Livestock: August 2003

In economic terms, margin is defined as "the minimum return, below which activities are not profitable enough to be continued." More times than not, when I hear the term "stocker," the word "margin" is looming closely. This is not to imply that other segments of the beef industry are not concerned with margin, because they are or they should be. However, what this does imply is that to achieve long-term success, stocker operators not only have to monitor expenditures but also project return (i.e., determine their BREAKEVEN) prior to purchases being made in order to determine if a venture is warranted.

Contrary to what you might be thinking, this article is not about breakeven analyses. However, I did want to stress the importance of calculating a breakeven because this practice is far too often overlooked. What this article does pertain to is a very important component of assessing margin, especially for stocker cattle producers.

Click to enlarge Figure 1. Total Purchase Cost

Click to enlarge Figure 2. Costs Associated with the Backgrounding Process

Beginning in fall 2001, the Noble Foundation began a two-year study to determine the economic and performance differences between purchasing cattle through auction barns and "backgrounding" them prior to turnout and purchasing "preconditioned" cattle that are ready for turnout, requiring minimal inputs on the stocker operator's behalf. In each of the two years, about 85 head were purchased from both sources and delivered to the Red River Research and Demonstration Farm near Burneyville, Okla.

Cattle purchased at area auction barns (backgrounded) were bought about 35 days prior to estimated turnout and given initial vaccinations and boosters, as well as fed four pounds of a pelleted feed (20 percent crude protein; 80 percent total digestible nutrients) and given access to rye hay at all times during the backgrounding period.

Preconditioned cattle were purchased at OKC West (El Reno, Okla.) as a part of the Oklahoma Quality Beef Network (OQBN) program in early November and received a high-quality health and nutrition program in accordance with OQBN guidelines prior to being sold. Overall purchase cost was considerably higher in both years for the preconditioned cattle (Figure 1) due to pay weight and purchase price being heavier and higher, respectively. Specifically, in years 1 and 2 pay weights (per head) were 28 and 47 pounds heavier and purchase price ($/cwt) was $18 and $10 higher. This additional purchase cost is not surprising and a premium is justified (and necessary) for preconditioned calves due to the overall benefits (performance and health) associated with purchasing a preconditioned calf compared to naïve, sometimes highrisk cattle. But what does this mean to producers who purchase through auction barns and are willing to implement the extras needed to optimize health prior to turnout?

In both years, processing costs associated with the 35-day backgrounding period for the cattle purchased from area auction barns were similar. These costs included identification, preventative health, feed, labor and interest on input expenditures and cattle for the 35-day receiving period.

Factors not remaining constant across years were morbidity and mortality. Morbidity was higher in year 1 (25 percent vs. 16 percent, respectively) however the number of cattle that were pulled and treated twice (2 percent) remained constant, therefore treatment costs in year 1 were about $6.00/treated calf higher than in year 2. Mortality rate in year 1 (1 percent) was in line with what we expected, while in year 2, believe it or not, mortality rate was held to 0%.

An overview of the costs incurred during both years is presented in Figure 2. Morbidity (20 percent) and mortality (1 percent) costs were essentially averaged across years for comparison purposes. As stated previously, purchase costs for preconditioned cattle exceeded those of cattle bought from auction barns by about $100/head. However, the auction barn calves required approximately $50/head prior to turnout in backgrounding expenditures. Therefore, from a cost standpoint, based upon our experiences over the last two years, the net effect is about $50/head in favor of purchasing auction barn cattle and backgrounding them prior to turnout.

Based upon these results, some of you may feel that it is worth it to do it yourself, while some of you may be saying, "Why do I want to mess with all that for $50/head?" In reality, only you can answer the question of which one is right for you based upon your infrastructure, management ability and time.

Furthermore, it is important to note that these results should not be interpreted as one program being better than the other. Our experiences indicate that cattle in both programs performed very well. In fact, there were no significant performance or health differences during the grazing period in either year. These results are intended to help stocker producers make purchasing decisions and calculate breakevens. The beef industry has known for a long time the worth of a healthy calf. Our experiences indicate that there is more than one way to reach this endpoint based upon the goals and objectives of an individual. The decision is yours.