Market Advisor

Environment For Cowherd Expansion Is Very Favorable

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Economic theory suggests that when a major input cost goes up, the industry utilizing that input reduces its production. That’s exactly what happened to the beef industry in the biofuels era – high corn prices led to a lower national beef cowherd.

Texas, with 5 million beef cows, drives the U.S. industry. When a severe drought hits Texas, the U.S. cowherd shrinks. The economic reality is that when Texas and the Southern Plains restock, there will be a nationwide economic opportunity for herd expansion. This month, I’ll focus on that expansion potential.

Slaughter prices. The driving force behind the beef industry is slaughter cattle prices. Strong export demand, coupled with fewer cattle, adds considerable strength to slaughter cattle prices. USDA’s price tables cite Choice steers in the five area markets averaging $95/cwt. in 2010, and $115/cwt. in 2011 – a 20% increase. In 2012, USDA projects Choice steers to average $125/cwt.

Figure 1 depicts the long-run upward price trend of live-cattle futures from February 2009 to June 2013. A five-year statistical trend indicates a $14.02 average price increase each year during this period.

Corn price. The cattle cycle used to drive the ranch business; now, it’s driven by corn price. When we had price supports on corn, the corn price changed very little during a year, and from year to year. With corn prices fairly constant, ranchers didn’t have to study the corn market to run a ranch. Now, ranchers must routinely study the corn market.

In 2006, the beginning of the biofuels era, corn price started to move upward. Today’s volatile corn market is now a driving force for the economics of ranching. Markets tend to overreact on the upside and the downside, which fuels corn price volatility (Figure 2).

Biofuels have substantially increased the demand for corn, and this demand increase is trying to move corn price to a new higher price equilibrium – perhaps the $5-$6 range. However, it’s hard to determine just what the new equilibrium price will be. As corn demand rises, so does corn acreage. As this is being written, USDA is projecting record corn acreage for 2012.

Farm-level corn price. Western Nebraska/eastern Wyoming cattle feeders generally experience a negative basis, which means the farm-level corn price is less than the futures price; therefore, localized farm-level corn prices need to be adjusted by the local corn basis. I tend to use a -47¢ corn basis for western Nebraska/eastern Wyoming in my cattle feeding simulations.

Figure 3 presents my simulated average farm-level corn price used for growing and finishing calves based on the year of calf birth. Remember, calves are born on the ranch in one year and grown and harvested the next year. These calculated feedlot corn prices assume that the corn was purchased monthly as it was fed.

Figure 4 presents the average cost of gain (COG) calculated in my retained ownership simulations for western Nebraska/eastern Wyoming feedlots. This COG is posted to the year the calves were born. Note how COG has increased as we’ve moved through the biofuels era.

For example, calves born in 2005 had a COG below 40¢/lb., based on an average farm-level corn price of $1.69/bu. But, calves born in 2012 are projected to be harvested in 2013 with a COG of 93¢/lb., based on $5.64 average farm-level corn price. This projected 2012 COG is an eight-year high.

Feeder & calf prices. Feeder cattle price is basically a derived price based on slaughter cattle prices and COG in the feedlot. As discussed earlier, slaughter cattle prices are projected to trend up, while corn prices and COG may be peaking at a new equilibrium level, with the net results being increasing feeder calf prices in 2013 and perhaps 2014.

On a monthly basis, I analyze the most current week’s western Nebraska salebarn prices for steer feeder calves and calculate a statistical price line relating steer feeder calf prices and selling weight. The current 2012 price line in Figure 5 is the highest I’ve calculated – 550-lb. steers at $185/cwt., and 800-lb. steers at $153/cwt.

Planning prices. The latest salebarn price line is used in conjunction with the latest futures prices for corn, slaughter cattle and feeder cattle to develop a monthly set of planning prices for selected marketing months for the current and next calendar years.

Figure 6 presents the western Nebraska/eastern Wyoming feeder calf and feeder cattle prices for 2010 and 2011, along with my 2012 projections. The line for 550-lb. feeder calves clearly indicates the upward trend for fall-weaned steer calf prices.

The 550-lb. weaned calf price for fall 2010 was $132/cwt., while the fall 2011 weaned price was $157. I project the fall 2012 weaned price at $181/cwt., and should remain strong for the next few years. I project the next five-year average weaning price for 2012-2016 will be record-high.

In summary, strong and increasing slaughter cattle prices, impacted by higher but stabilizing corn prices, all suggest stronger feeder cattle prices. Stronger feeder cattle prices suggest a favorable economic environment for cowherd expansion. I think we’ll see that happen the next few years. 

Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701-238-9607 or harlan.hughes@gte.net.

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Harlan Hughes has spent a professional lifetime helping U.S. beef producers better manage the business end of their beef cow operations.

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Harlan Hughes

Harlan Hughes is a North Dakota State University professor emeritus and author of the monthly "Market Advisor" column that appears in BEEF magazine. He also consults and lectures widely,...

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