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).