The Big Picture by JT Korkow: A Closer Look at Feeding Margins
March 4, 2015
This year is a prime example of how quickly margins change in the beef industry! That may not necessarily be big news but it is important to where things are headed. Making or losing money affects behavior. That isn't news either – at least for most of us!
Feeding margins during the first half of 2015 will likely be a stark contrast to last year's picture and this situation isn't any mystery. Tight cattle supplies and growing demand were the drivers to record prices, but also to a record $1.70 /lb. breakeven in the feedlot. Judged against prices hovering around $1.60 / lb., I am expecting the feeding margin during the first half of the year to average -$136 / head. That is a drop of over $300 per head from the same period a year earlier!
Feeder cattle prices when cattle that are currently on feed were purchased averaged $2.29 / lb. That market leaves the price of feeder cattle over $500 / head higher than a year earlier. We expect corn prices to average about $3.68 / bu. during the time these cattle will be on feed. Feeder cattle prices averaged $161 / cwt. and corn was $4.84 / bu. when last year's first-quarter fed cattle were placed on feed.
Anticipated red ink has already taken a toll on the feeder cattle market with prices now hovering around $2.00 / lb. and pushing the breakeven into the mid $1.50 area. With Choice steer prices hovering in the mid $1.50 range, this projected breakeven would bring feeding margins into positive territory during the second half of the year. That is still a good market for feeder cattle.
Packer margins have been well into the red at the beginning of this year, but are expected to turn positive into the early summer as demand improves with the grilling season and fed cattle prices remain well under a year ago. Typically that is a seasonal picture and this year, I don't expect that picture to be any different.
Markets during 2014 posted new records. Those record prices generated strong feedlot profits. But, along with record prices come record breakeven prices for cattle that are currently on feed. Though beef markets have changed significantly over the past decade, we still need to keep our expectations in check, particularly in light of the sharp increase in total meat supplies that we are expecting this year. Some things do not change in the industry and one of those is adjustments to sustained losses.