John Nalivka: Rebalancing the Markets: Lower feeder cattle prices

John Nalivka

Feedlots are awash with red ink and while this isn’t anything new to that sector of the industry, the pace of equity erosion when margins approach -$600 per head is somewhat mind boggling. It definitely poses the question as to why anyone would feed cattle. But rather than debate that question (it isn’t new), the more enlightening conversation should center on the question of how the situation will change. That question can be answered and cattlemen who are realistic about markets certainly know the answer – feeder cattle prices will be pressured significantly lower. They have to be. This current situation is not sustainable without incurring significant structural change, i.e. feeding the last pen and locking the gate on the way out. Instead, I think feeder cattle prices will come down enough to return to healthy margins before that happens to any great extent.

We are at a turning point in the industry and at the forefront of increased beef production as the inventory continues to expand. Furthermore, pork and poultry production are also increasing into 2016. The result is that record high prices are behind us. I have warned for the last two years about the danger of breakeven prices in the $150 to $170 / cwt. range.

My estimate of the breakeven on current closeouts is about $168 / cwt. with 80 percent of the cost attributed to a feeder cattle cost of $226 / cwt. when these cattle were placed on feed. Using the 5 Area Direct steer negotiated price of about $126 / cwt. last week, that generated a loss of $542 per head on those cattle . While the severity of current losses will decline from current levels, the ink will still be red well into April. These cattle are in the feedlot right now and have estimated closeout breakeven that will finally range in the $130 area in April. In fact, USDA’s recently released cattle on feed report indicated the on-feed inventory on Nov. 1 was 2 percent above a year ago.

Prices for fed cattle will range in the mid-$120s to the low-$140s with the upper end of the range during March. At the same time, feeder cattle prices will be down to $150 / cwt. by March- April and thus, push break-even prices to the low $120s / cwt. with a projected corn price near $3.70 and cost of gain at $.75 / lb. when those cattle are marketed during September, a much more attainable break-even price with feeder cattle prices that don’t spell disaster for the cow-calf sector.