Dillon Feuz: Feeder cattle market future, watch corn and fed cattle board
Sometimes I am amazed at how coordinated the markets are. In this case I am talking about the Live Cattle, Feeder Cattle and Corn markets. On a fairly regular basis I calculate feedlot break-evens for different weights of feeder cattle to be fed to finish. On a weekly basis I observe feeder cattle prices at various auctions and I track Omaha corn prices as an indication of what is happening with feedlot cost of gain.
I have some fixed assumptions about average daily gain and feed efficiency. I know these vary throughout the year and with different types of cattle, but still holding those constant gives a fairly good idea of potential returns to cattle feeding. I use Live Cattle futures prices to project expected returns to feeding and I determine the break-even selling price for fat cattle based on the average price paid for feeders at auctions and based on expected total cost of gain in the feedlot.
However, I often use this information as well when I am looking at feeder cattle prices and trying to decide if I think they might be moving higher or lower over the next few weeks or months. As we are moving into fall, when we will sell a large number of feeder cattle, I was trying to determine how optimistic or pessimistic I should be about fall calf prices.
I first looked at the corn market. That is a little scary. Dec. corn futures have risen from $3.50 per bushel at the end of June to around $5 per bushel; the close on Sept. 23 was $4.97 per bushel. Where is the top in that market for this fall? I don’t know the answer to that, but what I do know is that feedlot cost of gains have likely increased over $10 per cwt. of gain. One model I use would suggest about $11 per cwt. increase for feeding a 700 lb. steer to finish at 1300 lbs. That would imply an increase in feeding costs of $66 per head.
I looked at Nov. Feeder Cattle futures to see if they had declined by $9-10 per cwt. to offset that higher feeding cost. What I saw was that the contract had declined about $7 from mid-August, but that Nov. Feeder Cattle were currently priced about $2 higher than they were in late June. I needed one more piece of information for this to make any sense. I looked at Feb. 2011 Live Cattle prices over that same time frame. Feb. Live Cattle were trading at $94 in late June and closed at about $100 on Sept. 23. An increase of $6 per cwt. on a 1300-lb. steer is just under $80 per head.
So, let’s look at this math and see what it tells us. A feedlot could now expect to sell fed cattle in February 2011 for about $80 per head more than what they thought back in June. However, it will cost them about $66 more to feed them at current expected corn prices than what was expected in June. That means that if I were trying to keep the same profit margin, I could pay $14 more per head for a 700-lb. steer compared to what I thought I could pay in June for the fall-delivered steer. On a 700-lb. steer that is $2 more per cwt. The exact difference between the Nov. Feeder Cattle contract the end of June compared to Sept. 23, 2010.
I have worked this type of analysis numerous times over the last 20 years. The math does not always work out as exact as it did in this analysis. But the markets do work. Feeder cattle prices are negatively impacted by corn prices and positively impacted by fed cattle prices. Relative feeder cattle prices are also impacted by corn prices.
I am not going to go through the math in this article, but when corn prices increase and the cost of gain increases in feedlots, then the price premium for lighter feeder cattle compared to heavier feeder cattle shrink. There will be a smaller weight price slide this fall compared to last fall, because we are dealing with higher feedlot cost of gain. It stands to reason, that if it costs me more to add that weight on a lighter feeder, then I must pay less for that lighter feeder than when it was relatively cheaper to add weight to that calf.
What is the take home message? If you want to know the direction of feeder cattle prices headed into fall, watch the corn board and the fed cattle board. My concern right now is that corn may continue to increase and fed cattle may not. Therefore, feeder cattle prices would likely fall in that scenario. Increased supply of feeder cattle in the cash market over the next couple of months will also likely pressure feeder cattle prices lower. I think the best hope for the calf market is if we have an open fall with excellent harvest conditions for the corn crop. That may slow the fall calf runs, and pressure corn prices a little lower.
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