Estimating the cost of gain and predicting market prices may be the foundation to deciding whether or not to stocker a particular set of calves. But marginal costs and returns are what can make the difference in profit potential before and after calves are bought.
In fact, Bryan McMurry, Ph.D., a beef economist with Cargill Animal Nutrition, suggests stocker operators focus at least as much on considering marginal costs and returns as they do overall costs and returns.
For the purposes of this article, think of what Walt Prevatt, Ph.D., an Auburn University Extension economist, refers to as the sensitive variables of a stocker operation.
"Average daily gain (ADG), death loss, feeder price, minerals, implants, ionophores, deworming, stocking rate, altering the marketing window, grazing days, alternative or byproduct feeds and feed waste are the sensitive variables that affect the profitability of the stocker enterprise," Prevatt explains. "Evaluating the marginal relationships of these sensitive variables helps us determine whether it's profitable to seek improvements in these variables."
Specifically, Prevatt advises, "First, identify the sensitive variable that you think you can use to improve your profitability. Second, examine what effect a small change in this sensitive variable will have to your marginal returns. Lastly, determine the marginal cost of making the small change.
"If marginal returns are greater than the marginal costs, move forward with making the needed change. These small changes can surely help you achieve a bigger profit and/or reduce a loss," Prevatt says.
The potential can be dramatic, especially when it comes to marginal practices a stock operator or backgrounder typically leaves on the shelf.
For example, McMurry points to minerals at $600/ton. At 0.20-lb. intake/day and an increased ADG of 0.25 lb./day, the marginal cost would be 6¢/head/day, or $6/head across 100 days of stockering.
The advantage of having that extra 25 lbs. to sell in December (basis 725-lb. steer, Oklahoma City, $103/cwt.) would have been $25.75/head. In other words, if you could have made the decision to feed minerals at the same time you sold the calves, it's easy to see how you could spend $6/head and get back $25.75. Figuring the true marginal cost and marginal return is more complicated though.
First, let's agree on how to define value of gain. According to Prevatt, it's the gross margin (sale price $/head minus purchase price $/head) divided by the pounds of gain. It's not the pounds of gain multiplied by the selling price.
So figure the calves above were purchased weighing 600 lbs. the middle of August for $103/cwt., or $618/head (basis Oklahoma City). After a 100-day grazing period, they weigh 800 lbs. after shrink and sell for $90/cwt., or $720/head, in December. The gross margin is $102/head ($720 - $618). The value of gain is 51¢/lb. ($102 ÷ 200 lbs.). Applying this to our same mineral example, the marginal return is $12.75/head (25 lbs. X 51¢), still a 2:1 rate of return. So, in this example, the decision to increase marginal cost with the mineral program can make sense as a way to improve profit.
Of course, if the value of gain could have been accurately forecast for calves purchased in August and sold in December last year, a stocker operator might have foregone the opportunity.
Keep in mind this discussion is based on the strictest definition of marginal return and marginal cost. The former being the value received for those additional pounds of output cost (marginal return), and the latter being the cost of producing the additional 25 lbs. of output (marginal cost).
Unfortunately says Prevatt, no one can accurately forecast market prices and value of gain. As beef supply and demand change daily, so do beef market prices, which in turn cause the value of gain to change over time.
That's where the true power of marginal costs and returns lies. Whether it's finding opportunity where none seems to exist before purchasing calves, or trying to salvage a profit in the face of a market wreck or animal health disaster, marginal costs and returns provide flexibility. More specifically, plenty of risk management exists in the margins.
Another example would be supplemental feed.
"If I spend an extra $15/calf on supplemental feed, can I expect an additional one-tenth of a pound in average daily gain (+0.1 ADG), which will provide additional revenue of $20/head?" Prevatt asks. "If so, buy the supplement and collect the additional $5/head. If the value of the additional output is not greater than the cost of the additional input, move on to look for something that will pay."
You can find some rules of thumb for consumption and gain provided by McMurry in Tables 1-2.
In general terms, McMurry explains it typically pays to increase weight gain in the stocker business up to the point where the marginal costs of producing the additional gain are equal to the marginal return for the increased gain.
Incidentally, when it comes to calculating the marginal net of nutrition, McMurry says, "Always feed high-quality mineral with a growth-promoting additive. Throw the salt blocks away because they reduce mineral intake; a high-quality mineral will provide sufficient salt. Remember that protein is often a limiting factor during the last half of the grazing season."
