Utilizing Value of Gain in Cattle Markets?

Calves are on the ground, crops are beginning to emerge and farming has hit the easy stretch right?  Nope, a farmer’s work is never done.  Summer is just upon us, then a little later weaning season will begin.  As weaning approaches for many cow-calf producers, those that have the facilities and resources for retaining ownership may want to evaluate whether or not they can increase returns by adding weight to their calves.

Currently, harvested forage price and corn price are low compared to previous years and producers may consider retaining calves after weaning to capture more value.  This is where farmers have to really begin watching the markets and looking at their records for this crop of calves to determine if holding them for a longer time will lead to a larger profit at the end of the day.

The first item of business that a farmer has to look at is the value of gain (VOG).  VOG is the value per head of the animal at the end of the feeding period (sales value) less the value of the animal at the beginning of the period (purchase value) divided by the weight gain. VOG is not constant and is particularly sensitive to market seasonality consistent with the changing nearby feeder cattle futures market contract associated with a given ending weight.  In other words, the market is always changing and so does the VOG.

The second item farmers have to look at is the cost of gain (COG).  COG is the total amount of costs associated with the calf divided by the weight gained.  This is one area that a lot of producers can’t accurately account for because of the lack of record keeping.  To attain an accurate value for the cost of gain, producers have to have a well-rounded record keeping system.  Nonetheless, COG will help producers determine how much money was used to gain a specific weight.

Why is VOG and COG important to cow calf producers? Because the value of gain needs to be greater than the cost of gain for the producer to make money. 

In the Table 1, we look at steer prices from the week of May 27, 2016.  Keep in mind that COG is an estimated value for this example as COG varies from farm to farm.  Here the farmer can expect to make a profit from selling his calves at the target weight of 450 and 550 lbs. (because the difference in VOG and COG is positive).   All other weight classes, the producer is expected to lose money.  As we begin to examine Table 2, steer prices from June 6, 2003, we see that cattle prices are much cheaper and so is the estimated COG (again an estimated value).  From here a producer can expect to make money from all weight classes except the 900 lbs form.  From these two examples we can see what exactly the cattle market is telling producers to do with their calves, sell light (table 1) or retain ownership to capture value (table 2).

Cow-calf producers should take the time to calculate an expected value of gain and know their cost of gain as they evaluate retaining ownership this of calves. Doing so may bring clarity to the decision of whether to sell calves or retain them. If producers maintain good records, watch the markets, and utilize all aspects of information then they will be successful in their operations. 






Source: Nathanial Cahill, Agricultural Business Specialist