Dillon Feuz
In the Cattle Markets
The workings of the market.
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 breakevens for different weights of feeder cattle to be fed to finish. I am typically taking current feeder-calf prices and corn prices as given and then using live-cattle futures prices to project expected returns to feeding and to determine the break-even selling price for fat cattle.
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. December corn futures have risen from $3.50 per bushel at the end of June to almost $5.00 per bushel; the close on Sept. 14 was $4.95 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 more than $10 per hundredweight (cwt.) of gain. One model I use would suggest about an $11-per-cwt. increase for feeding a 700-pound (lb.) steer to finish at 1,300 lb. That would imply an increase in feeding costs of $66 per head.
I looked at November 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 $5 from mid-August, but that November feeder cattle were currently priced $5 higher than they were in late June.
I needed one more piece of information for this to make any sense. I looked at February 2011 live cattle prices over that same time frame. February live cattle were trading at $94 in late June and closed at $102 on Sept. 14. An increase of $8 per cwt. on a 1,300-lb. steer is just more than $100 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 $100 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 would need to pay $34 less 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 $5 less per cwt. The exact difference between the November feeder cattle contract the end of June compared to today.
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 would likely fall in price 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.