McMurry believes there's plenty of untapped potential for marginal gain, too. He explains, "A quality, 500-lb. calf has the genetic potential to gain more than 4 lbs./day. They do it in the feed yard every day, yet will do well to gain half that in most grazing situations. If a steer is of the genetic makeup that results in an ideal slaughter weight of 1,250 lbs. or greater, then he's not likely to be too fleshy at 750-800 lbs. coming out of a 100-day program.
"If he gained 2.5-3.0 lbs./day in a 100-day program, his condition would be medium. If condition is a concern, then we simply begin with a 400-lb. calf of the same genetic type and make him weigh 700 lbs. This calf will hit the ground running in the yard," McMurry says.
The power of gross margin
Besides, buying lighter-weight calves may provide the most marginal opportunity of all. File it with that age-old wisdom of buying a profit.
McMurry uses the example of buying four-weight calves vs. those 100 lbs. heavier, and putting 200 lbs. of gain on them. At the outset, there is $50 more margin to work with — buy price vs. expected sell price.
In this case, a 400-lb. calf at $1.50 costs $600. Figuring $1.20 at 600 lbs. that's $720, or a gross margin of $120. Compare that to a five-weight steer calf purchased at $1.40, or $700; and a selling price of $1.10 on a seven-weight, or $770. So there's an additional $50 margin advantage in favor of buying and selling lighter in this scenario.
Spun another way, McMurry points out in this example the value of gain on the lighter-weight calf is 60¢, vs. 35¢ for the heavier one.
Using the margin above and applying the costs in Table 3, McMurry calculates the profit advantage of the lighter animal to be $49.54. So the profit was purchased in the form of gross margin — the cost of gain for both the 4-weight and 5-weight was identical at 43¢.
"That's just too much margin to ignore," McMurry says.
Obviously he's not suggesting this is the profit or cost one can expect in any given situation. The point is that comparing gross margins at the outset can reveal opportunities tougher to see when focusing only on price and cost of gain.
"Some folks use these marginal revenue and marginal cost concepts without knowing what they're called. They're simply well focused and intuitively in touch with their enterprise," Prevatt says. "Others may not know from experience what to expect for a given change in inputs or management regarding performance. Still others may have the benefit of experience, and know that the expected change in performance can be quite variable. In this case, it helps to be a good gambler."
For more stocker production information visit: http://www.beefstockerusa.org
In fact, Bryan McMurry, Ph.D., a beef economist with Cargill Animal Nutrition, suggests stocker operators focus at least as much on considering marginal costs and returns as they do overall costs and returns.
For the purposes of this article, think of what Walt Prevatt, Ph.D., an Auburn University Extension economist, refers to as the sensitive variables of a stocker operation.
"Average daily gain (ADG), death loss, feeder price, minerals, implants, ionophores, deworming, stocking rate, altering the marketing window, grazing days, alternative or byproduct feeds and feed waste are the sensitive variables that affect the profitability of the stocker enterprise," Prevatt explains. "Evaluating the marginal relationships of these sensitive variables helps us determine whether it's profitable to seek improvements in these variables."
Specifically, Prevatt advises, "First, identify the sensitive variable that you think you can use to improve your profitability. Second, examine what effect a small change in this sensitive variable will have to your marginal returns. Lastly, determine the marginal cost of making the small change.
"If marginal returns are greater than the marginal costs, move forward with making the needed change. These small changes can surely help you achieve a bigger profit and/or reduce a loss," Prevatt says.
The potential can be dramatic, especially when it comes to marginal practices a stock operator or backgrounder typically leaves on the shelf.
For example, McMurry points to minerals at $600/ton. At 0.20-lb. intake/day and an increased ADG of 0.25 lb./day, the marginal cost would be 6¢/head/day, or $6/head across 100 days of stockering.
The advantage of having that extra 25 lbs. to sell in December (basis 725-lb. steer, Oklahoma City, $103/cwt.) would have been $25.75/head. In other words, if you could have made the decision to feed minerals at the same time you sold the calves, it's easy to see how you could spend $6/head and get back $25.75. Figuring the true marginal cost and marginal return is more complicated though.
First, let's agree on how to define value of gain. According to Prevatt, it's the gross margin (sale price $/head minus purchase price $/head) divided by the pounds of gain. It's not the pounds of gain multiplied by the selling price.
