By now, drought has forced some ranchers to sell some cows and/or wean early; others have already priced their 2012 calves. We all have one thing in common – we’re all trying to figure out this cattle market. That said, here is my current analysis on marketing 2012 calves.
Every month, I refigure a set of planning prices for the next 12-15 months. I use these to project the economic performance of my simulated beef cowherd through the slaughter of the current calf crop.
A key factor in this month’s price analysis is the projected price for fall-weaned calves. While the trade media reports how drought has lowered calf prices (Figure 1), my 2012 fall price projections are still above those of last fall (Figure 2). On average, good profits were made with 2011 prices, so 2012 profits should also be reasonably good.
While it’s true that current calf prices are down from late winter and early spring, very few ranchers sold calves last winter or spring. As of this writing, I predict fall 2012 calf prices will be relatively good.
Fall 2012 calf prices equal to last fall’s prices would do much to help with emergency drought plans. Even if you weaned your calves early and sold them, your prices should be comparable to, or above, last year’s prices.
Live cattle futures prices is another positive marketing factor (bottom line, Figure 2). Slaughter prices – driven by exports – seem to keep trending upward. Ranchers who retain ownership typically harvest in May-June. Live cattle futures averaged $107/cwt. in May and June 2011, and $117 for the same two months in 2012. Slaughter price in 2013 is currently projected to average $133 in May-June 2013. If these prices materialize, they will negate some of the projected impact of higher-priced corn fed to 2012 retained calves.
This month’s market analysis has been a challenging one. A general characteristic of markets is to overreact – both on the upside and the downside. Indeed, the corn market has really increased in response to the 2012 summer drought, as the existing corn crop has to be rationed. With the current government-mandated ethanol program, the drought-driven demand adjustments for corn need to come from animal agriculture and/or corn exports.
Analysts suggest, however, that even if the ethanol mandate is relaxed, corn prices may not recede much. The futures market suggests 2012 calves will be finished with relatively high-priced corn; albeit, slightly lower than current (mid-August) corn prices.
Fortunately, most ranchers who marketed their 2011 spring-born calves via retained ownership should have harvested them in May-June 2012, thus going to market before the big summer run-up in corn prices. As this is written, nearby corn futures prices are near $8/bu., but corn futures for latter 2013 are in the $6.50 range based on the assumption of more normal rainfall in 2013.
I will stay with my projected record cost of gain (COG) for the growing and finishing of 2012 calves. The assumption here is that feedlots have to pay the farm-level cash price for corn.
A second challenge I encountered doing this month’s analysis relates to the local corn-price basis and local farm-level corn prices. Basis is cash price minus the futures price.
Not only has the corn futures price skyrocketed, it appears farm-level basis, at least in western Nebraska, has gone to a much smaller negative number (Figure 3). A smaller negative number implies even higher farm-level corn prices.
As a result, I’ve adjusted my corn basis in this month’s projections (Figure 3) from the -45¢/bu. basis in previous months’ price projections, to a -10¢ basis on corn fed to 2011 calves, and a -15¢ basis for corn fed to 2012 calves. COG went up for both years’ market analysis; and, yes, this has changed my economic calculations for 2011 and my projections for 2012 calves.
Volatile corn prices imply volatile COG in the feedlot. My current calculated COG for retaining (growing and finishing) 2010 calves is $1.09/lb. COG decreased to 94¢ for 2011 retained calves and is now projected at $1.18 for 2012 retained calves (see COG columns, Figure 4).
I project ranchers’ economic costs of producing 2012 weaned calves will rise from $126/cwt. of calf produced in 2011 to $142/cwt. in 2012. This is primarily due to drought-induced increased production costs.
This projected $16 increase results in a projected drop in per-cow profit for 2012 to $112/cow (Figure 4). I also project a higher buy/sell margin on backgrounding 2012 calves under a high target average daily gain. The buy/sell margins on the two finishing programs are projected to be less than in 2011.
Finally, some of you are asking about the cattle market further out. Of course, much depends on when it starts raining, but I expect that as the U.S. starts getting more grass in the next year or two, we will see a national herd expansion. Calf prices should increase through at least 2014. Heifers will be diverted from feeding to breeding and ranchers will try to rebuild the national beef cowherd. Needless to say, bred heifers will bring a premium.
Corn farmers will respond to higher prices by producing more corn. Feeder cattle supplies will be tight and feedlot competition will be keen. High-priced feeders and high-priced corn will keep feeding margins to a minimum. This all suggests to me that the profits will be made at the ranch level.
Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701-238-9607 or firstname.lastname@example.org.