8 November 2006

4 minute read

North America

Prices for corn and soybean meal have rallied over the past two months to the point where 2007 corn prices are projected to be in the top 5% of prices observed in the past 15 years and 2007 soybean meal prices are projected to be in the top 30% of prices observed over that same time period. Today's four weight calves will eat upwards of 30 bushels of corn on winter backgrounding rations that would take them to 750 pounds and then another 60 bushels of corn on the feedlot until slaughter. It logically follows that, just as car prices decline in the face of higher gas prices, so feeder cattle prices will decline in the face of higher feed prices. Furthermore, when gas prices spike, vehicles requiring the most gas face the most downward price pressure. The same is true for cattle as the lightweight feeders - the cattle with the most eating in front of them - will face the greatest downward price pressure.

For example, in 1996, when corn prices averaged over $4 a bushel, all feeder cattle prices averaged in the $50's and 3-4 cwt cattle sold for only 10% more than 7-8 cwt cattle. Usually, the price premium for 3-4 cwt cattle is about 30% above 7-8 cwt feeders. Compared to 1995, in which corn prices averaged around $2.50, 3-4 cwt feeder prices dropped about $20 while 7-8 cwt feeder prices dropped only about $10.

How will feed price increases work this year? Well, the price of the November 2006 CME feeder cattle contract dropped from around $118 at the beginning of September to around $102 in recent days. For a 750-pound feeder steer this is a loss of $120 per head. During that same time the December corn futures price rallied $1 and December soybean meal futures price rallied $30. Before it goes to slaughter, a 750-pound steer will eat about 60 bushels of corn, which now means an extra $60 of costs, and about 120 of meal, which now costs about $2 more. So about half of the drop in 750-pound feeder cattle futures prices can be chalked up to extra feed costs.

Lighter weight feeders have two disadvantages compared to heavier weights. First they will eat more total feed (at least 50% more under most feeding regimens) during their lifetimes. So, that means another $30 or so needs to come off the per-head price. Second, the consumption will come later, when corn prices are projected to be even more expensive. This could mean another $10 or so, on a per head basis. On a per hundred weight basis, this will show up in even more drastic terms for light weight feeders because the extra feed costs associated with them is spread over fewer total pounds of animal.

The price of 300-350 pound feeder steers in Kentucky auctions has only dropped $10 between early September and late October. This type of downward price movement is typical during the fall, suggesting that, perhaps, local buyers have not yet fully taken increased feed costs into mind yet. My standard feeder cattle price model has some dramatic price decreases projected over the next 6 months (see graphs below). This is based upon how cash prices for various weight classes of feeder cattle have reacted to changes in feed prices and futures prices over the past decade. For example, it projects 300-400 pound feeder steer prices dropping by about $40 between now and April, which essentially reflects higher feed prices, while 700-800 pound feeder steer prices are projected to drop about $20. The general level of these projections may be a bit low, as the model works off average prices from public auction prices, which tend to be lower than private sales and graded sales, and it also works off data gathered from the Great Plains and assumes a fixed transportation costs, while local prices may reflect stronger local bidding conditions than have existed in the past. So please keep that in mind when interpreting the numbers. Of course, any relief in feed prices will also be quickly reflected in price projections.