Don't Get Surprised at Market Time: Know Value of Gain
Value of gain (VOG) can be useful information for cattle producers who are contemplating purchasing cattle or making retained ownership or marketing decisions for currently owned cattle.
VOG can be defined in multiple ways. Some have defined it as the difference in the value (weight × price) from the beginning of a growing period to the end of the growing period divided by the pounds gained. Another way to define it is as the amount of money the market is willing to pay for the next pound of weight a calf or yearling gains.
Know What to Purchase
Knowing the VOG between the various weight ranges can be used to determine which weight would be best to purchase. As long as a producer can purchase pounds for the same price or less than it costs to put pounds on, it makes economic sense to keep evaluating heavier cattle until the market is paying more than his or her cost of gain.
Know When to Sell
Once a producer has made the purchase or has calves at home, an important question is: at what weight should calves be sold?
The answer can be obtained by calculating the total cost to put on a pound of gain and comparing that to the VOG as weight is added to the calf.
Too often a producer is guilty of viewing a market report from their favorite point of sale and calculating what the market paid at that time for cattle of different weights. The time it takes to grow the calf to a heavier weight is overlooked. If a producer has five- or six-weight cattle and they are thinking about growing them to 800 pounds, a current market report is not the best information to use because the calf is not going to weigh 800 pounds until possibly 100 to 150 days into the future. Therefore, a future price for an 800-pound calf is a better indicator of what the market will pay for gain rather than using the price for an 800-pounder from the current market report.
What price is used for the future date? The only source available today is the cattle futures market. All the reasons why the futures market is not a good indicator could be debated for a lengthy time. A producer could argue they can forward a cash contract with an order buyer. But likely what the order buyer offers is based off the underlying feeder cattle contract for that future time period. Observing the feeder cattle contract for the closest month, but not before the time of planned sell date, then adjusting it for the market where the cattle will be sold is the only price a producer can lock in for the calf at the heavier weight. Therefore, this is the price producers should use in analyzing the retained ownership decision of how big to grow a calf.
Fall 2016 serves as a good example to illustrate the fallacy of using a current market report to determine VOG. Eight-weight cattle were priced such that the VOG from 500 pounds to 800 pounds was more than $1 per pound. However, if a producer had a 500-pound weaned calf, it would likely be March 2017 before the calf would weigh 800 pounds. The March 2017 feeder cattle futures contract was discounted more than $15 per hundredweight to the October cash price, indicating a VOG less than 60 cents per pound. It would be quite a disappointing surprise for a producer to think the market was paying $1 per pound to learn when the calf actually weighed 800 pounds, the market only paid 60 cents per pound or $120 per head less than they thought the calf would be worth.
Cow-calf and stocker producers alike can benefit from having a knowledge of their cost of gain and comparing their cost to what the market is paying for gain at the various weights as the calf grows. This knowledge is very powerful as marketing and risk management decisions are made for the operation.