Age of turnoff economics – a critical issue for profitability in northern Australia

Northern Australian cattle breeders sell male progeny into a variety of markets at ages ranging from several months to as much as four and a half years.

Most profitable turnoff age is not the same for everybody, since it depends on breeder productivity, steer performance, price relativities, and available markets.

Modelling exercises using Breedcow and Dynama software over a 25 year period to 2011 have consistently pointed to ‘older’ turnoff being more profitable, where ‘older’ can be defined as anything other than weaners.

For the Northern Territory and far northern Western Australia, with no reasonable access to meatworks, the upper limit to ‘older’ has been defined by live export specifications. Most recently this has been 350kg liveweight to Indonesia, although at times heavier cattle have found markets in Indonesia and Egypt.

In north Queensland, 300kg dressed weight has been a reference point for bullock producers. This weight has been achieved by turnoff at two and a half (exceptionally), three and a half, or four and a half years.

Examples

The following data comes from a large modelling exercise under the auspices of the Beef CRC, and assisted by beef extension officers from Queensland, Northern Territory and Western Australia. For this illustration, the data is split into that part of the profit (gross margin) generated by the breeders, and the part generated by growing out the steers. Growout was to ages ranging from a year and a half (live export) to four and a half years. Weaner steers were ‘sold’ from the breeding enterprise at market value to the steer enterprise at ages of five to nine months. Prices were estimated in April and May 2011. This data aims to represent the whole herd in the defined area.

GM = Gross Margin; AE = Adult Equivalent

For complete data see ‘Representative herd templates for northern Australia’.

The files themselves can be viewed using components of Breedcow and Dynama software (see Breedcow and Dynama) or the text and Excel summary documents can be viewed after downloading the whole content.

Note that although the steer GM is the profit centre of the herd, the steers comprise the smallest part of the herd. The most profitable part of the steer enterprise, measured as GM/AE, is the first year after weaning, assisted by the lower AE ratings (weaners eat less than adults).

Results from the Northern Territory and Western Australia indicate the highest GM/AE coming from steers, with the smallest proportion of the herd comprising steers, because turnoff is predominantly at a year and a half. The per cent of total GM from the steer part of the herd indicates the disproportionate contribution of the steers.

Herd structure and age of turnoff

The following numbers are from one of the more productive north Queensland regions modelled for the Beef CRC. They illustrate, for a herd held at a total of 5,000 adult equivalents (AE), the relationship between age of turnoff, breeder numbers, GM/AE and total herd capital.

Principles

Optimum age of male turnoff is driven by the relative profitability of breeders and steers, which is a function of breeder productivity, steer performance, and the relative prices of weaners and older steers.

The age of turnoff decision can be conceptualised as a series of decisions, the first of which is whether to sell the steers as weaners or to carry them another year. If the answer is to carry them to 18 months, the next question is whether to go on to 30 months, and so on. We assume that total stocking pressure is the same, with breeder numbers reduced to accommodate older male turnoff.

If growing a weaner steer out to 18 months earns $349/AE, as for the Northern Territory example, while the breeders are making only $82/AE, then clearly age of male turnoff should be at least 18 months. 10% of $349 plus 90% of $82 (= $109) is a lot better than 100% of $82.

The next question is whether it would be worth taking the steers on another year to 30 months. The comparison then will not be with just the breeder GM but with the overall GM up to that point, namely $109/AE. If the extra year can make more than $109/AE it will drag the average up, and if it makes less it will drag it down.

If we ask this question in the Northern Territory, older turnoff will involve sending the heavier steer a long way to market and getting a lower price per kilogram, so the answer could favour retaining the 18 month turnoff. It may be worth investing in the infrastructure required to draft and paddock cattle by weight ranges, so that animals are sold as close to 350 kg as possible. It might also be worth considering the gains to be made from wet season sales at price peaks. For most this is not possible without investment in land with wet season access. The answer as always will be in the sums.

If we asked the same question in Queensland, with better access to markets for heavier cattle, we are likely to conclude that 30 month turnoff is clearly preferable, and perhaps another year after that as well, although each increase in turnoff age will be less profitable than the one before.

Producers questioning the age at which they currently turn off steers can run whole herd comparisons using Bcowplus software (part of Breedcow and Dynama), or they compare their existing overall GM/AE (Bcowplus) with GM estimates for another year of steers (Bullocks program).

