Buy/sell margins - part III

Buy/sell margins - part III

The feeder-cattle futures market is being whipsawed by corn futures prices. Corn futures prices were in the mid-to-high $3 range early in 2007, decreased to the low $3 in mid-year, and surpassed $4 later in the year.

Current indications are that futures corn prices could easily remain in the high $4 range throughout 2008. In general terms, corn went up $1 in 2007 and is expected to gain another $1 in 2008.

When corn prices backed off in mid-summer 2007, feeder-cattle futures prices strengthened. But as corn prices rose last fall and winter, feeder-cattle futures trended down significantly (Figure 1).

Most market analysts predict beef exports will drive slaughter cattle to a new record in 2008. At the same time, the mid-January futures market suggests feeder-cattle prices will trend upward again by mid-summer 2008, peaking at $7-$8 lower than mid-summer 2007.

The net result is that as slaughter-cattle prices are driven to record-highs in 2008, corn prices will drive feeder-cattle prices to less than record prices. That is, the buy/sell margins for backgrounding and finishing calves will decrease. I think ranchers now fully understand that increasing costs of feedlot gains are driving buy/sell margins downward.

Table 1 presents my January suggested planning prices for Western Nebraska. This is the third consecutive month I’ve published my recalculated set of suggested planning prices. This illustrates the general trend in cattle prices as we move through this emerging biofuels era and experience increasingly higher corn prices.

Using Figure 1, readers can calculate buy/sell margins for many different marketing situations. For example, the fall 2007 weaning price for 550-lb. steer calves is $124 (Table 1). The price for 800-lb. backgrounded steer calves in January 2008 is $96 (Table 1). These two prices give a buy/sell margin of a -$28 ($96-$124). Readers should be able to use Figure 1 to calculate various buy/sell margins appropriate to their own marketing programs.

A downward adjustment

Even with the downward adjustment in feeder-cattle futures discussed around Figure 1, I’m still greatly concerned by my projections for continued backgrounding and feedlot losses due to overbidding for calves and feeder cattle. Basically, the feeder-calf and feeder-cattle markets aren’t adjusting in pace with the corn market.

My January 2008 projected buy/sell margin for 2007 calf-feds is -$30 (Table 2), down $2 from my December projection of -$28. Large, negative buy/sell margins favor selling at weaning in what I call pre-weaning profit centers. Meanwhile, smaller buy/sell margins favor selling after weaning in post-weaning profit centers.

All my analyses suggest that a typical rancher who backgrounded his 2007 calves ended up taking a big hit through large negative buy/sell margins. My projections suggest a huge buy/sell margin of -$28 with backgrounded calves (Table 2).

It’s interesting to note, however, that the buy/sell margin for finishing back grounded steers is projected to decrease to only -$3. That’s low enough for me to project a $11 profit to finishing 2007 backgrounded calves!

This suggests that the feeder-cattle market is doing a better job of adjusting to the corn market than the feeder-calf market. In general, the cattle market is slowly getting closer to returning a profit to the cattle-feeding sector.

Comparing the buy/sell margins for 2007 calves (Table 2) and for 2008 calves (Table 3) suggests the buy/sell margins are indeed adjusting downward, but not enough to return a projected profit to backgrounding 2008 feeder calves, nor to 2008 calf-feds. The small projected buy/sell margin for finishing backgrounded calves is projected to start returning a profit for finishing backgrounded steers – albeit a small positive number.

Where are margins headed?

Some of my earlier work suggested that high feedlot gain costs during the emerging biofuels era may well require the cattle industry to live with -$6 to -$8 buy/sell margins for both feeder and slaughter cattle. This suggests that, by the end of the decade, $100 slaugh- ter-cattle prices will imply $106-$108 feeder-cattle and $112-$116 feeder-calf prices. Even with 2008’s projected $95 annual average slaughter-cattle price, this would suggest $101-$103 feeder- cattle and $107-$109 calf prices.

It’s very important that ranchers un- derstand buy/sell margins can be adjusted in three ways.

  • Feeder-cattle prices can be reduced.
  • Slaughter-cattle prices can increase.
  • Or a combination of feeder prices adjusting downward and slaughter cattle adjusting upward.

It’s extremely important that ranch- ers recognize that the increasing export market is what generated 2007’s record slaughter-cattle prices. That same in- creasing export market is again project- ed to set another record in 2008.

Couple the growing export market with a decreasing domestic beef cow herd for the rest of this decade, and my $100 slaughter-cattle, $106-$108 feeder- cattle, and $112-$116 feeder-calf prices are real possibilities by the end of this decade. If ranchers put a strong manage- ment focus on their unit cost of produc- tion (UCOP), the ranch industry could live profitability with my suggested end- of-this-decade, biofuels era prices.