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Marketing
Tough Winter, Costly Corn, Plentiful Fed Cattle = Big Feeding Losses
By Jeff Stolle
Let’s just say that “Happy New Year” doesn’t exactly fit for the cattle feeding industry in early 2007. As I pen this piece in early February, tough feeding conditions, grain costs that are roughly double what they were a year ago and plentiful fed cattle numbers shoved up against seasonally soft beef demand have plunged the industry into a vat of red ink that’s likely to last for quite some time. Adding to the level of consternation is the fact that there are so many fundamental and technical variables in play that the marketing arena (on both the buy side and the sell side of the feedyard) has the feel of a whole new ballgame.
Although outsiders looking in might view the mid to upper $80s trading range of the first few weeks of the year as a relatively strong market, one must consider that there are precious few breakevens below $95 per hundredweight at this point. The reality of $3.50 to $4 per bushel corn combined with higher death losses and decreased feed conversions due to winter feeding conditions has created quite a nasty number at the bottom of most closeouts from Ainsworth to Amarillo and beyond. Even those who were fortunate enough to stash away some feed before the grain markets moved to this new trading range are marking $50 to $75 per head losses due to winter’s wide-reaching and ongoing impacts on feedlot performance. On the other end of the spectrum, some of the yearling cattle that were purchased in late August through early October of 2006 are losing $175 to $200 per head at current levels.
The equity drain is likely to continue at least into the middle of this year with decent numbers of northern calves bought in the summer of 2006 for October/November delivery that had upper $80s breakeven projections using $2 grain. Again, from a historical perspective, CME June Live Cattle trading near $92 per hundredweight tend to look “high” at a casual glance – but many of the spring-born and summer-bought 2006 calf crops won’t even hold their money together at that level. Although CBT Corn futures seem to be carving out a $4 to $4.25 per bushel trading range for the time being, the new levels of volatility and uncertainty concerning feed costs will likely make most feedyard managers a bit less eager to contract calves during the late spring and summer of this year for fall delivery.
As of mid-February, CME Live Cattle futures seem to be sending the message that the industry will make up for at least a portion of its increased costs by selling fed cattle at higher levels. With every Live Cattle futures issue on the board as of Feb. 6 having a “9” front number – with the exception of August 2007, which closed only a dime shy of $90 – the board effectively forecasts summer lows for this year to be at least $10 per hundredweight higher than last year’s early bottom for the cash trade. It leaves one to wonder if consumers, domestically and abroad, are ready to buy our product in volume at a new, and higher price point. Only time will tell, but it is encouraging that $140 to $145 per hundredweight Choice beef prices now seem to stimulate retail demand and featuring when just a few years ago the same price levels tended to squelch interest in and movement of the product.
Given USDA’s downward revision to 2006 beef cow numbers and the January 2007 inventory report’s suggestion that last summer’s drought stopped herd expansion in its tracks, it does appear that the long-term market would still have some room on the upside. My guess right now is that some time in the next 90 days we’ll probe for the current ceiling from a fed cattle perspective, and in the heat of summer (July/August) we’ll likely mark this year’s low. The timing and price levels involved in that process should start to provide some preliminary answers to the bushel basketful of question marks currently confronting not only cattle feeders but the entire beef industry. Y Jeff Stolle is NC’s vice president of Marketing. |