Market Advisor

Is a turnaround in the economy ahead?

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Since the current biofuels era has negated the long-run effect of the traditional cattle cycle, ranch-management decisions have become more difficult. Today, predictions about the ranch business can only be made as far out as the predictability of the corn market.

When we had cattle cycles, ranchers could routinely predict the complete 9- to 11-year cattle cycle. In addition to the projectable cattle cycle, past government programs effectively set a maximum corn price for cattle feeders. Thus, cattle feeders could easily predict their cost of gain (COG).

The beef industry grew into a mature industry based on relatively stable government-driven corn prices. The major economic force at work was the cattle cycle's impact on the annual supplies of feeder cattle. That strong economic force has now been negated.

After the biofuels era cranked up in the beginning of the last decade, corn prices took off in late 2006. Clearly the beef industry gained a new and big competitor for corn — ethanol production — and the result was higher and more volatile corn prices.

With no government-held or farmer-held corn reserves, corn prices swing with every weather scare and corn crop forecast. In the past, corn prices centered around $2/bu.; today, they center around $4. Most analysts suggest we've now established a new higher overall average corn price. Cheap corn, as we have known it for decades, may not exist again.

Continued higher corn prices have led to continued higher COG beyond the ranch gate, and higher COG has led to lower feeder-cattle prices. Lower feeder-cattle prices are leading to a downsizing of the nation's beef cowherd, which is leading to surplus feedlot capacity and surplus harvesting capacity. Add in a faltering economy and you have a downsizing of the U.S. beef industry under considerable economic pressure. This economic pressure is substantial and painful to all sectors of the beef industry.

Falling corn prices, on the other hand, can have a positive impact on the beef industry. The corn price drop in January 2010 may well have triggered a substantial turnaround in the beef industry. But, will corn prices stay down?

One indicator of future corn prices is the corn futures market. I encourage ranchers to watch the corn futures market weekly and specifically the December contract prices. For example, as this is being written, the nearby corn futures price is $3.74/bu., while the December 2010 corn futures price was $4.08, December 2011 was $4.19, December 2012 was $4.20, and December 2013 was $4.30. Note the yearly progression in prices.

In a few months, corn price will be primarily driven by the projected 2010 corn crop. Feeder-cattle prices will also again respond to projected corn prices. What I glean from all this is that corn prices probably will not stay at the current lower price levels.

Figure 1 summarizes my current projections for four alternative marketing programs for 2009 calves. Today's lower corn prices are positively impacting the economics of growing and finishing 2009 spring-born calves.

The first line in Figure 1 summarizes my calculated profit for selling at weaning. The second line summarizes my projections for backgrounding those calves to 800 lbs., line 3 summarizes the finishing of those backgrounded calves, and line 4 summarizes retained ownership (grow and finish) of 2009 spring-born calves.

The first numbered column in Figure 1 presents the projected buy/sell margins for each marketing alternative. The second numbered column presents the projected COG, and the right-most column presents the projected economic profit from each marketing alternative. The higher profits can be attributed to both lower COG due to lower corn prices and also projected higher slaughter-cattle prices. These profit projections are quite favorable relative to recent previous projections.

Figure 2 presents the same set of economic projections for the production and marketing of 2010 calves. It suggests that profits for producing 2010 calves should increase for beef-cow producers; however, profits beyond the ranch gate are projected to again come under pressure. My 2010 projections suggest higher buy/sell margins and higher COG when compared to the projections for 2009 calves.

These large negative buy/sell margins and higher COG suggest the current turnaround in the beef industry may be short lived. While the ranching sector certainly needs some increased profits, the projected level of profits probably won't trigger any expansion in the nation's beef cowherd. As a result, I expect the beef industry to continue to downsize over the next few years.

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. Economic projections for four different marketing alternatives for 2009 calves
Marketing strategy Buy/sell margin Cost of gain (COG) Profit/head
Spring calving 2009 ND-FBM-07*
Sell at weaning xxxxxx $105 $29
Background high ADG -$15 $0.65 -$13
Finish background steers -$5 $0.74 $37
Grow & finish -$19 $0.65 $53
Figure 2. Economic projections for marketing 2010 spring-born calves
Marketing strategy Buy/sell margin Cost of gain (COG) Profit/head
Spring calving 2010 ND-FBM-07*
Sell at weaning xxxxxx $105 $89
Background high ADG -$20 $0.69 -$36
Finish background steers -$9 $0.78 -$16
Grow & finish -$27 $0.70 -$20

*North Dakota Farm Business Management — 2007

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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