Making Money Feeding Cattle? You’re Kidding Aren’t You?

Livestock producers have been consuming a lot of red ink lately. Not that they want to corner the market on that commodity, but it has taken a lot to print their income statements, P & L sheets, cash flow projections and the like. In cattle country, the only person lonelier than the Maytag repairman is the fellow who sells black ink. We got to this point with high corn prices, but since they have backed off $2 from the June highs, let’s find out if any cowboys are having fun yet.

Along with the $2 drop in corn futures, Nebraska livestock economist Darrell Mark says fed cattle prices have dropped about $8 in the past month also. His monthly newsletter give cattle producers a bit of encouragement that the cheaper corn is a result of higher ratings of the corn crop and the market’s belief that a trendline yield and production is still a possibility for 2008. Livestock producers want nothing more than to see an abundant corn crop that will feed their herds and the ethanol plants also. Mark says that would be a 13 billion bushel corn crop, and combined with a comfortable one billion bushel carryover, the opportunity may arise for better times ahead. And he says sharpen your pencil to figure out how near you are to the point of breaking even, then locking in some corn and cattle futures.

Darrell Mark offers an example for feeding a 750# yearling, which averaged $117.77/cwt the past week in Nebraska. With a 3.69 lb. daily rate of gain this steer would hit 1,300 lbs. at the end of November (150 days). Feed costs are $5.25 for corn or $65 per ton for wet distillers’ grains. At the same time December live cattle futures are $107.10/cwt, and with basis and insurance, the hedge net is $105.81. Mark says the feeding cost of gain is just under $80/cwt with a potential profit of $53 per head.

Interestingly, since corn prices hit the June high and declined, there has been a slight increase in prices for both 500-600 lb. steers and 700-800 yearlings, meaning the drop in feed prices has not resulted in a wider premium for calves, which usually parallels a drop in feed costs, compared to yearlings. Darrell Mark says that means feeding calves will provide a $40 per head premium over yearlings. His assumptions include 1,250 lbs. market weight reached next February, with a $105.02 net hedge, feed cost of gain at $76.71, and a return to feed at $90 per head. One of his key points is the fact that corn or WDG bought on the spot market and not hedged resulted in calves returning $114 less than when both feed and cattle were hedged while the yearlings made $96 less, and while there is more profit potential on calves, there is more risk. Mark also notes that any rebound in feed prices will quickly erode the profitability of the feedlots, along with a decline in cattle prices.

So, does this scenario match recent history and will it hold up in the near term? Darrell Mark says there are several lessons to be learned from the research he has conducted:
1) The trend toward higher corn prices brought a change in practice with the cattle industry, which was increased interest in backgrounding fall-weaned calves on grass systems.
2) Over the past 10 years, returns have been highly variable for yearlings on the grass background system.
3) Profits for the calf-fed systems (November to May feedlot) ranged from -$151 to +$221 per head.
4) Profits for the yearlings (November corn stalks, spring and summer pasture fall feedlot) ranged from -$171 to +$356 per head.
5) Yearling profits may offer a higher maximum profit, there is also a greater loss risk. “Producers should consider the greater profit variability associated with backgrounding calves and then finishing yearlings.”

Darrell Mark says there currently is profit potential in feeding calves, but that is not guaranteed for the long term. He says risk has to be hedged and performance has to be good enough to get satisfactory returns.

Summary:
Corn prices and distillers’ grain prices have fallen enough and feeder calf prices have risen slightly, enough to pencil in some profits for feedlots which have hedged both their corn and their live cattle. Profits can be locked in for yearlings at $53 per head. But the expected widening of the price gap between calves and yearlings has not occurred, giving more premium to calves when corn prices decline and calves have become cheaper relative to yearlings, with a $90 profit.