Watch out for high prices
Be cautious about paying too much for calves this season, despite low cereal prices, writes independent beef consultant David Allen
RISK of high autumn calf prices means the beef market could struggle to deliver sale prices that leave realistic margins for producers.
A £10 rise in calf price needs a 2p/kg liveweight increase in sale price to pay for it. And for each 2p/kg shortfall in sale price, the gross margin falls £10.
Some buyers may use the availability of cheap cereals to justify buying calves at high prices. But whereas for cereal beef a £10/t fall in concentrate price cuts the sale price required by 4p/kg liveweight, in a grass beef system the reduction in sale price is only 1p/kg.
The market price for purebred Holstein Friesian bull calves is effectively set by the calf slaughter subsidy. This is £82.90, but set to fall to about £80 in October in response to the August revaluation of the green £. However, old fashioned Friesians, capable of producing O+ carcasses, are selling to rearers for £100.
Beef cross calves are selling for well above the slaughter subsidy of £104.52. In mid August Hereford x Friesian bull calves averaged £130, Charolais x £180, Limousin x £160, Simmental x £175 and Belgian Blue x £170. This is a result of several factors – a shortage of crossbred calves due to the swing to purebred dairy breeding last winter, a calving season which seems later than usual, and general high demand. That is despite crossbred calf slaughterings being down to 1000 a week or fewer.
As dairy herd calvings rise to the autumn peak, there are two opposing views about calf price trends. One is that the usual seasonal decline of about £30 in crossbred bull calf prices will occur. The other is that, fuelled by cheap cereals, the calf market will actually strengthen.
Either way, producers should get to grips with the budgets involved. The table shows required sale prices to achieve a gross margin of £10 a month, excluding Beef Special Premium.
A gross margin of £10 a month, excluding BSP, is reasonable for the effort involved. The budgets assume relatively low calf prices in September and October and are based on typical variable costs, including a home-mixed concentrate with an ingredient cost of £100/t.
For most of the dairy beef systems, required sale prices are in the range 100-110p/kg liveweight. But will the market deliver?
The collapse of farm gate prices in May, to a 16-year low of 90p/kg liveweight, came as a nasty shock. High domestic slaughterings and a strengthening £ that sucked in cheap imports were to blame.
But slaughterings are expected to ease back during the rest of 1997, and to fall next year as the effects of the calf slaughter scheme begin to take effect.
That might create an upward pressure on price, were it not for cheap imports which will continue to be sucked in by the strong £.
Another plus for producers is that eventually the export ban will be lifted, allowing export markets to be rebuilt, albeit hampered by the exchange rate. Consumer confidence is also continuing to build.
A cautiously optimistic forecast is that average prices from late 1998 and into 1999 will be in the 100-110p/kg liveweight range, but 115-120p/kg may be out of reach.
The longer the production cycle – as long as cattle are slaughtered before 30 months old – the more likely the required price will be achieved. This favours systems such as grass beef, especially if steers qualify for both BSP payments; eligibility for BSP is critical to profitability in all-beef systems.
But cereal beef producers selling finished bulls in the winter of 1998/99 are most exposed, especially if BSP eligibility is restricted. However, it could turn out that fortune favours the brave if export markets reopen and bull beef is suddenly in demand again.
The danger is cheap cereals will be used to justify buying dearer calves. That cannot be done when beef systems are fully budgeted. *
The danger is that the availability of cheap cereals will be used to justify buying calves at higher prices, warns independent beef consultant David Allen.
Last winters swing to breeding purebred dairy calves has meant fewer crossbred calves for sale and higher prices. A calving season which seems later than usual and high demand have also pushed up prices.
Required sale prices (p/kg) to achieve gross margins* of £10 a month.
*Gross margin excludes Beef Special Premium.