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To pen fatten or not to pen fatten: feedlot economics

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This article attempts to highlight the important variables that can guide decision-making on whether a pen fattening exercise makes business sense.

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To pen fatten or not to pen fatten: feedlot economics

  1. 1. Feedlot Economics – Eddington Gororo (2015) Page 1 TO PEN-FATTEN OR NOT TO PEN-FATTEN AN ASSESSMENT OF FEEDLOT ECONOMICS Eddington Gororo1 What is pen fattening? Pen fattening involves the feeding of finishing beef cattle with a protein balanced, high- energy diet for a period of 70 to 120 days under confinement to increase live weights and improve degree of finish. There are many reasons for pen fattening, which include 1. To add extra weight to stock at a younger age and thus increase turnover and maximize output from the beef enterprise 2. To improve the degree of fatness and fleshiness (finish) of the carcass in order to achieve higher grades and better prices 3. To take advantage of seasonal beef price fluctuations at the abattoirs. Prices are generally favourable from October to February. The feedlot manager is usually a speculator Is a feedlot enterprise economic in Zimbabwe? Now is the time of the year when decisions have to be made whether or not to pen feed. Usually farmers have trouble finding an answer to this dilemma. The current beef prices give cattle farmers at least something to smile about. However, farmers are being encouraged from many quarters (abattoirs, development organizations and government departments) to put some thickness into their mombes by pen feeding. But the question remains: is pen fattening economic? Is it worth the while? Profitability factors An attempt here is made to give some pointers on how farmers can make an economic assessment of pen fattening. It is very ease to make a loss from a pen fattening exercise. There are many variables affecting profitability in pen fattening, namely: induction cost of the animal; quality and cost of feed; response of animal to pen fattening (feed conversion efficiency); and slaughter value of the finished animal (carcass grade and price). 1. The animal One must be able to source an animal of the right breed, age, sex and conformation for optimum performance in the pens. As a general guide, if the animal cannot achieve a daily live mass gain of 1.2-1.6kg/day with a feed conversion ratio of at most 8:1 to live 1 Department of Animal Production and Technology, Chinhoyi University of Technology Private Bag 7724 Chinhoyi, Zimbabwe. Mobile: +263 77 391 6375 Email: gororoeddington@yahoo.com
  2. 2. Feedlot Economics – Eddington Gororo (2015) Page 2 mass (or 11:1 to cold dressed mass), then it may make business sense not to pen fatten. 2. Beef: maize price ratio Because of the high proportion of energy required to ensure good performance in pen fattening, the cost of carbohydrate, which is usually included in most feedlot rations in the form of maize, snap corn, hominy chop or sorghum, in relation to the beef price, is a significant factor deciding profitability of a feedlot enterprise. This is usually expressed by the ratio beef: maize price. Experience has shown that this ratio should not be less than 13:1for pen fattening to be profitable. Pen fatting enterprises can make substantial profits when the beef to feed cost price ratio is favourable. Generally, average daily gain declines toward the end of the feeding period, where animals are fed for too long a period of time (are over-finished), resulting in a negative feed margin and consequently reduced profit margins. With the price of choice beef and maize grain at around $2.80/kg and $0.30/kg respectively, the ratio is currently above the economic minimum. In this case it may make business sense to go for pen-fattening this winter, provided the farmer can be able to source the right animal for high performance and maize grain at an even lower cost. 3. Feedlot margins An assessment of profitability can also be done mathematically using a combination of the two most important margins: price margin and feed margin. By far these two have the greatest effect on pen fattening enterprise profit. The price margin includes the difference between animal purchase/cost price and selling price resulting from beef price fluctuations as well as improvement in carcass quality due