Calf prices are up year over year. At the same time, forage availability is shrinking and grain prices are pressuring profits in the cattle feeding sector. What are the current forces to watch for in the beef cattle market and can retaining ownership increase profit potentials this year?
3/15/2022 – ARC/PLC Sign-up Deadline
3/17/2022 – Briscoe County Cattle Program
3/23,30, 4/6,13/2022 – Master Irrigator , Spearman
3/25 – 3/27/2022 – TSCRA Convention , Fort Wrorth
4/5/2022 – Hale & Floyd County Beef Cattle Conference, Plainview
4/8/2022 – Owning Your Piece of Texas , Burnet
4/12/2022 – Ector County Input Cost Management Conference, Digital/Midland
4/20/2022 – Direct Beef Sales Webinar National Ag Law Center , Digital
4/26-27/2022 – Hemphill County Beef Conference, Candian
5/13/2022 – Direct Beef Sales Workshop, Amarillo
What We’re Reading
Cattle producers welcome Contract Library pilot program – Morning Ag Clips
First half 2022 price prospects – Corn & Soybean Digest
Sorghum an option on more irrigated acres – Farm Progress
Cattle Market Update
The cattle market has seen some turmoil in the last three weeks, though not as much as the grain complex. Though we have seen some pressure on feeder calf prices coming from increased feed costs, on the whole, feeder and fed cattle prices are expected to provide more profits this year than they have in the last three to five.
To begin with, demand for beef is really good. The Retail All Fresh Beef Demand Index, a function of retail beef prices and volume consumed, saw a 20-year high in 2000 with the second highest year coming in 2021. Of course, some of this increased demand is a function of pandemic distortions like lower beef packing throughput increasing retail prices to record highs. However, the Index would suggest that people still ate enough beef at historically high prices to increase the outcome of the demand index. Even leaving out the last two, pandemic-impacted, years we see that demand in the prior five years was strong, historically speaking.
Retail All Fresh Beef Demand Index
At the same time that we are seeing record setting measures of demand, the cattle herd is shrinking, and shrinking quickly. The cattle cycle moved into a contraction, in terms of volume, between 2019 and 2020. Liquidation continued from 2020 to 2021 and accelerated to near-unprecedented levels from 2021 to 2022. The Cattle Inventory Report showed a 2.3 percent net decrease in cow numbers across the U.S. To put that value into perspective, the 2021-2022 decline in cow numbers is the largest percentage decline since prior to the drought of the early 2010s. The contraction in cow numbers was exacerbated by the drought in the Northern Plains and western Corn Belt region over the last two years.
January 1 Cow Inventory
The fundamentals of the cattle cycle are holding, with prices for calves, fed cattle, and other cattle up year over year across the board. Cull cows are particularly high, with Southern Plains auction prices up approximately 65% year over year in the last two weeks. High cull cow values suggest to me that the U.S. liquidated such a large percent of the herd last year that finding cull cows, even in a high cost environment, is becoming relatively difficult.
Slaughter Cow Prices
The value of feeder calves is also up year over year, though prices have fallen from relative highs over the last month. In February we were seeing cash prices on the Southern Plains in the neighborhood of $1.65/lb. for 7-8 weight calves. As of last week those prices had fallen to less than $1.55/lb., a 13% decline in just a month. There are plenty of reasons this decline may have occurred.
First, as we’ll discuss further, the cost of adding weight to cattle in a feed yard has gone up drastically over the last month. The cost of feed is second only to the cost of purchasing feeder cattle when converting feeder calves to fed cattle. If feed yards hold more market power relative to the cow-calf sector and want to maintain their margins, they have to offer a lower price for feeder calves all else equal. Additionally, because of the lack of forage, we may be seeing a deviation from the normal seasonal pattern. With little perennial pasture in good condition and a lack of successful wheat pasture, many producers turned to selling calves earlier than normal. This being the case, it’s possible that we’re seeing an earlier decline from seasonal highs than normal for this time of year.
Med. & Lrg. #1 Feeder Steer Prices
I mentioned the drought in the Northern Plains and western Corn Belt earlier. The drought has now moved south, and if it remains through the spring (it is forecast to do so) we will see difficulties establishing grain crops and perennial forages, the main feedstuffs for the cattle feeding and cow calf sectors, respectively. Since January, corn prices on the Southern Plains have risen approximately 25%, and the disruptions from Russia’s invasion of Ukraine may induce more volatility yet. Ukraine is the world’s fourth largest corn exporter and accounts for roughly 13% of the world’s feed grain exports. Corn planting in both Russia and Ukraine begins in April. If the war is still ongoing it seems unlikely that the normal amount of Ukrainian acres will be planted. Similarly, with Russia’s supply chain severely disrupted as a result of severe sanctions, it seems likely that Russian producers might face production challenges themselves. All of this means that if the war lasts even one to two more months we are likely to see a significant shortage of corn worldwide which will send prices higher still.
