Market Advisor

2007's calf-marketing opportunities

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Biofuels are impacting today's marketing decisions. As 2006 corn prices escalated in response to ethanol demand, it became clear that relative prices for feeder calves (500-600 lbs.), feeder cattle (750-850 lbs.) and slaughter cattle had to change if all sectors were to be profitable.

As corn prices rose in late 2006, I commented that the best cure for $4 corn is $100 slaughter cattle. The futures market made it to $100 live cattle in April 2007, and we could see $100 again this fall; $100 cattle is something I didn't envision last year.

The industry's saving grace has been the upward trend in slaughter-cattle prices over the last year, but that's not enough to generate simultaneous profits in all sectors. The relative prices of feeder calves, feeder cattle and slaughter cattle have to also change in response to the increased costs of feedlot gains.

As a result, I believe the relative prices for feeder calves, feeder cattle and slaughter cattle will change over the next few years in two phases. The first phase deals with the marketing of 2007 calves and the second phase will deal with the marketings of 2008 and 2009 calves.

Let's summarize the economics of 2006 calves before discussing Phase I price adjustments (the marketing of 2007 calves), as I now perceive them.

Marketing 2006 calves

North Dakota's 2006 Farm Business Management Summary indicates Northern Plains ranchers made $116/cow in 2006 through weaning, based on 553-lb. average weaning weights — down from 2005's record-high $218 profits. Accompanying 2006's slight drop in gross revenue per cow was an increase in production costs per cow relative to the high-profit 2005 year.

My simulations suggest those who backgrounded their 2006 calves from 553 to 800 lbs. with $2.70 corn and $120 hay generated another $12/head profit (Figure 1). Any time a rancher can market his ranch-raised feeds at the going market price (opportunity cost) through backgrounding calves and still make a small profit, he's executed a profitable marketing venture.

Meanwhile, the feedlot that finished those 800-lb. calves in June 2007 lost $48/head. In general, cattle feeders continued to consume equity capital in 2006, and breakeven prices suggest more of the same through most of 2007. March, April and May 2007 were exceptions.

My simulations suggest ranchers who retained ownership in a commercial feedlot (553 to 1,175 lbs) and hit the strong May 2007 market, netted $35/head. The key was hitting that May market. (USDA shows a $41/head profit for Southern Plains feeders who sold slaughter cattle in May 2007.)

The buy/sell margin for such backgrounded calves was -$13/cwt., while the cattle feeder finishing those calves also faced a -$13/cwt. buy/sell margin. Those retaining ownership and marketing in May faced a -$21 buy/sell margin.

Cost of gain (COG) increased with the marketing of 2006 calves. My calculated COG was $98/cwt. of calf produced by the rancher, 69¢/lb. of gain for the backgrounder and 78¢/lb. for the cattle feeder finishing the backgrounded cattle. The retained ownership option had a COG of 71¢/lb. of gain. All these COGs were higher than in 2005.

These same costs for 2005 calves were $93/cwt. for ranchers, 48¢/lb. for backgrounders and 55¢/lb. for cattle feeders. Retained ownership for 2005 calves was executed at 49¢/lb.

This suggests two things. First, ranchers who sold 2006 calves at weaning did reasonably well last year. Those who backgrounded their calves received full market price (albeit somewhat inflated) for ranch-raised feeds plus a little profit. This suggests feeder-calf prices vs. feeder-cattle prices made the needed price adjustments in a reasonable manner with respect to calves born in 2006.

Feeder-cattle prices vs. slaughter-cattle prices didn't make the needed price adjustments to return profitability to the cattle-feeding sector with 2006 calves. Over-capacity in the cattle-feeding sector prevented this price adjustment.

In general, cattle feeders simply bid too much for cattle, which was preferable to closing the feedlot. The price adjustment needed to return profits to the cattle-feeding sector is projected to occur in Phase II of the biofuel era (the production and marketing of 2008 and 2009 calves).

Marketing 2007 calves

Let's take a look at marketing 2007 calves as volatile corn prices continue. My current cattle price projections (Figure 3) for fall 2007 feeder calves and 2008 feeder cattle suggest higher prices than 2006. Even with these projected higher calf prices, I project a 11% increase in beef cow costs (opportunity costs) due to much higher wintering feed costs (fall 2006/winter 2007) and higher summer grazing costs. These higher beef-cow production costs reduce the projected rancher profit in 2007 to $49/cow (from $106/cow in 2006).