to feeding. The price margin is calculated as follows: Price margin = Initial live mass x (sale price/kg - cost price/kg) The feedlot manager cannot control price fluctuations in the market and must therefore rely on a reliable prediction (speculation) of what prices will be when stock are sold at a future date. Although profits are potentially high, risk is high and people lacking experience often lose money with speculation. When buying livestock, most farmers make use of the price per kg live mass for their calculations, but they also must know the dressing percentage they expect after finish. The profit or loss a feedlot makes as a result of live mass gain in relation to cost of feed consumed, is called the feed margin and is calculated as follows: Feed margin = Live mass gain X (sale price/kg – feed cost/kg gained) A feedlot can influence feed margin by ensuring, through good management, that high feed conversion efficiency and optimal growth rates are achieved and by taking steps to obtain the best feed at the most economic price.
  3. 3. Feedlot Economics – Eddington Gororo (2015) Page 3 From the above ratios it is apparent that the price paid for feedlot cattle or their initial value (cost/kg), is a critical factor affecting the profitability of a pen-feeding enterprise, especially when a small or negative feed margin exists. A positive feed margin can only be realized with high mass gains and a relatively low cost of feed. The cost of the feedlot ration relative to the beef price and live mass gain thus exerts a major influence on the cost of gain. 4. Feedlot Profit margin The feedlot profit margin is a function of price margin, feed margin and other expenses. Adding these three together, indicates profit or loss for the period of time over which the calculation is made. Feedlot managers need to keep a close watch on feedlot profit, which is a very sensitive measure of the efficiency of management. Hypothetical example – Kukodza Ltd Assumptions In order to demonstrate use of the margins, let us assume the following performance norms and figures for Kukodza Ltd, a feedlot enterprise in Chinhoyi (Zimbabwe):  Buy 200 feeders from another farmer at 18 months of age with a minimum induction mass of 250kg (@$1.60/kg) to achieve a final slaughter mass of 400kg, which means a total targeted gain of 150kg/head.  Average daily gain of 1.4kg/day means a feeding period of about 110 days (i.e., 150/1.4) to achieve the total gain targeted.  Feed Conversion Ratio (FCR) to live mass assumed to be 8:1, hence total feed consumed = Total Gain x FCR =1200kg/head + 10% losses = 1,320kg  Feed costs: Concentrate + snapped maize (husk, cob and grain) in the ratio 1:9. - Snap corn has 78% grain hence it is valued at $235.00/t ($0.235/kg) (i.e., assuming a maize grain price of $300.00/t) - Concentrate buying price:$600.00/t ($0.60/kg) - Hence feed price (grain + concentrate) = $0.27/kg - Cost of feed = 1,320kg x $0.27/kg = $356.40  A 50% killing out (CDM/LM x 100%) giving a CDM of 200kg graded into ‘Super Beef’ (@$4.00/kg)
  4. 4. Feedlot Economics – Eddington Gororo (2015) Page 4 Calculations of the margins Beef: maize = price ratio of beef to maize = $4.00/kg to $0.30/kg = 13.3:1 (just favourable) Price margin = Initial live mass x (sale price/kg - cost price/kg) = 250kg x (2.00 – 1.60) = 250x0.4 = +$100.00/head (positive and favourable) = +$20,000 (for 200 head) Feed margin = Live mass gain X (sale price/kg - cost/kg gained) = 150kg x ($2.00 – ($356.40/150)) = 150 x (2.00-2.376) = ($65.40) (negative and therefore not favourable) = ($13,080) (for 200 head) Profit Margin = Price Margin + Feed Margin - Other Costs (Fixed & Variable) = Assuming FC of $2,000 and variable costs (excl. feed) of $20.00 per head (VC =$4,000.00) = Hence, Profit Margin = $20,000.00 + ($13,080.00) - $4,000.00 - $2000.00 = $920.00 Using figures from the Kukodza hypothetical example above, it makes little business sense to pen feed this winter. Conclusion This article was an attempt to highlight, in plain simple language, the important variables and tools that a farmer could use to assess the economics of pen fattening. For a feedlot enterprise to be economic, the farmer should get the right animal at lower cost, push up weight gains and feed conversion efficiency, and reduce feed costs significantly. It is important to note that pen fattening is part art, part science and largely business.

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