Southern Plains Corn Prices
At the same time that corn prices are pressuring returns in the feed yard, keeping calves on pasture is facing similar challenges. As of last report, approximately 46% of the continental U.S. range and pasture were in poor to very poor conditions. If anything, the drought has expanded through the winter, meaning that forage resources are low. At the same time, hay production was low across the country, and national hay stocks are down year over year. The combination of low forage resources and expensive corn create difficulties for decision makers when deciding whether or not to retain ownership of calves.
U.S. Range & Pasture Condition
The Retained Ownership Decision
This year is relatively unique for wheat calves. The lack of wheat available on the Southern Plains combined with the current value of wheat sent many winter stocker calves through the sale-barn relatively early this year. Anecdotal evidence and sale-barn AMS reports indicated that winter stockers started leaving pasture as early as January this year. As we mentioned in the previous section pasture conditions are poor across the board, and with wheat so valuable, the value of gain on wheat pasture where it even exists is not as competitive. As an aside, this earlier sale trend contributed to the record-setting cattle on feed values and a higher-than-average value for cattle placed under 700 lbs. we saw the last two months.
Normally we’d be bumping up against the deadline to pull cattle off of wheat (tomorrow). Even though most with cattle to sell have already made that choice, its worth considering the outcomes if you do still have cattle that you may or may not retain.
First, as we discussed earlier, calf prices are strong compared to last year, despite the dip over the last two weeks. The value of calves at local auctions over the last four weeks has averaged $1.75/lb. for 4-weight calves, $1.75/lb. for 5-weight calves, $1.65/lb. for 6-weight calves, and $1.53/lb. for 7-weight calves. At those prices, revenue per head would roughly pencil out to $801, $962, $1,072 , $1,147 per head, respectively.
How does selling now compare to the retained ownership option? First, we must establish an expected cost of gain (COG). The average CME Corn contract value for delivery dates out to six months is $7.28/bu. The same value for delivery dates a year out is $7.03/bu. Once we add the recent basis of $0.70/bu., the expected cost of corn totals $7.98/bu. and $7.73/bu., respectively.
Expected Total Feed Cost of Gain, Varied In-Weights and COG
To calculate the COG, simply take the total cost of feed divided by the pounds gained. The formula used to calculate feed cost is:
Total Cost of Feed = Days on Feed * Cost of Feed ($/Lb.) * Pounds of Feed Per Pound of Gain * Pounds of Feed Per Day
Using corn as our benchmark feed input, assuming a feed to gain ratio of 6.1:1, and assuming a target ADG of 3.5 lbs., we can calculate an expected feed cost of gain for any calf placed on feed. We then multiply the feed cost of gain by 1.33 as a rough rule of thumb to account for other expenses like yardage, health, and other expenses. Feed cost of gain and yardage fees vary by yard if not by lot. The table above presents different expected total COG values that are realistic with cash corn priced anywhere from $7/bu. to $8/bu.
Expected Value of Gain, Varied Sale Prices & In-Weights
Though forecast COG are extremely high, live cattle prices are seeing support too. The table above projects expected revenue for calves sold at 1,300 pounds for different in-weights ranging from 450 pounds to 750 pounds. The three questions to answer using the two previous tables are:
- Is this profitable?
- Is this MORE profitable than selling a calf?
- If it is more profitable than selling a calf, is it worth the additional risk?
The table below shows expected net revenue for a calf placed on feed at 650 pounds and sold at 1,300 pounds, roughly 180 days from now. Interestingly enough, and as a bit of a surprise to me, these returns are competitive compared to selling a 5-weight calf at an auction this week. The qualifier is obviously whether or not COG remains in this range and whether or not calf prices remain in this range. As of open on 3/14/2022, contract live calf prices averaged $1.40/lb. through March ’23, while contract corn prices averaged $7.03/bu., corresponding to roughly a feed COG of $1.02/lb. and a total COG of $1.35/lb.
Expected Net Revenue, 650 Lb. In-Weight & Varied Expected Sale Prices