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Are We There Yet?

I’ve been asked that question a lot in the last couple weeks – not by tired kids on some Griswold-like family vacation to Wally World, but rather by livestock feeders eyeing the plummet in corn prices with some hope of reversing (or at least slowing) the deep losses they’ve been experiencing.  Although corn prices have dropped, fed cattle prices have also dropped about $8/cwt in the past month.  Since nearby corn futures posted a high at $7.625/bu the last week of June, corn has dropped $2.185/bu to its low at $5.44/bu on July 23. 

In The Cattle Markets

A weekly newsletter jointly produced by Kansas State University, University of Nebraska and Utah State University.

July 23, 2008

Darrell R. Mark, Ph.D., Assoc. Professor
Rebecca M. Small, Graduate Research Assistant
Department of Agricultural Economics, University of Nebraska–Lincoln

Are We There Yet?

I’ve been asked that question a lot in the last couple weeks – not by tired kids on some Griswold-like family vacation to Wally World, but rather by livestock feeders eyeing the plummet in corn prices with some hope of reversing (or at least slowing) the deep losses they’ve been experiencing.  Although corn prices have dropped, fed cattle prices have also dropped about $8/cwt in the past month.  Since nearby corn futures posted a high at $7.625/bu the last week of June, corn has dropped $2.185/bu to its low at $5.44/bu on July 23.  This precipitous decline in corn price resulted from ideas that corn crop conditions have significantly improved in recent weeks.  In fact, as of Sunday, June 20, 65% of the national corn crop was rated good or excellent, three percentage points higher than last year at this time.  The actions of traders in the corn futures market clearly indicate that many believe nearly trendline yields (about a 12 billion bushel corn crop) are still possible and the 2008-09 ending stocks will be closer to a comfortable level (around one billion bushels).  Because this year’s planted acreage is yet uncertain and yield prospects are highly variable, reasonable arguments could be made that corn prices may rebound at some point and move higher into fall harvest.  Nonetheless, now is a good time to pencil out some breakevens and see if feeding yearlings or calves could be profitable.  And, for those with cattle on feed and purchasing corn, it is a time to watch for a bottom in the corn market and consider making purchases. 

Back in the May 5, 2008 issue of In the Cattle Markets, I talked about the difference hedging corn, distillers grain, and fed cattle prices makes in the returns to feeding yearlings.  Let’s again start with similar assumptions (so you can go back and compare to that article) and calculate the projected return to feeding yearling steers.  Last week’s average price for 750 lb. steers in Nebraska was $117.77/cwt.  Assuming that those steers could gain 3.69 lbs per day, they would reach 1,300 lbs on November 30, 2008 after being on feed for 150 days.  I also assume feed conversion is 6.5 lbs. feed/lb. gain (dry matter basis), 1.5% death loss, $15/head for processing, and $0.35/head/day for yardage.  Corn in Omaha, NE could be purchased for $5.25/bu this week and wet distillers grain plus solubes (WDGS) could be bought for $58-72.50/ton (average of $65.25/ton).  The finished steers could be hedged for an expected price of $105.81/cwt (based on December futures at $107.10/cwt, an expected basis of -$1.04/cwt, and $0.25/cwt risk management costs).  Assuming these prices were locked in today (see Scenario 1, Table 1), the feeding cost of gain is just under $80/cwt, and a profit of nearly $53/head is possible.  That’s about $7/head better than back on April 24 for the same cattle with the same production assumptions.