ruminants will eat grass, but we might as well find a class or type of livestock that maximizes our return for our time and effort.” Here, Blake takes us through how we can do that. Enjoy!
Prices for different weights, sexes, and types of cattle can vary greatly throughout the year. When a person is trying to decide what kind of stocker animals to buy, it is important to study the relationships between these prices. Market prices paid for cattle are constantly changing, and certain classes or sizes are often in far greater demand than others. Performing a value of gain analysis shows a prospective buyer which classes of cattle are overvalued compared to others, and which are undervalued. We want to sell the overvalued animals from our inventory and buy the undervalued.
What is Value of Gain?
The concept of value of gain is an important one to understand for anyone involved in commercial cattle production. A value of gain analysis is a useful tool whether you run a cow/calf, stocker, or finishing operation. Value of gain is basically what the market is willing to pay you to add weight to a certain size or class of animal at any given time. It varies between different sizes of animals and can change greatly depending on the time of year and overall market conditions. Value of gain should be measured against your cost of gain, which is what it costs you to add each pound to an animal.
How Is It Calculated?
Calculating value of gain is fairly straight forward. First, you subtract the purchase price of the animal you plan to sell from the expected sale price to figure out what your gross margin is, then divide by the weight gained.
Suppose you’ve decided to graze some steers over the spring and summer. You will turn them out in April and graze them until early September. That’s roughly 150 days. If your cattle gain two pounds per day, they will be 300 pounds heavier at the end of the grazing season. Your best guess is that an 800 pound steer in September might be worth $1.25 per pound. That’s $1,000. You buy a 500 pound steer today, and he costs $1.50 per pound. That equals $750. So, you subtract $750 from $1,000 to get your gross margin of $250 per head. Now, divide the gross margin by the 300 pounds the steer gained, and you find that the value of gain is worth $0.83 cents per pound. This means that in today’s environment, the market is willing to pay you .83 cents for each pound you add to your steer.
What if you decided you wanted to sell steers weighing 600 pounds instead of 800 pounds? Let’s say you could sell them for $1.40, or $840 per head. Keeping with our plan of grazing for 150 days and adding 300 pounds, you would buy them weighing 300 pounds in April. 300 pound calves now would cost around $1.65. That means the average cost would be $495 per head. Subtract $495 from $840 to get your gross margin of $345. Then divide by 300 pounds, and you find that the value of gain is $1.15 per pound. This figure leaves a lot more room for profit than the .83 cents that the five weight steer offered.
So, why the difference in these two?
The five weight steer is the overvalued animal right now. It is the preferred animal by many stocker operations for summer grazing, and the demand for them outweighs supply this time of year.
In contrast, the 300 pound calf costs less in today’s market. The 600 pound yearling in September may be overvalued, in high demand by folks who want to graze cattle through the fall and finish them over the winter. This gives the 300 pound calf an attractive value of gain and offers the person buying them an opportunity to profit.
Things to Keep In Mind
Remember, all of the numbers in these examples are estimates and are based on my local market conditions. Use your local market information when making value of gain calculations and purchasing decisions.
You also must remember to weigh the value of gain against your cost of gain.
Value of gain analysis is a useful tool for cow calf operations as well.
When five weight “grass” cattle are in high demand this time of year, they often bring as many or just a few dollars per head less than their six and seven hundred pound counterparts. If you sell your calves in the spring, it doesn’t make any financial sense to feed your calves heavily all winter or seek high weaning weights when a lighter calf will bring you just as much money as a heavy calf that costs more to produce. When doing value of gain calculations to decide whether to keep calves longer or sell them, cow calf operators should use the price they could get for their calves if sold that day as the purchase price. Remember, your feed and forages are not free, so weigh the value of gain against cost of gain. In addition, selling the calves earlier may leave you with some surplus grass for the cow herd in case of a drought.
This Is a Useful Tool in Down Times
The cattle market has been in turmoil over the last month and a half or so. Lately, prices have been much lower. I’ve seen all kinds of negative commentary about how bad the market is and how packers are just stealing cattle from ranchers. It is important to remember that all markets are cyclical, with high priced times as well as low priced times. There isn’t much any of us can do about the overall market or the prices we’re offered. What we can do is look at our local markets, find profitable opportunities to sell or buy, and do the best job we can at keeping our stock healthy and growing.