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.