As cattle feeders look to fill their pens this fall and winter, they’ll need to pay close attention to prices they pay for feeder cattle and the outlook for feed costs.
While tight supplies and good beef demand should keep fed-cattle prices strong next year, high input prices will make for tight margins. USDA’s September projection for a 13.3 billion-bushel corn crop provided some welcome relief to the feeding sector, but corn is likely to stay above $3 per bushel in most markets. Hay prices also remain high.
Looking at the prospects for 550-pound calves placed in mid-September, Iowa State University economist Shane Ellis calculated a chance for modest profits on spring closeouts. April and June live-cattle futures contracts at the time were $99 and $95, respectively, and the three-year average basis for those months is a positive $1 to $4 per hundredweight. Using a corn price of $3.10 per bushel and other input costs based on current prices, he estimated that cattle feeders could pay up to $136 per hundredweight for a 550-pound calf and break even selling it at 1,200 pounds next spring. Five-weight calves at the time were selling for $127 to $129, offering a modest profit opportunity.
Putting it another way, Ellis says if five-weight steer calves cost $125 per hundredweight and corn is purchased at $3.10 per bushel, the finished cattle would need to sell for $92 per hundredweight to break even.
High feed prices coupled with severe drought in some key cow-calf areas over the past two years have stifled herd expansion in spite of strong calf prices, and tight supplies should continue to support the fed-cattle market. USDA’s September Cattle on Feed report showed that high production costs continued to discourage placements, particularly of lightweight cattle, into feedyards.
As of Sept. 1, feedyard inventories were 6 percent below those of one year earlier. Placements during August, at 2.12 million head, were 7 percent below those during August 2006. Following the trend of recent months, the biggest decline in placements was in the lightest weight categories. Placements of cattle weighing less than 600 pounds declined by 28 percent compared with August 2006, while placements in heavier weight categories were close to those of one year ago. Feedyards marketed 2.07 million finished cattle during August, virtually the same as last year.
Improvements in beef trade also should help support fed-cattle prices in the coming months. According to the U.S. Meat Export Federation, U.S. beef and beef variety meat exports for the January through July period increased 27 percent in value and 16 percent in volume compared with the same period last year. During July alone, beef exports were up 59 percent in value over those of July 2006. Through July, Mexico continued to be the leading market for U.S. beef exports with a volume of 446 million pounds valued at almost $671 million.