Current feeder cattle prices and summer stockers’ prospects |

Current feeder cattle prices and summer stockers’ prospects

Dillon Feuz
for Tri-State Livestock News
Photo by Carrie Stadheim

After reaching contract highs in late-December, early-January, CME Feeder Cattle prices have been declining since that time. In trying to explain this decline, I looked at the usual suspect: the corn market. However, when I looked at that market I found that the nearby March and May contracts were currently trading at about the same level as they were in late-December, early-January. The new crop December contract prices have actually declined since the first of the year. So, in this case, the corn market cannot be blamed for falling feeder cattle prices. I next looked to see what was going on with fat cattle prices. Cash fed cattle prices have declined $5 per hundredweight (cwt) since the first week in January. On the CME board, Live Cattle April contract prices have declined about $7 per cwt and the fall October contract has declined about $5 per cwt. The decline in the fed market and reduced expectations in that market is the reason for lower feeder cattle prices.

We know we have a relatively short supply of feeder cattle. This is resulting in smaller numbers of cattle on feed, reduced marketings, and ultimately less beef in the market place. So why has there been a decline in fed cattle prices? The short supply of feeder cattle has really been the case for the last couple of years. This has resulted in record high fed cattle prices in 2011 and again in 2012. During that time, the retail price of beef has risen some, but not to the same extent has fed cattle prices. As a result of this profit margins at the retail level and in the beef slaughter sector have declined and in some cases gone negative. While these segments can operate with negative margins in the short run, they generally try and adjust in the longer run to get back to more positive margins. With pork and poultry prices not increasing as much as beef prices have, retailers are having a hard time convincing consumers they should pay higher and higher prices for beef. If retailers can’t sell beef for higher prices, than they try and buy it for less to maintain their desired margin. If packers can’t sell beef to retailers at a higher price, then they also try to buy fed cattle at a lower price to maintain their desired positive operating margins. I believe it is this push back from retailers and then packers that is pressuring fed cattle prices to be lower.

How much have feeder cattle prices declined this winter? During November 2012, 650 pound feeder steers averaged $157.27 in Nebraska auctions. The second week in January those same weight steers sold for an average of $164.77 per cwt in Nebraska auctions and by the second week in February, prices had fallen back to $157.23. So, while prices have declined $7.50 per cwt. from the peak in January, they are at the same level as last fall. Looking at the CME Feeder Cattle board reveals a similar story. May Feeder Cattle were trading around $152 and in November, last fall, increased to $158 around the first of the year, and have now declined to $150 per cwt. The August Feeder Cattle contract was trading at $155 in November, increased to $162 in early January, and now has declined to $156 per cwt. Again, while price expectations for feeder cattle have declined since the first of the year, they are in line with expectations of late fall 2012. Perhaps these price levels are more sustainable and the December-January prices were over inflated with a little too much optimism.

Given the current price expectation for the May and August Feeder Cattle contracts, what are the prospects for positive returns for summer stocker operators? First, I am assuming we will have grass for the summer. In some drought areas, this may not be a valid assumption. Using the Nebraska market and historical basis, I evaluated projected returns from running cattle on grass from May 1, until the end of August.

I looked at placing feeder steers on pasture for 120 days to see if one could expect a positive return from this enterprise. I used this past week’s May Feeder Cattle price of $150 per cwt and adjusted that price by a $15 per cwt expected basis for a 650 pound steer in Nebraska auction markets for the first of May. Therefore, I am expecting a purchase price of $165 per cwt or $1,072 per head. August Feeder Cattle prices last week were at $156 per cwt. The historical basis in Nebraska auctions for 850 pound steers in August is near zero. Therefore, I assumed a sale price for the the 850 pound steers of $156 per cwt. or $1,326 per head. Can you run yearling stockers for less than $254 per head (1,326-1,072) for the summer?

I assumed the following summer pasture costs: $25 per head per month pasture rental, or $100 per head for the summer; $25 per head to cover fly tags, implants, medical costs and transportation; 5 percent interest rate on the value of the cattle and a 1 percent death loss. Total summer costs were then $154 per head. That results in a positive return of $100 per head for the stocker operation. I did not include any labor costs in my calculations, so part of that $100 per head will cover your own or hired labor and the remaining should represent a profit to you.

I did a similar analysis about a year ago and estimated a $110 per head positive return. However, I seem to recall that prices declined last August and those returns were not realized for producers who were only in the cash market. For those who had either forward contracted, or who had hedged using the feeder cattle board, their returns were likely close to the $110 projected. My point here is not to tell you that you should hedge or forward contract. There are years when prices increase and your return is greater in the cash market. However, if you are using the futures market to project future returns, as I have just done in this article, the only way you can guarantee that you receive those returns is to lock in those prices.