Two economic forces are driving a new economic “normal” that is unfolding in U.S. ranching – stronger beef demand and near-record high corn prices. At press time, prices for fed cattle and corn were both trending upward. Meanwhile, strong fed-cattle prices and rising feedlot profits were pulling feeder-cattle prices higher as well.
Based on mid-December placements, my current budgets (Figure 1) suggest a $58 loss/head from growing and finishing 550-lb. feeders with $4.94/bu. corn and a minus $37 buy/sell margin. A second budget shows a $43 loss/head from finishing 800-lb. feeders with $4.94/bu. corn and a -$15 buy/sell margin.
On the other hand, fed steers harvested in mid-December 2010 are calculated to generate a $148 profit/head based on $3.32/bu. corn and a -$10 buy/sell margin. Lower corn prices coupled with lower buy/sell margins were a good recipe for returning profits to the cattle-feeding sector, but these relationships aren’t holding in my projections for cattle harvested in 2011.
This month, I’ll use three measures to summarize a cattle-feeding enterprise: buy/sell margin, feed cost of gain (COG) and profit per head; all reported in Figure 1. It’s clear these three cattle-feeding indicators are changing in today’s markets. Let’s look at the economics of these market indicators.
While domestic beef demand is still being negatively impacted by the weak economy, beef exports are a shining light. The net result of increasing export demand is increasing fed-cattle prices, and increasing fed-cattle prices narrow the buy/sell margin.
Figure 2 summarizes the dramatic increase in fed-cattle prices as reflected by the futures market. By mid-December 2010, live-cattle futures were suggesting $109 slaughter cattle by the end of 2011. Lower beef imports are adding to cull-cow prices, which is a plus for the ranch sector. Things seem to be currently in a win-win situation for the beef industry.
Feed COG is driven directly by corn price. Ethanol’s growing demand for corn is driving corn prices higher. After a year of finishing our 2009 calf crop with $4-or-lower corn, the futures market suggests we’ll finish 2010 calves with $5+ corn prices, perhaps even reaching $6 in mid-2011.
While 2009 calves finished with feed COG in the mid $40s, 2010 calves are projected to finish with feed costs in the mid $50 to low $60s – a 40-50% increase in feed costs. 2011 calves are now projected to be finished with feed costs in the low $60s.
Now let’s look at the third and final indicator. Year 2009 calves, which were finished with lower-priced corn, generated some good profits from cattle feeding (Figure 3); note the low buy/sell margins on 2009 calves. Ranchers selling 2009 calves at weaning, however, were hit hard.
Year 2010 calves are expected to be finished with higher-priced corn and higher buy/sell margins. A key question is whether the current increase in beef demand can offset the impact of higher-priced corn? If so, we could see strong feeder-cattle prices throughout 2011.
Ranchers selling calves at weaning in 2010 should have done quite well. After the record-low profits from selling at weaning in 2009, the higher 2010 profits were badly needed in the ranching sector.
Figure 4 presents my latest projections for harvesting 2010-born calves based on mid-December 2010 futures. Ranchers selling at weaning are projected to have generated a $146/cow profit. Meanwhile, those retaining ownership are projected to add on another $34/calf retained, which is down considerably from retained ownership of 2009 calves. Figure 4 suggests beef demand will add more to feeder-cattle prices than what high-priced corn will remove.
The late-2010 futures market indeed suggested stronger 2011 feeder-cattle prices (Figure 5). My projections suggest cattle feeders will have to lessen their feeder-cattle bids if they want to make money harvesting 2011-born cattle.
My current 2011 projections (Figure 5) suggest that those selling 2011 calves at weaning will again do very well (Figure 6). Meanwhile, feedlots finishing 2011 calves may well expect considerable profit pressure as a result of over-priced feeder cattle. High-priced corn simply may not allow the level of buy/sell margins projected in Figure 6.
Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701-238-9607 or [email protected].