Backgrounding these 2007 weaned calves with ranch-raised feeds (again high-priced) is projected to generate a $9/head profit. Ranchers are projected to receive market price-plus (albeit inflated market prices) for 2007 ranch-raised feeds if they background their calves.

The cattle feeder who finishes the backgrounded calves in June 2008 with $3.54 corn is projected to lose $66/head. My 2007 marketing alternative simulations suggest the cow-calf sector should remain somewhat profitable through 2007, but the cattle-feeding sector will continue to consume equity capital.

My simulations project that the buy/sell margin for feeder calves vs. feeder cattle will be a -$14, and the buy/sell margin for the cattle feeder is projected to be -$20/cwt. (Figure 3). This -$20 buy/sell margin for feeder cattle to slaughter cattle isn't sustainable with the new level of projected corn prices in the emerging biofuels era. The economic pressure will be for either slaughter-cattle prices to rise or feeder-cattle prices to decrease relative to each other.

Phase II market adjustments

Phase II market adjustments are projected to focus on returning profitability to the cattle-feeding sector and will take place with 2008 and 2009 calf crops. The question is: “Can beef exports increase enough to drive slaughter cattle price up sufficiently?”

With corn prices projected to move up in 2008 and 2009, feeder-cattle prices relative to slaughter-cattle prices are projected to reduce the buy/sell margins (Figure 4). If export markets don't increase the “sell” portion of the buy/sell margin, the “buy” portion will be lowered by the downward adjustment of feeder-cattle and feeder-calf prices as 2008 and 2009 calves are marketed.

In a previous “Market Advisor” column, I predicted U.S. beef exports to Japan would reach pre-BSE levels around 2010. If this happens, we could see the price adjustment on the “sell” side of the buy/sell margins. Let's hope the export markets do their job.

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.

Figure 1. Traditional marketing alternatives for 2006 calves
Marketing strategy Buy/sell margin Cost of gain (COG) Profit/head
Spring calving 2006 ND-FBM-06

Sell at weaning xxxxxxx $98 $106
Backgrounded high ADG -$13 $0.69 $12
Finish backgrounded steers -$13 $0.78 -$48
Grow & finish -$21 $0.71 $35
May/June calving '06 Oct weaned $110 $84
Winter grow feeder into '07 -$5 $1.05 $11
'06 steers on grass in '07 -$5 $0.48 $97
Finish '07 grass steers -$16 $53 $16
Figure 2. Projected planning prices
Lbs. Jan. '06 Mar. '06 Spring 'O6 Fall '06 Jan. '07 Mar. '07 Spring 'O7 Fall '07 Jan. '08 Week of 24 Aug '07 Prices
425 $174 $174 $144 $129 $124 $141 $144 $135 $133 $134
500 $154 $154 $138 $123 $118 $120 $136 $132 $129 $131
550


$119


$130
$129
600 $116 $133 $130 $116 $112 $114 $127 $128 $125 $127
700 $116 $116 $123 $110 $107 $109 $117 $123 $121 $122
800 $104 $104 $117 $105 $103 $105 $108 $119 $116 $118
900 $96 $96 $111 $102 $101 $103 $98 $115 $112 $114
Slaughter $92 $83 $85 $88 $88 $97 $104 $99 $97 $101
Figure 3. Projected traditional marketing alternatives for 2007 calves
Marketing strategy Buy/sell margin Cost of gain (COG) Profit/head
Spring calving ND-FBM-06

Sell at weaning xxxxxxx $121 $49
Backgrounded high ADG -$14 $0.80 $9
Finish backgrounded steers -$20 $0.74 -$66
Grow & finish -$32 $0.68 $4
Figure 4. Projected traditional marketing alternatives for 2008 calves
Marketing strategy Buy/sell margin Cost of gain (COG) Profit/head
Spring calving ND-FBM-06

Sell at weaning xxxxxxx $117 $12
Backgrounded high ADG -$9 $0.64 $60
Finish backgrounded steers -$20 $0.73 -$85
Grow & finish -$27 $0.66 $4
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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