Market Advisor

Corn & Cattle Prices Are A Roller Coaster

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The economics of the U.S. beef-cow sector have turned into a real roller coaster – three of them, in fact – one for corn, one for slaughter cattle and another for feeder cattle. The challenge for beef cow producers is to determine which extreme of the roller coaster the sector is on today and where it will sit over the next two years.

• The corn roller coaster set a record price in summer 2008, but retreated to the $3.50/bu. range from December 2008 to December 2010. Another record was set in spring 2011, but, as of April 18, the futures market is suggesting a gradual decrease going into December 2012. As this is written, seasonal corn-planting problems are set to affect 2011 corn prices.

• The roller coaster for slaughter cattle is also quite dynamic from the profitability standpoint. Cattle-feeding profits heavily influence the price of feeder cattle. My current analysis suggests the mid-April 2011 cattle market generated very large per-head profits, though these April 2011-harvested cattle were fed with the lower-priced corn of 2010 and early 2011. I calculated a feed cost of 54¢/lb. of gain based on a $5.69/bu. average farm-level price for corn.

My numbers suggest cattle-feeding profits in mid-April to be over $250/head (Figure 1). When cattle feeders make these high profits feeding cattle, they generally tend to pay big dollars for replacement feeders.

• The feeder-cattle roller coaster is also dynamic. In mid-April 2011, 800-lb. replacement feeders were in the $138 range. Compare that to the $111 range in mid-November 2010 for the cattle harvested in April 2011. Buying at $111 and selling at $118 (generating a +$7 buy/sell margin) is a sure way to drive up feeder-cattle prices. A positive buy/sell margin for harvested cattle is somewhat unusual.

What’s the economic projection for placing cattle on feed in April 2011? Placing 800-lb. feeders in mid April 2011 at $137 and harvesting in August 2011 (second column, Figure 2) is projected to be fed with $6.77 farm-level corn price and generate an 83¢/lb. of gain feed cost. Harvest price in August 2011 is projected at $117 for a loss of $143/head. Thus, cattle feeders are projected to pressure feeder prices lower in August 2011.

In this example, cattle-feeding outcomes over a four-month period are projected to go from a $272/head profit to -$143/head. That’s not a good recipe for increasing feeder-cattle prices.

What’s the projected economics of placing lightweight feeders on feed? My current analysis shows mid- April, 550-lb. feeders could be placed at $163 with a projected November 2011 harvest price of $122 (first column, Figure 2). The projected average farm-level corn price (futures price minus 40¢ basis) is $6.72, generating a projected feed cost of 77¢/lb. of gain, and a projected breakeven harvest price of $131/cwt. This works out to be a projected loss of $108/head.

In seven months, my numbers go from a $272 profit/animal harvested to a projected loss of $108/animal harvested. As a result, cattle feeders are projected to pay less for replacement lightweight feeders in November 2011 even with near-record harvest prices.

Let’s talk about fall 2011 retained ownership. I currently project that retained ownership of 2011 calves will have ranchers feeding $6.57 farm-level corn price for a feed cost of 77¢/lb. of gain. A negative profit of $137/head is projected; again, putting pressure on the price of replacement feeders in the spring of 2012. Figure 2 summarizes my current projections for four marketing alternatives for 2011 calves. Selling at weaning dominates the four programs evaluated.

How, then, does one put all of these corn, feeder cattle and slaughter cattle roller coasters together to decide how to best market 2011 calves?

I’ve developed a statistical model utilizing harvest-time price and average farm-level corn price to predict the breakeven price for marketing feeder calves at weaning (Figure 3). The top row lists the
assumed feedlot-specific numbers for lot charges/day, shrink and death loss. Meanwhile, the ranch-specific input numbers are:

• Average farm-level corn price for growing and finishing fall 2011 calves (my projection is $6.77 corn) and,
• The projected April/May 2012 harvest price (my projection is $124).

The model projects a before-tax breakeven price for 2011 weaned calves – in my case, $143/cwt. of weaned calf. If the tax-adjusted weaned price is greater than $143, you should sell at weaning. If the tax-adjusted weaned price is less then $143, you should retain ownership.

Ask your tax person to help you evaluate the tax consequences of these two alternatives. Your goal should be to maximize after-tax profits, not to minimize taxes.

I reran this model multiple times under alternative corn and harvest-time prices and used the results to generate Figure 4. Let’s look at an example where farm-level corn prices are expected to average $6/bu. and the harvest-time price to be $125. Using the table, we calculate the breakeven before-tax price for 550-lb. weaned calves is $151. I encourage readers to use this table monthly from now through weaning to evaluate the decision to sell at weaning or retain ownership.

In summary, early 2011 record (or near-record) cattle-feeding profits have driven feeder-cattle prices to record levels, and fall 2011 weaned calves are projected to sell at record prices. But I expect feeder-cattle prices to be pressured the last half of 2011 and well into 2012.

Since we may be approaching the top of the feeder-cattle roller coaster, ranchers should work to ensure they capture the maximum profit possible from this year’s record calf prices.

But be careful that faulty accounting doesn’t lead you into an ill-advised retained ownership decision. Proper accounting requires you to price and value your fall 2011 calves at weaning regardless of how you plan to market them. This fall weaning value must serve as the beginning value in your post-weaning decisions. In a year of record prices, you don’t want to leave any money on the table.

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.

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.

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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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