In previous columns, we've discussed producers' preparation of cost-and-return projections for 2009 calves. This month, we'll develop a set of planning prices for use by a rancher in evaluating marketing alternatives for 2009 calves.
The best and most readily available predictor of prices is the futures market for live cattle going into 2010. The closing live-cattle futures prices for April 29, 2009, suggests a gradual increase in live-cattle prices as we progress into 2010 (Figure 1), with April 2010 projected to be the next slaughter-cattle price peak — a typical seasonal price pattern. However, relatively few ranchers are part of an April harvest-time system. The challenge to ranchers is to be part of a production system that harvests slaughter cattle in April.
The other critical price series is corn. Figure 2 presents the futures prices for corn as of April 29. Though still high by historical standards, it suggests a corn price range of $4.25 to $4.50 for feeding out 2009 calves.
The most recent change in corn price for the different contract months over the March-April time period was a positive 19-36¢/bu. This suggests a December 2009 price of $4.22 and a Dec. 10 price of $4.37. I advise ranchers to continuously watch the December harvest-time futures prices as a key indicator for corn prices down the road.
Today's corn futures prices suggest feedlot COG will be high relative to historical standards. Given the corn prices suggested in Figure 2, I expect COG on 2009 calves to be in the $80 range in the Southern Plains, with Midwest feedlots in the high $70s. I'm currently using a 47¢ negative basis for cash corn in western Nebraska feedlots.
Here's my calculated feedlot COG for alternative corn prices:
Feeder-cattle prices have trended up most of April 2009; increased demand for grass cattle explains much of the increase. Feedlot COG, however, will limit that run-up.
Figure 3 is a scatter diagram of feeder-calf price vs. weight for western Nebraska sale barn prices for the week of April 25, 2009. The scatter of prices around the regression line in the left-hand chart suggests substantial quality difference in groups of calves sold that week. The downward sloping regression line illustrates the price drop (price slide) associated with increased weight.
For example, the price drop for 600-lb. feeders vs. 500-lb. feeders was -$7.51. This steep drop is probably related to the fact that lighter-weight calves are preferred for grazing.
The regression line in the right-hand chart is the calculated price line for feeders the same week — 550-lb. feeder steers averaged $120/cwt. while 750-lb. steers averaged $104/cwt.
Feeder-cattle prices are quite strong this spring, perhaps stronger than what the fed-cattle market supports. I predict the 2009 calf crop will be marketed with large buy/sell margins that will again lead to negative feedlot margins for those finishing 2009 calves.
The feeder-cattle futures prices presented in Figure 4 suggest $100 feeder-steer prices in fall 2009.
It appears that as long as feeder numbers lag far behind feedlot capacities, cattle feeders will keep overbidding feeder cattle rather than idle their feedlots. I'm absolutely amazed at how much equity capital there is out there to lose in cattle feeding.
My 2009 suggested planning price summary (Figure 5) projects 550-lb. feeder calves to average $116/cwt. in western Nebraska. This compares to $107 in fall 2008, $128 in fall 2007 and $119 in fall 2006. Figure 5 also projects fall 2009 800-lb. feeder steers at $96/cwt. compared to $98 in fall 2008, $114 in fall 2007 and $105 in fall 2006.
Cattle feeders are slowly ratcheting down feeder-cattle prices. Given today's long-run corn-price projections and the related COG in the feedlot, feeder-cattle prices probably need to shrink even more to return profit to cattle feeding.
Figure 6 presents my projected fall 2009 feeder-cattle prices for western Nebraska. I project 550-lb. steer calves in fall 2009 at $116/cwt., and 800-lb. feeder steers off grass at $96. These prices are based on April 29, 2009 feeder-cattle futures. Readers in other parts of the U.S. can adjust these projected Nebraska prices by their regional basis.
The projected price slides (labeled “price drop”) are based on late April 2009 western Nebraska sale barn prices. This large drop will ensure the buy/sell margins for 2009 marketings are large negative numbers for both backgrounding and retained ownership of 2009 calves. In fact, I predict that large price drops (slides) will again lead to negative backgrounding and retained ownership profits with 2009 calves.
The “value of the last pound” column depicts the market value of the last pound of weight added. The value of added weight is always less than the average market price. For example, when weaning 600-lb. calves instead of 550-lb. calves, the value of the last 50 lbs. is $78.67/cwt. or $39.33. Don’t value the last 50 lbs. at the projected $112/cwt. average price.
As you push for heavier weaning weights, remember that the value of the last pound is always less than the average price. Heavier weaned calves also tend to come with increased costs per pound. So, heavier calves cost more and tend to bring less per cwt.
My highest profit ranch herds aren’t those that produce the biggest calves. They’re those that produce calves for the lowest cost per cwt. of calf weaned.
Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701/238-9607 or firstname.lastname@example.org.