Calculating net returns from preconditioning programs

Source: Beef Cattle Research Council, www.BeefResearch.c

Low calf prices, low feed costs and good grass conditions make hardy arguments for retained ownership. Depending on the market in your area, it could make economic sense to hold on to calves a bit longer this year. The Beef Cattle Research Council’s Preconditioning Calculator is a decision-making tool designed to identify economic opportunities and risks from adding a preconditioning program to traditional management.

The BCRC preconditioning topic page provides an overview on the advantages of preconditioning for animal health. Preconditioned calves may return higher gross revenues because they sell at higher weights. They often have lower cost of gain at the feedlot, improved feed efficiency, require fewer treatments and have lower death loss; for these reasons, preconditioned calves may be sold with an added premium. These higher revenues may however come with added costs.

The disadvantages of preconditioning? It costs more to retain ownership, through added feed and labour. Greater input costs don’t necessarily mean margins will shrink though. The balance of net returns will depend on both the cost of retained ownership as well as the projected price at a later sale date. These are unique to each operation.

Deciding if preconditioning makes economic sense? That’s where the decision-making tool can help. The calculator provides a summary of estimated net returns and projected breakeven price premiums based on your costs for up to three different preconditioning programs. While the length of preconditioning programs can be adjusted in the calculator, typical time periods are 30, 45 or 60 days. The tool has a built-in database going back 10 years for price projection comparisons.

Using the Tool: Three Scenarios

The potential net returns from preconditioning a steer calf, born at 85 lbs in mid-March 2020 in Western Canada are evaluated. The net-return from preconditioning will be determined by estimating the sale price and weight, then defining base prices for 30, 45 and 60 days out. The tool will account for added fixed costs and feed costs. Since these costs will vary among producers, they can be adjusted when using the tool. There is also an option to factor in a sale premium to the final price.

Three scenarios and their assumptions are outlined below.

Scenario 1: Our steer calf was weaned at 215 days and gained 2 lbs per day, with a shrink of 6%. He comes to sale mid-October at a pay weight of 484 lbs. Based on the 2019 price for a 450 lb steer in Alberta selling mid-October, the projected price for the animal is $234/cwt, for a traditional gross revenue of $1,132.79/hd (See Table 1 below).

Now suppose the animal was preconditioned during a 30, 45 or 60-day program. It’s assumed the animal gains 2.25 lbs/day, with a 3% shrink applied to the sale weight. A projected price using the 10-year average price, seasonally adjusted for mid-November ($213/cwt), end of November ($213/cwt) and mid-December ($199/cwt) is used to estimate the gross revenue at the end of each preconditioning program. The feed cost per head/day was $1.60, with other costs (e.g. yardage, vet and marketing costs) added to the tune of $33.50/head. We factored in an interest rate of 3.45% and 1% rate of death loss.

The results in Table 1 below show that under these conditions, there is no net return from preconditioning. To break even, a price premium of 1 to 5% would be required.

Table 1. Calculator Results

At higher rates of gain, however, net-positive returns come from the 45-day program. Table 2 shows that if the animal gains 2.5 lbs/day, it should net $10.16 per head.

Table 2. Net Returns ($/head)

*Feed costs variable with average daily gain (ADG).

Scenario 2: Uses a steer calf weaned at 250 days weighing 550 lbs in mid-November. Using the 2019 Alberta 550 lb steer price for November ($217/cwt), this animal would traditionally gross $1,193.28. Adjusting the cost to feed this animal up (assumed now to be $1.82/head/day), and keeping all other parameters the same as scenario 1, Table 2 shows that both 45 and 60-day precondition programs provide net-positive returns from preconditioning, at all rates of gain listed.

Scenario 3: Uses the Alberta satellite sale projections for November rather than the 2019 price for the 550 lb steer. Using this method, the average price for the animal could be $200/cwt if sold in November this year, for a traditional gross revenue of $1,099.80 (Figure 1 below). Using 30, 45 and 60-day price projections, seasonally adjusted and based on the 10-year average from the database, 45 and 60-day preconditioning programs will once again produce net-positive returns (shown in Table 2). Figure 2 shows the net-positive returns assuming the average daily gain for this scenario at 3 lbs/day, with feed costs adjusted to $2.43.

Figures 1 and 2. Show scenario 3 gross revenue and net returns from preconditioning programs assuming an average daily gain of 3 lbs/day.

Conclusion

With fed prices well below breakeven this spring, the tone of fall buying may be loss mitigation. Feeder calf prices are steady with 2019 but a seasonal price softening is expected through the fall run this year. Feed grains are abundant with prices 10 to 15% lower this August compared to last year. Low feed costs and extended grazing where possible help to realize net-positive returns from 45 to 60-day preconditioning programs. Use BCRC’s Preconditioning Calculator and the Canfax free price projection app, CFX Pro, to create scenarios for your operation and make the best preconditioning decision this fall.

The CFX Pro is available free online.