A large corn crop and falling corn prices this fall have resulted in record or near record high feeder steer prices this fall. Prices for 700-799 lb yearling steers in South Dakota posted an all-time record high of $172.64/cwt during the week ending October 18, 2013 (the first week of reporting after the government shutdown ended). In the weeks since then, those yearling steer prices have settled back to $169-170/cwt. Still, that’s fully $30/cwt higher than during late May 2013. Lighter weight steer calves (500-599 lb) have averaged $190-191/cwt for the last month, which is only about $8/cwt lower than the all-time high established in June 2012 for this weight of feeder steers.
The price increases in the feeder cattle market are resulting from both supply and demand factors. Historically small cow herds have restricted calf crop supplies for several consecutive years. Now, as some herd rebuilding begins, fewer heifers are available for feeding as more are held for breeding replacement. On the demand side, ample feeding capacity and much lower corn prices this fall have spurred interests in placing feeder cattle amongst commercial feedyards and farmer-feeders. It’s likely that these supply and demand fundamentals won’t change for a year or more, which could drive feeder cattle prices to new highs in the year ahead. In the meantime, examining the economics of feeding programs at current price levels is important.
Let’s first consider placing a yearling steer (750 lb) on feed on November 18. At average South Dakota prices, that steer would cost about $170/cwt or $1275/head. We’ll project the steer’s average daily gain to be 3.9 lb/day and its feed conversion to be 6.4 lb feed per lb of gain (dry matter, DM, basis). At that rate, the steer would reach a market weight of 1,350 lb in about 154 days, or on April 21, 2014. April 2014 Live Cattle futures could currently be hedged at $135/cwt. Adding a $1.75/cwt fed cattle basis to the futures price implies a price of $136.75/cwt, or $1,846/head for the finished steer. Thus, there is a gross feeding margin of $571/head for these yearling steers.
Assuming feed ingredients for the entire feeding period are secured now at current prices, corn for the feeding ration could be purchased at about $4.10/bu in South Dakota. Wet distillers grain plus solubles (WDGS) can be bought for $59/ton. Corn and WDGS will comprise 59% and 30% of the ration, respectively (DM basis). Corn stalks, valued at $60/ton, will account for another 7% of the ration. The remaining 4% of the ration will be supplement valued at $250/ton. At these prices and inclusion levels, the ration costs $172/ton on a DM basis. Other costs included in the feeding budget include yardage ($0.45/head/day), death loss (2%), veterinary and health ($20/head), and interest on the feeder steer and half of the variable feed expenses (4.8%).
With the performance and costs assumptions above, the total cost of gain is about $82/cwt, or $489/head, for these yearling steers. Thus, there is about $82/head profit in placing these yearling steers now – given the performance and price assumptions outlined above.
Now let’s project a feeding budget for 550 lb steer calves. On average, these calves will cost about $190/cwt, or $1,045/head, in South Dakota at current prices. We’ll project an average daily gain of 3.46 lb/day and a feed conversion of 6.64 lb feed per lb of gain (DM basis). Thus, the steers would reach slaughter weight (1,350 lb) in 231 days on July 7, 2014. August 2014 Live Cattle futures are currently at about $127.60/cwt. Basis in early July has averaged -$0.11/cwt over the past three years. So, a net price for the slaughter steers, if hedged, could be projected at $127.49/cwt, or $1,720/head. Thus, there is a $675/head gross margin to add 800 lb to the steers.
We’ll assume the same ration ingredients and prices as in the yearling steer feeding budget (above). Yardage will also be $0.45/head/day and interest will be assessed at 4.8%. Veterinary and health expenses on these lighter steers will be projected at $25/head and death loss will be estimated at 2.5%. With these assumptions, total cost of gain is $84/cwt, or $673/cwt. The resulting profit is about $2/head for feeding these 550 lb steer calves through this winter and next spring.
Clearly, the current profit incentive is for placing yearling weight steers now to target the late April slaughter cattle market. Typically, the fed cattle market posts a seasonal high in April and early May before retreating to summer lows in July and August. It might be possible to avoid marketing the calf-feds during this time period by lengthening the feeding period and targeting them for slaughter after prices seasonally rebound from the summer lows in September or October. Doing so would likely require different feedstuffs as the feeding period would need more of a pronounced backgrounding/growing phase than assumed in the example above.
As always, costs, cattle performance, and other assumptions will differ amongst feeders. But, based on these averages, it would appear that there is a profit opportunity to feeding cattle – even at today’s near record feeder cattle prices. And, that’s something that’s been hard to come by for several years.
The information in this report is believed to be reliable and correct. However, no guarantee or warranty is provided for its accuracy or completeness. This information is provided exclusively for educational purposes and any action or inaction or decisions made as the result of reading this material is solely the responsibility of readers. The author and South Dakota State University disclaim any responsibility for loss associated with the use of this information. There is substantial risk of loss in trading commodity futures contracts and traders should consult their brokers for a full disclosure of these risks to determine whether such trading is suitable for them in light of their circumstances and financial resources.
Source: Darrell Mark