Other issues

To a small degree, most profitable male turnoff age is influenced by female productivity, since it is the tension between breeder profit and steer profit that drives age of turnoff. For the less productive areas of Northern Australia, the degree of improvement possible in breeder productivity may move optimum steer turnoff age back a year. Improved breeder productivity is profitable in its own right, and has the dual payoff of better profit from the breeders themselves and an increased proportion of steers in the herd at the same turnoff age (hence more of the higher GM/AE).

A herd of cattle represents a significant investment in livestock capital. More importantly, this capital differs for herds of the same size (total AE) depending on age of male turnoff. Herds turning off older steers tie up more capital than herds turning off weaners. The incremental approach to determining best age of turnoff thus has a capital dimension to it as well. Shifting the age of turnoff up a year may increase the gross margin, but it also increases the investment in the herd. The extra gross margin must be sufficient to justify the extra capital. This can be ensured by including interest on livestock capital in the gross margin calculation.

These shifts in herd capital can perhaps best be illustrated by what happens when age of turnoff is increased. Assuming the change is implemented in one year, the male turnoff is held back for that year, and room is made for the extras by selling more cows. The cows are worth less than the unsold steers, so the herd increases its value while income goes short. Similarly, if age of turnoff is reduced, by selling two drops of steers in the one year and holding back some cows, there is a flush of cash as herd capital is liquidated, though this is usually mistaken for income.

When producers know that older turnoff will be more profitable, but cannot endure the income sacrifice (capital accumulation) required to get there, they can be said to be caught in ‘the store trap’. This may explain the attraction of seemingly illogical sales of younger cattle, even weaners. The situation can arise during the recovery period from crises, or in the establishment phase of a business.

Separate fattening country

Selling older steers is almost always preferable to selling weaners for the integrated breeding and growing property, but this may change if a separate fattening property enters the picture.

When a breeding property is combined with a fattening property, the problem becomes one of maximising profit on both properties, or at least on the combination.

The two property situation can be analysed by an assessment of each property using Bcowplus and Bullocks programs. The process is:

• Find the most profitable turnoff age for the breeding property, ignoring for the moment the existence of the fattening property.
• Run the Tools Breakeven function in Bcowplus. This calculates the price that would need to be received for each possible age of turnoff to equal the gross margin after interest indicated for the current turnoff age. If these prices are used to ‘sell’ stores to the fattening block, profit on the breeding place will be the same regardless of turnoff age.
• Using Bullocks program, assess ‘purchase’ of stores for the fattening block from the breeding property using the breakevens as the purchase prices. Also check the profitability of some outside purchases. Select the most profitable purchase option, or a combination of options.
• Adjust breeder numbers to accommodate the selected transfer age.

The ‘two property’ situations looked at so far indicate a strong preference for transferring steers to the fattening block as young as possible, though this will be influenced by the relative sizes of the properties.

Industry perspective

The integrated breeding and fattening operation mirrors the situation of the industry as a whole, suggesting that overall productivity would be greater if steers were transferred to fattening country as weaners.

Cattle breeders however will not sell weaners if this is their least profitable turnoff age. The exceptions are those caught in ‘the store trap’, or perhaps who are simply unaware of the profit opportunity of keeping their steers longer. One reason that weaner turnoff is unprofitable is that weaner prices are below their opportunity value to the people who breed them. This situation might change if there was a more widespread recognition of the folly of selling steers too young.

Conclusion

Getting age of male turnoff right is something we can do without driving the country any harder, and without changing the underlying parameters of the herd.

What it will require, if getting it right means selling older steers, is some additional herd capital. This should be viewed in the same light as expenditure on more tangible assets – as an investment whose function is to improve profitability.

Download a free copy of the Breedcow and Dynama herd modelling package.

References

Holmes, W.E. (2011). Breedcow and Dynama Herd Budgeting Software Package, Version 5.05 for all Windows 32 bit OS. Training Series QE99002, Queensland Department of Employment, Economic Development and Innovation, Townsville.

Holmes, W.E, Bertram, J.D, Best, M, English, B.E, Hamlyn-Hill, F.J, Jackson, D.C, Laing, A.R, Rolfe, J.W, Stirton, A, Sullivan, M.T, Telford, P.B (Qld), Leigo, S, MacDonald, N, Oxley, T, Schatz, T (NT), Huey, A.M, Jeffery, M, and Smith, P.C. (WA), Representative Herds Templates for Northern Australia V2.0 – data files for Breedcow and Dynama herd budgeting software, Beef CRC, DEEDI (Qld), DAFWA and DRDPIF&R (NT). June 2011.