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Using Value of Gain To Determine Calf Affordability

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The price of calves finished 2010 on a strong note, and these increased prices have changed the value of gain. The value of gain is what the market pays for an additional pound of weight gained. Prior to 2007 when corn prices were less than $3 per bushel, it was not uncommon for the value of gain to be in the 30 cents to 50 cents per pound range or less. More recently, the value of gain has risen to 90 cents per pound or more. Knowing the current figure is important because calculating what the market is paying for gain can help determine what one can afford to pay for a calf. Once value of gain is known, then each producer can calculate what their individual cost is to produce a pound of gain. Producers may want to include only feed and forage costs or they may want to also include an amount for fixed costs (pickup, trailer, corrals, debt service, farm income, etc.) and profit.

To calculate the value of gain, the total price of the animal to be purchased is subtracted from the net sales price of that animal at the projected sale weight and date. The difference in the two prices is then divided by the difference in pounds of the sale weight and purchase weight. The result of this calculation is the value of gain per pound.

Table 1.

Table 1 shows the value of gain between each weight group reported by the USDA Market News Service for the first week in January 2011 for the average of eight auction barns in Oklahoma. The table shows that the value of gain between a 327-pound steer and a 379-pound steer is $145.20 per pound. This was calculated by taking 327 pounds times the price of $156.57 resulting in $511.98. The next calculation is to take 379 pounds times its market price of $155.01 equaling $587.49. The difference in the two values per head is $75.51 ($587.49 - $511.98). The difference in the weight of the two steers is 52 pounds (379 pounds - 327 pounds). To complete the calculations, divide the difference in the value per head of the two calves, $75.51, by the difference in the weight of the two calves, 52 pounds, resulting in a value of gain of $145.20.

If a producer wanted to know how much they should pay for a 425-pound steer if they planned to gain the steer to 725 pounds, the price of the 725-pound steer at sale time would need to be known plus the cost of gain to increase the calf's weight by 300 pounds. There are several ways to predict future prices. One way is to view the Feeder Cattle Futures price for the month closest to, but not before, the expected sale time. This can be found at many websites including www.cmegroup.com. The futures price should be reduced by about $2/cwt to arrive at the net sales price. Let us assume it is $1.25 per pound. Using this price and the methodology in our previous example, the value of gain would be $93.28. If we assume your total cost of gain plus profit objective is 80 cents per pound, the producer could afford to pay (725 pounds x $1.25 = $906.25 minus 300 pounds x 80 cents = $240 divided by 425 lbs) $156.75/cwt, somewhat more than the $148.09 that was quoted as the market price for the first week of January. Considering this, are calves too high to buy?

Steve Swigert
Agricultural Economics Consultant (Retired)