Market Advisor

Key Economic Opportunities In Calf Marketing

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My last series of articles focused on the economic challenges occurring in the beef-cow sector since the start of the biofuels era. This month, I’ll focus on the key economic opportunities for the beef-cow sector.

• The export market is generating strong slaughter cattle prices.

Beef exports have been the shining light in the cattle business in 2011. U.S. beef exports were up 26.8% from January to July, while beef imports were down 16.6%, compared to a year ago. In that time frame, 10.6% of U.S. beef production was exported, while an amount equal to 8.3% of U.S. production was imported. A weak U.S. dollar lowers prices to foreign customers and increases export demand.
Export-driven slaughter cattle prices have trended up since April 2009 and are projected to continue up through 2012. The monthly statistical trend line for live-cattle futures is +$1.10/month, or $13.20/year. As this is written, 2012 live-cattle futures are over $120/cwt. Clearly, we’re seeing record-high slaughter cattle prices.

• A smaller national herd implies stronger weaned-calf prices.

The biofuels era broke the cattle cycle, and the nation’s beef cowherd has been shrinking for more than a decade. While northern producers appear to be building their herds, drought-stricken Southern Plains producers are culling heavily, ensuring that the national cowherd will continue to shrink. One well-known analyst predicts the nation’s beef cowherd will shrink 2-3% this year.

Once the drought ends and restocking begins, feeder-cattle numbers will shrink even more as heifer calves are diverted from feeding to breeding. Feedlots will struggle to fill their pens, and bidding for feeder cattle will be very aggressive.

• Projected high gross incomes/cow.

Ground beef’s popularity is ensuring strong cull-cow prices despite higher cull-cow numbers. I expect we’ll continue to import less ground beef, which normally makes up the majority of imported beef, adding further strength to cull-cow prices. So, strong calf prices and strong cull-cow prices point to favorable gross-income projections for beef cowherds for the next five years.

Figure 1 presents my conservative long-run gross income projections, which I presented in detail in last month’s column. Gross income was projected to average $766/cow for the 2011-2015 period, and current projections suggest it will continue to increase over the next five years. This should trigger a national herd expansion.

• Corn price heavily influences weaned-calf prices.

In the “old normal” we focused on cattle cycles when talking about weaned-calf prices. In the “new normal,” we focus on corn prices when we talk about weaned-calf prices.

Weaned-calf prices are a derived demand for feeder calves and are heavily influenced by the cost of gain beyond the ranch gate. Since corn is the dominant feed used to finish cattle, the derived demand for feeder calves is a direct function of corn price.

I calculate my monthly budgets with a 47¢ negative basis targeted for Eastern Wyoming/Western Nebraska. If the corn futures price is $7.50, I subtract the 47¢ basis and use $7.03 in my cattle-feeding budgets, assuming that corn is purchased in the month it is fed.

In my budgets, I fed 2008 calves with $3.69 corn, 2009 calves with $3.34 corn, 2010 calves with $5.50 corn, and project I’ll feed 2011 calves with $7.29 corn. That’s a doubling of corn price in three years!

Figure 2 was generated to give my readers a feel for what increasing corn prices does to weaned-calf prices. Let’s assume that beef-export demand sets slaughter-cattle price at $125/cwt. for 2011 calves’ harvest time price. (Remember, most 2011 calves will be harvested in 2012.)

If corn is $5/bu., the breakeven (BE) 2011 weaned-calf price is projected at $159/cwt.; if corn is $6/bu., the BE 2011 price is $151; and, if corn is $7/bu., the BE 2011 weaned-calf price is $143/cwt. To make a point, I entered $4 corn and $125 slaughter cattle in the lower-left hand calculator and it projected the BE calf price at $167.

A $3 increase in corn prices ($4 to $7) projects a $23 drop in weaned-calf price. That’s $126/head on a 550-lb. weaned calf! Don’t let anyone tell you that corn ethanol is not impacting beef calf prices.

Figure 3 summarizes my current planning prices for marketing 2011 calves. Planning prices for alternative production programs can be quickly generated via Figure 3. For example, 550-lb. fall-weaned calves are projected to sell for $149/cwt. (column AN, Row 3). These same steer calves backgrounded to 800 lbs. and sold in January 2012 are projected to sell for $128/cwt. (column AO and Row 6).

Meanwhile, finishing these backgrounded calves at $128/cwt. going into the lot, calculates to $124/cwt. (column AQ, Row 8) coming out of the lot in the spring.

And, 600-lb. grass cattle are projected to go on grass in spring 2012 at $140/cwt. (column AQ, Row 4), and come off grass in September 2012 at 800 lbs., bringing $129/cwt. (column AR & row 6).

Enter in your operation’s costs of added weight (gain) to determine your best marketing alternative. I’ll just focus on selling at weaning.

When I apply these planning prices to my example Eastern Wyoming/Western Nebraska herd, given the strong export market for finished beef and $7+ corn prices, I have 560-lb. fall 2011 weaned steer calves priced at $145/cwt., which leads to a $149/cow profit. Thus, 2011 is projected to be the highest profit year so far in the biofuels era – if you have grass! Many don’t.

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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