Part II: Short-term management implications
The bottom line to the changing corn environment is that feedlot costs of gain (COG) will increase substantially the rest of this decade and probably beyond. That changes the profit prospects of various post-weaning production/marketing alternatives for ranchers.
Each month, I prepare a set of planning-price projections for 12-18 months ahead, and then examine their management implications. Eight different short-run production/marketing programs for marketing 2007 calves are summarized below; these were generated in mid-April with corn that was priced at 30¢ off that month's futures price. Projected COG and breakeven prices are also included:
Selling 2007 calves at October 2007 weaning: (COG is $112/cwt. of calf produced. Breakeven selling price is $112/cwt.).
Backgrounding 2007 calves to 800 lbs. marketed in late January 2008: (Corn @ $3.26/bu. with COG at $66/cwt. Breakeven selling price is $106).
Finishing 2007 backgrounded calves in a custom feedlot marketed in June 2008: (Corn @ $4.74/bu. with COG at $87/cwt. Breakeven selling price is $92).
Marketing 2007 calves as calf-feds at 1,175 lbs. in May 2008: (Corn @ $4.32/bu. with COG at $77/cwt. Breakeven selling price is $100).
Marketing 2007 calves as grass cattle off grass in September 2008: (COG is $54/cwt. Breakeven price is $101/cwt).
Placing 550-lb. calf-feds mid-April 2008 to be harvested October 2008: (Corn @ $5.85/bu. with COG at $93/cwt. Breakeven selling price is $106/cwt).
Placing 800-lb. feeders on feed mid-April 2008 to be harvested June 2008: (Corn @ $5.03/bu. with COG at $91/cwt. Breakeven selling price is $96/cwt).
Harvesting finished steers mid-April 2008: (Corn @ $3.26/bu. with COG at $74/cwt. Breakeven selling price is $102/cwt).
Figure 1 summarizes and compares my profit projections for these eight production/marketing alternatives. In general, I find it very difficult to add value to 2007-born calves beyond weaning. The only two positive post-weaning production/marketing alternatives listed above were finishing 2007 backgrounded calves with a projected profit of $4/head, and running 2007 calves as grass cattle during summer 2008 with a projected $15/head profit (after paying for grass).
Alternatives for 2008 calves
Meanwhile, my projection for 2008 calves is for an $11/cow profit when selling at weaning (compared to $69/cow in 2007). Lower gross income per cow in 2008 generates the projected drop in net income per cow.
High corn prices keep me from finding a way to add value to 2008 weaned calves with a profit. I project a $53/head loss for backgrounding 2008 calves. Finishing these backgrounded 2008 calves projects a loss of $37/head, and marketing the 2008-born calves as calf-feds projects a loss of $61/head. (A $5.19 market premium is needed to project a breakeven calf-fed production/marketing alternative.)
Comparing my projected marketings of 2008 calves vs. 2007 calves offers some optimism for cattle feeders. It appears feeder-calf and feeder-cattle prices are ever so slowly adjusting to return a profit back to the post-weaning profit centers, including the cattle-feeding sector.
The feeding sector
High corn prices are putting post-weaning profits under severe economic pressures. The reality is feeder-calf and feeder-cattle prices haven't yet adjusted to the new price equilibrium of $4, $5 and possibly $6 corn. These corn-price levels suggest feedlot COGs in the $70s, $80s and $90s, respectively. The cattle industry has never seen these feedlot COG levels.
First-quarter 2008 cattle feeding losses were substantial — $138/head in January, $128 in February, $132 in March and $148 in April. Such losses could lead to feedlot closings and sales of feedlots at 50¢ on the dollar, both of which lead to further feedlot consolidation.
Record-high post-weaning COG brought about by record-high corn prices must eventually be reflected in feeder-cattle and feeder-calf prices. This, however, hasn't yet happened to the extent needed to return profits back to cattle feeding.
Feedlots continue to overbid cattle due to an oversupply of bunk space. Once a feedlot shuts down, a feedlot owner's balance-sheet equity takes a huge hit. This equity loss probably won't be felt as long as the feedlot is operating — even if operating at a loss. Eventually, these kinds of feedlot loses will take their toll on the feedlot sector.
High feeder-calf and feeder-cattle prices relative to projected COG result in my projecting little or no post-weaning profits with 2007 or 2008 calves. My current short-run projections suggest that profits to be made with 2007 and 2008 calves will be made by weaning time.
Ranchers, take note! Your unit cost of producing (UCOP) a cwt. of calf has become all-critical! Yet, most of you aren't even measuring UCOP. Without this measure, you can't be sure you're actually operating your lowest-cost production/marketing alternative.
Ranchers may be already locked into their production/marketing programs for 2007 calves, but there's still time to push the pencil on the production/marketing of 2008 calves. Now is the time to re-evaluate your complete ranch production/marketing program; today's demand-driven corn prices won't be coming down as they have in previous supply-driven run-ups. The biofuels era is different!
Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701-238-9607 or [email protected].