Wednesday, December 07, 2011
Continued Cattle Profitability May Take A Sharp Pencil
Cowboys are currently carrying the water for the grain farmer. With a 27% increase in the amount of beef being exported January through September, a quarter of a million bushels of corn that was not exported in the form of grain was exported in the form of beef. Even with volatile corn prices in 2010, there was profitability for the cattleman and those are expected to continue into 2012, but a sharp pencil may be needed to keep the ink black.
Net returns for cattle finishing were certainly in the red in 2008 and 2009, with average losses of $105 and $117 per head respectively. But even with rising corn prices in 2011, there have been some months with positive net returns, according to the calculations of Kansas State University economist Michael Langemeier. His monthly returns so far this year range from a top of $171 in April, to a loss of $107 in September. October recorded a $7 per head net gain, but that was barely breakeven. However it gives us $70 to the good going into November, where the numbers are not tallied yet, but where Langemeier is expecting returns very close to breakeven.
Although corn prices have softened since September, the gain made on feeding will not be recorded until the cattle are sold. But Langemeier calculates breakeven prices of $124 to $126 in November, which would cast a doubt on profitability. He expects corn prices to remain at a level that would keep breakeven between $124 and $128 for several months based on corn futures.
The KSU economist calculated corn and alfalfa prices with feed conversion to yield a feeding cost of gain that rose from $69 in October 2010 to $106 in October 2011. But he says that will rise to $110 by March and then drop back to around $100 for the spring months of 2012.
For the past decade Langemeier says the average price ratio of feeder calves to fed cattle has been 1.17, but it has ranged from 1.48 in late 2001 to a low of .83 in early 2004. He says the months below a 1.0 ratio have resulted in an average net return of $178 per head, but when the ratio gets above 1.40 the average loss is $163 per head. For October, the ratio was 1.04 which gave the $7 per head gain. He is expecting the ratio for November to be 1.05 to 1.07 and December to be 1.12 to 1.14.
Langemeier says it is not easy to predict fed cattle profitability when purchasing feeder calves, and that is underscored by Utah State livestock economist Dillon Feuz, who says it is no longer true that a dime increase in corn leads to a $1 drop in feeder cattle prices. He says that was historically true for many years, and particularly for 600 to 800 lb cattle. But he says the recent volatility and variability of corn prices has put that adage out to pasture. He says the higher corn prices and the increased feeding of distillers dried grains have changed the game.
Feuz analyzed feeder cattle prices from Kansas, Montana, and Nebraska over the course of 10 years along with monthly corn prices, and a variety of weights for feeder calves. He says, “Clearly the old rule no longer applies; a dime increase in the price of corn now only results in about a $.35/cwt decrease in heavier feeder cattle prices and even has less of an impact on 5-weight feeders. I don’t know if this is all due to higher and more volatile corn prices or if it is due to the relatively short supply of feeder cattle relative to feedlot capacity. What I do know is that the relationship has changed.”
So far, there is not enough history to identify a trend, and until corn prices settle down and DDGS can be broken out of the equation, it might be a while before a new “rule of thumb” can be identified.
Summary:
Cattle prices may be high, but so is corn, and profits that were present early in 2011, have not been realized in recent months. However, softer corn prices may have reduced the breakeven point in October. Looking to the future, cost of gain may be higher early in 2012. Variability in corn prices has increased the difficulty in being able to correlate corn prices with feeder cattle profitability.
Posted by Stu Ellis on 12/07 at 10:29 PM | Permalink