So figure the calves above were purchased weighing 600 lbs. the middle of August for $103/cwt., or $618/head (basis Oklahoma City). After a 100-day grazing period, they weigh 800 lbs. after shrink and sell for $90/cwt., or $720/head, in December. The gross margin is $102/head ($720 - $618). The value of gain is 51¢/lb. ($102 ÷ 200 lbs.). Applying this to our same mineral example, the marginal return is $12.75/head (25 lbs. X 51¢), still a 2:1 rate of return. So, in this example, the decision to increase marginal cost with the mineral program can make sense as a way to improve profit.
Of course, if the value of gain could have been accurately forecast for calves purchased in August and sold in December last year, a stocker operator might have foregone the opportunity.
Keep in mind this discussion is based on the strictest definition of marginal return and marginal cost. The former being the value received for those additional pounds of output cost (marginal return), and the latter being the cost of producing the additional 25 lbs. of output (marginal cost).
Unfortunately says Prevatt, no one can accurately forecast market prices and value of gain. As beef supply and demand change daily, so do beef market prices, which in turn cause the value of gain to change over time.
That's where the true power of marginal costs and returns lies. Whether it's finding opportunity where none seems to exist before purchasing calves, or trying to salvage a profit in the face of a market wreck or animal health disaster, marginal costs and returns provide flexibility. More specifically, plenty of risk management exists in the margins.
Another example would be supplemental feed.
"If I spend an extra $15/calf on supplemental feed, can I expect an additional one-tenth of a pound in average daily gain (+0.1 ADG), which will provide additional revenue of $20/head?" Prevatt asks. "If so, buy the supplement and collect the additional $5/head. If the value of the additional output is not greater than the cost of the additional input, move on to look for something that will pay."
You can find some rules of thumb for consumption and gain provided by McMurry in Tables 1-2.
In general terms, McMurry explains it typically pays to increase weight gain in the stocker business up to the point where the marginal costs of producing the additional gain are equal to the marginal return for the increased gain.
Incidentally, when it comes to calculating the marginal net of nutrition, McMurry says, "Always feed high-quality mineral with a growth-promoting additive. Throw the salt blocks away because they reduce mineral intake; a high-quality mineral will provide sufficient salt. Remember that protein is often a limiting factor during the last half of the grazing season."
McMurry believes there's plenty of untapped potential for marginal gain, too. He explains, "A quality, 500-lb. calf has the genetic potential to gain more than 4 lbs./day. They do it in the feed yard every day, yet will do well to gain half that in most grazing situations. If a steer is of the genetic makeup that results in an ideal slaughter weight of 1,250 lbs. or greater, then he's not likely to be too fleshy at 750-800 lbs. coming out of a 100-day program.
"If he gained 2.5-3.0 lbs./day in a 100-day program, his condition would be medium. If condition is a concern, then we simply begin with a 400-lb. calf of the same genetic type and make him weigh 700 lbs. This calf will hit the ground running in the yard," McMurry says.
The power of gross margin
Besides, buying lighter-weight calves may provide the most marginal opportunity of all. File it with that age-old wisdom of buying a profit.
McMurry uses the example of buying four-weight calves vs. those 100 lbs. heavier, and putting 200 lbs. of gain on them. At the outset, there is $50 more margin to work with — buy price vs. expected sell price.
In this case, a 400-lb. calf at $1.50 costs $600. Figuring $1.20 at 600 lbs. that's $720, or a gross margin of $120. Compare that to a five-weight steer calf purchased at $1.40, or $700; and a selling price of $1.10 on a seven-weight, or $770. So there's an additional $50 margin advantage in favor of buying and selling lighter in this scenario.
Spun another way, McMurry points out in this example the value of gain on the lighter-weight calf is 60¢, vs. 35¢ for the heavier one.
Using the margin above and applying the costs in Table 3, McMurry calculates the profit advantage of the lighter animal to be $49.54. So the profit was purchased in the form of gross margin — the cost of gain for both the 4-weight and 5-weight was identical at 43¢.
"That's just too much margin to ignore," McMurry says.
Obviously he's not suggesting this is the profit or cost one can expect in any given situation. The point is that comparing gross margins at the outset can reveal opportunities tougher to see when focusing only on price and cost of gain.
"Some folks use these marginal revenue and marginal cost concepts without knowing what they're called. They're simply well focused and intuitively in touch with their enterprise," Prevatt says. "Others may not know from experience what to expect for a given change in inputs or management regarding performance. Still others may have the benefit of experience, and know that the expected change in performance can be quite variable. In this case, it helps to be a good gambler."
For more stocker production information visit: http://www.beefstockerusa.org
