Market Advisor

2008 grass cattle planning prices

RSS

After 30 years of government-supported and stabilized corn markets, the new biofuels era features no government- or farmer-held corn reserves and highly volatile corn prices. It's an economic environment in which ranchers have never before operated.

The result is that the traditional cattle cycle is broken, and the cattle industry is massively restructuring to respond to the new economics. Many of the tried and tested past economic relationships probably will not hold in the emerging biofuels era.

What's different in the current run-up in corn prices is that it is demand, not supply, driven. This increased demand is expected to last several years; some suggest it will be a decade before cellulose becomes the primary input source for ethanol.

A look at corn prices

Figure 1 presents the corn-futures history from early 2002 through December 2010. In general, corn prices from 2002 through September 2006 were in the $2/bu. range, rising to $3-$4 in 2007, and surpassing the $5 range in 2008.

As this is being written, the futures market through 2010 is well above $5/bu. Cash-corn prices in Omaha went to $5.27 the week of Feb. 29. My analysis suggests cattle prices have failed to adjust fast enough to these increasing corn prices.

Given what a weather scare this year in the Cornbelt could do to cattle prices, I encourage ranchers to explore price protection on their 2008 calves. USDA offers several subsidized livestock price risk management programs. All ranchers should look into how these risk-management packages might fit their ranch.

Suggested planning prices

Table 1 depicts my futures-based February 2008 price projections. What's notable is that my futures-based fall 2008 price projections are stronger than fall 2007 actual prices, which runs counter to my intuitive thinking.

For a variety of reasons, the cattle market appears unable to make the needed price adjustments to return profits back to the cattle-finishing sector. I keep expecting feeder-cattle and feeder-calf prices to weaken more due to the impact of higher feedlot gain costs, but it's yet to happen to the degree needed to return profits to cattle feeding.

Based on several queries I received on my January issue column, I will share how I adjusted the February futures price with a five-year average basis to localize the futures prices to Eastern Wyoming/Western Nebraska. This the primary area of my client base.

Basis is defined as cash price minus nearby futures price. Since basis is so difficult to predict, market analysts tend to use a three- to five-year average as the projected current year's basis. Each region of the country, however, has a different three- to five-year average basis.

An excellent source of readily available localized basis data is www.beefbasis.com, where you can pick your state and a local salebarn within that state. This is my source of basis data for this article.

Table 2 presents the beefbasis.com data generated for Torrington, WY salebarn basis data for selling feeders off grass for mid-September 2008. I ran this model for the 15th of each of the 12 months in 2008; the results of the feeder cattle-based model are presented under the “5-Year Avg.” column in Table 3.

The suggested planning prices on the right of Table 3 are the futures-contract prices for each specific month as of Feb. 20, 2008, adjusted by the monthly Torrington five-year average basis.

Planning for 2008 grass cattle

Let's build a business plan for putting 625-lb. steer calves on grass May 1, 2008 and harvesting them as 850-lb. feeders in mid-September. Let's first look at generating a projected planning price for “going on grass” in early May 2008.

The Feb. 20 futures price for May 1 (Table 3) was $111.75. I used a five-year beefbasis.com basis average of a +$3.50, so this adds up to a suggested (localized to Eastern Wyoming/Western Nebraska) basis-adjusted May 2008 planning price of $115/cwt. for 700- to 800-lb. feeders.

Second, let's adjust this localized planning price to the weight of “my” cattle. My Eastern Wyoming/Western Nebraska February 2008 calculated price slides (see my January column for how I did this) for May 2008 projects a $126/cwt. planning price for 625-lb. steers going on grass in my study region this year. (Actually, this price can also be extrapolated directly from Table 1, Spring '08 column). Now we have a planning price for putting 625-lb. steers on grass this summer.

My new ranch business plan for the emerging biofuels era calls for the marketing of 850-lb. feeders off grass — heavier than normal for my ranch. The September 2008 planning prices in Table 3 suggest a 700- to 800-lb. feeder-steer planning price coming off grass at $115. I used my calculated price slide for 850-lb. feeders off grass and came up with a planning price off grass of $108. (Again, this price can be extrapolated from Table 1. Since 850 lbs. off grass in Sept. '08 is halfway between Sept. '08, 800 lbs. and Sept. '08, 900 lbs., the market price is halfway between $111 and $104. Or, take $111 + $104 and divide by two = $107.50, which rounds to $108 as the price off grass. With this technique, Table 1 provides prices for many different weights of feeder cattle.).

Let's review what I did. I used the Chicago Mercantile Exchange (CME) futures market for a given contract month as my base price. I then localized the CME price to my geographic location via the basis adjustment, giving me a futures-based localized planning price.

I then adjusted the localized suggested planning price by my calculated Torrington price slides to adjust the planning price to my specific weight of cattle being marketed locally. I ended up with two planning prices — $126 feeder calves going on grass and $108 feeders coming off grass.

This suggests a buy/sell margin of a -$18/cwt. of feeder calf purchased. Can you make money with a -$18 buy/sell margin on grass cattle in 2008? My numbers say “no” if you charge for your grass, but “yes” if you give away your 2008 grass.

Visit www.beefeconomics.blogspot.com to see my completed “2008 Business Plan For Grass Cattle In The Emerging Biofuels Era.” Scroll down to the article by that title; “Running grass cattle” is the third marketing alternative from the left in the projected “Fall Calving Cow Profit Center Projection.”

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.

I wholeheartedly encourage ranchers to go to www.beefbasis.com and build a set of basis data for your location. I also encourage ranchers to routinely update the left-hand column of Table 3 with current futures prices — every Wednesday. You can update this table in just 10 minutes on your computer.

Whenever you can't explain why prices went the way they did, check with your state Extension marketing specialist or your local sale-barn manager for their opinion. Now you have become a price watcher, and I'll bet you become a better feeder-cattle marketer.

Beefbasis.com

What's Market Advisor?

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

Contributors

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,...

Sponsored Introduction Continue on to (or wait seconds) ×