If you keep an eye on cattle prices, you’ll notice the large disparity in prices paid for calves of different weights. For instance, 700-800 lb steers in Nebraska are currently selling for around $1.60/lb, but in the same market, 300-400 lb steers are up around $2.20/lb. Now that’s a huge difference! So what’s the deal?
To better understand the disparity in prices of different sized cattle, you need to think in terms of incremental cost of gain. Simply put, it costs much more to get a calf to 400 pounds than it does to get it from 400 to 800.
Let’s take a step back and think about the production chain from calf to fed steer (remember the cattle industry is split into three main sectors). One of the wisest men I know in the cattle industry is Allan Nation, editor of the Stockman Grass Farmer magazine. Nation understands cattle markets better than most, and he advises to think in terms of the fat steer price. According to him and other experts, cattle prices across all segments of the market eventually correlate to the price of a fed steer. So if you look at the fed steer price and factor in the different costs to get a calf to that end product, you can better understand why light calves sell for so much.
Today the slaughter steer price is hovering around $1.30/lb. So a 1200 lb steer should command about $1550 at the slaughter plant. A typical feedlot will purchase feeder cattle at, say, 750 lbs and grow them to that 1200 or so lb target. They have a $1550 selling target, so that feedlot must purchase feeders and put 450 lbs on them for a total of less than $1550 to make a profit. Keep in mind that the nature of the free market results in those feedlots continuing to bid up the price of feeder cattle as long as any profit remains on the table.
Our 750 lb steer in Nebraska at $1.60/lb is a $1200 animal. That means the feedlot must put those 450 lbs on at a total cost of $350 just to break even. It’s no wonder feedlots are losing money right now!
Regardless, the main reason feedlots can bid so much for calves is the extremely low current price of corn, and other feeds that follow the corn price. Low corn means cheap gain, and cheap gain steepens the per-pound price hike as calves get lighter.
So what about those 350 lb calves selling for $2.20/lb? Those calves are selling for $770, meaning the backgrounder can theoretically profit from putting 400 lbs on them for less than the breakeven of $430.
In summary, low feed costs are allowing backgrounders and feedlots to bid up the price of calves, and a limited supply of calves with higher demand means a higher price per pound for light calves. Only a certain number of calves are born each year, and a farmer or rancher typically has a minimum of several hundred dollars invested in a calf before it even hits the ground. So the light calf is worth a lot of money right now, and the low cost of gain means that calf will be worth incrementally less the heavier it gets.
It hasn’t always been this way. When the fed steer price drops and corn prices skyrocket, the incentive for feeders to bid up light calf prices disappears. At that point, the price-per-pound disparity, often called price rollback, gets much lower, and sometimes even goes away. In fact, there have been times when fat cattle have been worth more per pound than feeders! That’s when it is prime time for a cattle owner to hang on to their calves to heavier weights, because each pound of gain becomes that much more profitable.
Current conditions in the cattle market do not provide much incentive for the cattle owner to hang onto their calves for very long, especially in areas of the country with lots of feedlots bidding up cheap calves. Similarly, there’s little incentive to buy light calves, put them out on grass and sell them heavy. But when corn prices go back up and the price-per-pound disparity tightens, it’ll be prime time to put calves out on grass for big profits.