Market Advisor

What cheaper corn means

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Ranchers clearly understand they're at the mercy of the national bio-fuels policy. They also know full well how increasing corn prices the past three years have shrunk their ranching profits.

Thus, ranchers have welcomed with open arms this summer's corn-price downturn. Will these decreasing corn prices translate into increased ranch profits when marketing 2009 calves? Let's assess the profit implications.

Ranching profits are strongly influenced by feeder-calf prices, which, in turn, are directly influenced by cost of gain (COG) beyond the ranch gate and by slaughter prices. Finally, ranching profits are directly impacted by the economic costs of running the ranch. Let's look at the profit potential of this summer's approximate $1.40/bu. drop in corn prices.

Thus far, 2009 corn prices have peaked in early June in the $4.70/bu. range and bottomed in mid July in the $3.20 range. Futures prices suggest a continued weakening of corn prices going into the 2009 corn harvest.

Of course, the challenge with respect to marketing 2009 calves is that these calves won't be grown and harvested in 2009 but will be grown and harvested well into 2010. Last year's 2008 calves were grown and finished under the current 2009 corn prices. The current corn futures market suggests corn prices could start increasing in December 2009 and continue increasing through 2010.

Given these Aug. 1, 2009, corn prices, I project that retaining 2009 calves through harvest will be done with $3.08/bu. corn in Western Nebraska after adjusting for the 47¢ negative basis on local corn prices that I used in my Western Nebraska cattle-feeding budgets. This, in turn, suggests a feed COG at 40¢/lb. gained (my comparable feed COG for retaining 2008 calves was 49¢/lb. of gain). Total feed cost per animal retained is projected at $247/head for 2009 calves vs. $297 for 2008 calves. Today's (Aug. 1) projected lower corn prices are suggesting a $50/head lower feed cost for retaining 2009 calves.

Feed COG, however, is only half the picture; the buy/sell margin is the other half. Figure 1 incorporates both current lower corn prices and current buy/sell margins into a projected total cost and return summary covering four traditional marketing options for 2009 calves. Note that total COG is reported in this table rather than just feed COG. Finally, the projected bottom line for each marketing alternative is also presented. Figure 2 presents comparable marketing numbers for growing and finishing 2008 calves.

One would expect total COG to be lower on 2009 calves; I project an 8¢/lb. lower total COG for retaining 2009 calves over retaining 2008 calves. My projections suggest the cattle industry is going to have to live with COG in the mid 60¢ to 70¢ as long as we're operating in the current bio-fuel era.

Once again, the negative buy/sell margin becomes critical with respect to generating a profit in grower and finishing operations. For comparison purposes, please note the slight drop in buy/sell margins for finishing backgrounded calves and the retained ownership marketing option in 2009 as compared to 2008.

Lower feed costs and smaller buy/sell margins suggest some profits are finally being projected for the cattle-feeding sector in 2010. Please note that a small profit is now projected for the cow-calf producer selling 2009 calves at weaning.

Current lower corn prices suggest retained ownership through a 2010 harvest may be a viable marketing option, albeit a risky one, to add additional profit from 2009 calves. For once, profits are projected to move in the right direction. I haven't seen this in a long time.

It's clear that, in the long run, the cattle industry is going to have to live with higher COG beyond the ranch gate in this bio-fuel era. In the short run, post-weaning gain on 2009 calves is projected to cost somewhat less than post-weaning gain on 2008 calves.

Second, the long-run negative buy/sell margins in cattle feeding must decrease more if we're to return a profit from the grower and finishing sectors. Only increasing slaughter cattle prices, decreasing feedercattle prices, or some combination of both, can accomplish this. As a result, this suggests feeder-calf prices will remain under considerable pressure and thus, economic efficiency at the ranch level will become increasingly critical.

The national economy and increasing unemployment continue to restrain higher slaughter-cattle prices. Thus, the economic pressure remains on feeder-cattle prices (Figure 3). Only over-capacity in the feedlot sector is keeping feeder-cattle prices from falling even faster.

My conclusion is that the current lower corn price does signal a potential profit increase for ranchers who retain their 2009 calves. This is the first time I've projected a profit for retained ownership for a very long time. Let's hope corn prices remain lower going into 2010 when your 2009 calves will be harvested.

Harlan Hughes is a North Dakota State University professor emeritus. 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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