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Corn Determines Calf Prices

Ranchers are facing a new normal in the beef cow-calf business. The price of corn has replaced the cattle cycle as the key factor determining feeder-cattle prices. As more corn is converted into ethanol and corn prices trend upward, cost of gain (COG) beyond the ranch gate is dramatically increasing.

Three decades of government feed grain programs led to low and relatively stable corn prices, but the biofuels era is a new ballgame. Not only is the average corn price considerably higher, but feeder-cattle prices are now linked directly to the volatile energy market via ethanol.

Figure 1 illustrates the dramatic change in corn prices represented by the current futures market through December 2013. For years, corn prices ranged in the $1.50 to $2.50 range. Because government feed grain programs removed much of the market volatility, ranchers really never had to monitor corn prices.

That changed in mid-2006 with the advent of the biofuels era. Record-high corn prices in spring/summer 2008 generated massive feedlot losses. The retreat to the $3+ range in 2010 returned profits again to the feedlot sector, but the futures market is now suggesting $6+ corn in 2011. Ranchers now must monitor corn prices to predict their impact on feeder-cattle prices.

The ballgame is again changing as the government begins implementing a 15% ethanol blend rate compared to the previous 10% level. While it’s important to note that some of the future growth in ethanol production is expected to come from cellulose rather than corn, at least 16 billion gals. of ethanol annually is still projected to be produced from corn, with the remainder derived from cellulose.

Corn price is the key determinant of feedlot cost of production. Figure 2 illustrates corn’s dramatic impact on feedlot COG. For example, $3 corn will generate a total feedlot COG in the $70/cwt. range; $5 corn, a $90 COG; and $6 corn leads to $100 COG. Even ethanol by-products are priced off of corn price.

While cattle feeders can’t control corn prices, they can control what they pay for feeder cattle. Feedlots have very good accounting systems and can predict their COG quite well. Feedlot managers can lock in both the corn price and harvest price when it looks to be advantageous. Thus, they have the ability to derive their breakeven prices for feeder cattle with some degree of confidence. However, their two unknowns are the final harvest price and the cost of sickness in the cattle.

Many custom cattle feeders are ranchers. Thus, astute ranchers also must have a good estimate of the derived feeder-calf prices that they are facing in order to evaluate their marketing alternatives at weaning.

Figure 3 is my current table of derived feeder calf prices for 550-lb. steer calves based on alternative corn prices and harvested cattle prices. It was generated with a set of simulated feedlot costs I use to monitor profits in the various sectors of the beef industry.

In order to allow readers to generate a set of derived feeder cattle prices targeted to their own unique custom-feeding opportunities, here’s the process I used to generate Figure 4.

First, you need a spreadsheet designed to budget the economics of custom feeding your calves. Land-grant universities have such budget spreadsheets readily available online. I don’t share my budget software with readers as I don’t have the time to support the software.

An example budget in the form of a cattle-feeding business plan (Figure 3) was generated for finishing a 550-lb. weaned 2010 steer calf based on mid-January 2011 planning prices. It was run with $5/bu. corn.

If I calculate a breakeven feeder-calf price, I get a $146 breakeven purchase price for the 550-lb. feeder steer calf. This budget can be rerun with several alternative corn prices and harvest prices, allowing you to build a table of all the corn prices, harvest prices and calculated breakeven prices.

Then, you can use your spreadsheet software to run a regression equation where breakeven feeder-calf price equals a function of corn price and harvest price. The equation for my example ranch is: breakeven feeder calf price = -22.3 – (8.2 × corn price) + (1.76 × harvest price). This is based on 26¢/day lot costs, 2% shrink and 1% death loss.

Once you have this equation, simply plug in any corn price and harvest price to arrive at your breakeven feeder-calf price.

Let’s use Figure 4 to calculate some example breakeven feeder-calf prices. If we plug in a $105 harvest price and 5/bu. corn, the breakeven feeder-calf price is $123. At a $115 harvest price and $6 corn, I get a $133 breakeven feeder-calf price.

As harvest price of slaughter cattle and corn price changes through time, you can quickly recalculate a new breakeven feeder-calf price. Do this monthly as you produce your 2011 calves, utilizing each month’s current corn and live-cattle futures prices. As you approach weaning, your most profitable calf-marketing alternative will begin to surface.

As I write this, fed-cattle harvest prices are approaching $115 for 2011, and $117 for 2012. There’s some indication, however, that the retail beef market is peaking out so we may not be able to sustain these price levels.

But let’s look at some possible breakeven feeder-calf prices for 2011 calves to be harvested in 2012. Today’s corn futures market suggests 2011 calves might be finished with around $5.50/bu. corn. Figure 4 suggests $5.50 corn and $115-$120 harvest prices should generate a $137-$146 breakeven on weaned 2011 feeder calves.

Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701-238-9607 or [email protected].