As I look at feeder cattle markets across the country and as I have opportunities to talk with cattle producers, it become very apparent that feeder cattle prices have dropped sharply and unexpectedly. In the last month, prices for 5 and 6 weight calves have dropped about $10 per cwt, or $50-60 per head. If you compare prices from July-August to now, the price decline has been about $20 per cwt, over $100 per head. That price decline is substantially more than is typical based on historic seasonal patterns. Because of the large fall calf runs, some price weakness is to be expected, but this decline is of greater magnitude than the typical seasonal decline. It is not only cow-calf producers who have been somewhat surprised by this market weakness, but many market analysts as well. I for one expected fall calf prices to be about $8-10 stronger than current levels.
What is the source of this new weakness in calf prices? One culprit is the weather. We had a record corn crop growing all year, but everyone has known it was late and at risk for an early freeze. That early freeze did occur in the northern corn belt and wet weather has delayed harvest progress. The result has been that corn price has increased about $0.50 per bushel. That adds about $30 to the cost of feeding a 600 pound calf out to slaughter. So, that accounts for some of the weakness feeder cattle prices.
The other on-going and worsening situation is there continues to be no money in feeding cattle. While it appeared back in the spring that feedlots were poised to finally start making a little money feeding cattle, that hope disappeared through the summer and early fall. I model weekly feedlot profitability for Nebraska. It is based on cattle feeders buying feeder cattle at the average Nebraska auction market price and selling fed cattle 230 days later for calf feds and 160 days later for yearlings. The model also assumes that corn is purchased throughout the feeding period at current cash prices. While no model is representative of all producers, I have verified this model with a number of feedlots, and it is usually fairly accurate with their current closeouts. That model showed feedlots lost an average of $112 per head in 2008. At the start of 2009, they were losing about $200 per head but conditions steadily improved so that by mid May of this year feedlots were actually showing small positive closeouts. Summer months are often difficult for feeders and some price weakness was expected. Losses during that time averaged about $35 per head. However, instead of fed cattle prices improving this fall, they have further deteriorated. The results are that feedlots have lost an average of about $65 per head the last two months.
I really thought, and I am sure feedlots thought, that they had bought feeder cattle cheap enough last spring to be making money at this point in time. But the price of fed cattle has also declined from expectations. Rather than selling fed cattle in the upper $80's this fall, as was expected last spring, we have struggled in the low $80's per cwt. A reduction of $5 per cwt in the price of fed cattle result in a decrease in revenue of about $65. That difference in expected versus actual price would be enough to have most feedlots making money rather than losing money on close-outs.
These feedlot losses are not trivial and have taken a toll on the industry. There are feedlots in some areas that have gone out of business. Certainly, those who remain in business have limited ability to bid up feeder cattle prices. This also has contributed to the current weakness in feeder cattle prices.
Cow-calf producers are probably selling calves at a loss this year. While cow-calf producers never want to sell their calves too cheap to feedlots, they may actually want to this year, or there may be no feedlots left to buy their calves next year.