What Are The Prospects For Profits In Cattle?

There is no secret that cattle bids have not covered the feed budget for quite some time, but many cowboys are holding on for better days ahead. (If only everyone else would get out of the business there might be money to be made!) Times have not been friendly for the feedlot operator or the cow/calf operator, but there may be some ideas that will either raise additional revenue or at least limit the loss.

First of all, please don’t get your hopes too high. As Ohio State Extension Specialist Stan Smith says, “There aren't enough cost saving feed alternatives anywhere in this State of Ohio which will allow us to put together a cattle finishing budget for the next year which shows a profit. At least not at the feeder cattle prices we presently see and the feed costs we can anticipate today.” Pound for pound, beef will not cover the price of corn, when you add in the cost of the animal and all of the other deductions that have to be taken off the sale price.

Smith and other Extension specialists have all heard the response that feeding retained calves somehow clears that hurdle of profitability, but he adds, “Unfortunately, that dog won't hunt.” If you are a full meal deal operator, you are either shorting yourself on the profit of selling feeder calves, or buying your calves for your feedlot that are not properly priced. If you need help with budgeting, Smith offers the 2008 OSU Enterprise Beef Budgets.

Smith says it is reasonable to expect the value of feeder calves to match the cost of feed and the projected value of fed cattle, plus a profit; but he says that is not happening at current economics because someone is willing to pay more for the calves than that formula allows. He suggests leaving feedlots empty this year and next, or finding an alternative use such as backgrounding, re-packaging cattle, or storing such things as grain, fertilizer or machinery in empty barns.

Higher feed costs are reality, says livestock economist John Lawrence at Iowa State University in his latest newsletter. He says they are not a passing fad, and livestock prices will eventually rise in response to the higher feed costs and find equilibrium. That point will also see more land producing crops, increased yields, reduced demand for feed, and commercially viable cellulosic ethanol, all of which will moderate corn prices. In the meantime, Lawrence says corn prices will be somewhere between bumper crop levels of $4 and drought levels of $8.

Until that point of equilibrium, Lawrence says livestock production will have to decline to return to profitability, including liquidation of both cattle and swine herds. Producers remaining will have to manage risk with a variety of tools, but also to learn how to manage margin, not just price.

Margins have been positive only for processors and retailers in the first five months of the year say Missouri livestock economists Glenn Grimes and Ron Plain. Their margin was up 9.5% from last year, and packers’ margin was down nearly 11% for the five months and prices for fed steers were down 2.4%. They add, “Most of the increase in prices that will result from the higher feed grain prices are still in the future.” The liquidation that Lawrence says is necessary is happening faster than the market anticipated. Grimes and Plain report, “The cattle on feed report for June 1 came in a little more positive than the trade reports. The number on feed June 1 was down 4.1%, the trade estimates average was for a 2.8% decline. Placements on feed during May were down 11%, the trade estimate were for a 9.6% decline. Fed marketings were up 2.6% and trade expected the number marketed would be up 1.7%.”

There are a number of realities in today’s cattle market that can either benefit or hurt a cowboy, says Utah State livestock economist Dillon Feuz, and you just can’t manage around them:
1) Heifers were discounted just under $9 per cwt. from steers and they found that heavier calves received a lower price per pound than lighter calves (the well known weight price slide).
2) Angus, black or red, calves received the highest price and that Charolais-Angus cross calves were about $1 per cwt. less.
3) Angus-other English breed cross calves were priced on average about $2 per cwt. less than Angus and calves with Brahma or "ear" influence were priced $5 per cwt. lower than Angus.
4) Small frame calves were priced $10 per cwt. lower than medium-large frame calves.

However, Feuz says there are some management items that can be controlled:
1) Calves with horns were discounted a little more than $1.50 per cwt. So, it would pay you to dehorn any calves with horns.
2) The greater the weight variation within a sale lot, the lower the market price. It might therefore pay you to sort cattle into more uniform sale lots.
3) However, there is also a premium for larger lots, 300 head or more receiving the highest price. Lots of less than a semi-trailer load are discounted sharply.
4) Pencil shrink varied between 0-3 percent. Calves that were offered with greater pencil shrink did bring a higher price per pound. However, that higher price did not fully offset the revenue that was lost by selling less weight. The moral of this story might be that if you want coffee shop bragging rights for topping the sale, offer more pencil shrink, but if you want more dollars in your bank account offer less pencil shrink or perhaps none.

Summary:
Today’s cattle prices are not going to be profitable, no matter how you calculate it, but profitability will return as beef prices rise to meet the value of feed. In the meantime, there are budget calculators that will help minimize the losses, as well as a variety of marketing tips. Cattlemen need to be patient, or in the alternative, vacate feedlots for a year or two and find alternative income for those facilities.