Cattle feeding: Taking advantage of lower corn futures

March 2013 corn futures have traded in a sideways range since harvest time and reached is highest point in the last two months on November 28 when it closed at $7.64/bu. During the first two weeks of December, March corn futures have lost more than $0.40/bu as poor exports and other bearish factors have dominated the trade. While that provides cattle feeders an opportunity to lock in some of their corn needs and possibly improve margins for cattle currently on feed, this drop in corn prices doesn’t provide as much help for current placements because feeder cattle prices have rallied sharply during this same time period. January feeder cattle futures prices have increased more than $7/cwt since the last week of November. Cash feeder cattle prices in South Dakota auction markets have been steady to higher, depending upon weight class, over the last couple of weeks as well. 

Let’s examine the profit potential from buying and placing a 650 lb feeder steer on feed given the recent decline in corn prices and higher feeder cattle prices. Last week, that feeder steer would cost about $157/cwt in South Dakota, or $1,020/head. Corn could currently be obtained for about $7.25/bu in eastern South Dakota markets. That’s also close to a price that could be hedged through the winter feeding months in the March futures contract (assuming option basis).  Modified wet distillers grains plus solubes (MWDGS) is available at about $136/ton (as-fed basis) in South Dakota. Let’s assume that our example ration would be 10% dry rolled corn and 40% MWDGS on a dry matter (DM) basis. Another 45% of the ration (again, DM basis) would be corn silage valued at $60/ton. The remaining 5% would be a supplement at $300/ton. That results in ration cost of $244/ton on a DM basis. Assuming that the steer would gain an average of 3.75 lb/day and convert feed at a rate of 6.3 lb/feed for each pound of gain, that puts the total cost of gain at $99/cwt.  This cost of gain also includes a yardage charge of $0.45/head/day, $17/head for veterinary/medical/processing, 1.75% death loss, 5% interest charge on the feeder steer purchase price and half the other variable expenses, and a $0.25/cwt marketing fee.

With the feeding performance assumed above, it would take 187 days for the feeder steer to reach a finished weight of 1,350 lb, making the marketing date about June 20, 2013. June 2013 live cattle futures are trading at about $131.42/cwt. Basis in mid-June has been fairly erratic the last few years, ranging from about -$0.25/cwt to over +$5.00/cwt. A relatively conservative average, though, might be about +$1.00/cwt. Thus, an expected hedged sales price for the 1,350 lb slaughter steer next June would be about $132.42/cwt, or $1,788/head. Given the costs projected above, that leaves a positive margin of about $73/head.

A projected profit over $70/cwt is quite a change from the deep losses on most cattle closed out during 2012. And, while this much margin leaves some room for higher costs or poorer cattle feeding performance, it is important to note that these budget projections are sensitive to the assumptions made, and the projected and current prices can (and likely will) change. Therefore, locking in as many variables in the feeding program as possible is advisable. For example, live cattle futures (or slaughter cattle basis) would only have to decline about $5/cwt from the projections used for the cattle to lose money. And, that could be a realistic scenario next year. Even though the supply-side fundamentals clearly point to record high cattle prices next year, the reality of demand providing a stiff headwind exists too as consumers aren’t apt to continue paying higher and higher record retail beef prices.

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.

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