NEWS for North Dakotans
Agriculture Communication, North Dakota
State University
7 Morrill Hall, Fargo, ND 58105-5665
August 6, 1998
Harlan Hughes, Extension Livestock Economist
NDSU Extension Service
Last year's turnaround in feeder calf prices was a welcomed change from the current cattle cycle price lows of 1994, 1995, and 1996. Western North Dakota's $23 run-up in 1997 calf prices from October 1996 to October 1997 certainly made running beef cows more profitable. However, I expressed a major concern last year about the beef industry's ability to sustain that kind of a price turnaround given the beef industry's loss of market demand in the 1990s.
I predicted last fall's 500 to 600 pound steer calf prices at $85 per hundredweight and fall 1998 steer calf prices at $80 per hundredweight. It turned out that market price for 550- to 600-pound feeder steers in western North Dakota averaged $87 for 1997. Current calf prices are suggesting that my fears may well come to fruition. The continued summer feedlot losses, coupled with the southern drought, are dragging down this year's projected feeder calf prices. The purpose of this market advisor is to share with my readers my late July price analysis for marketing 1998 calves in the Northern Plains.
In June I projected that the net returns per beef cow would average $104 per cow in 1998 and $120 per cow in 1999. I projected fall 1998 steer calf prices in the low $90s. Since that time, we have continued to market heavier beef carcasses leading to record amounts of beef, pork, and poultry available to consumers. In addition, drought has now intensified in the South. Current calf prices have backed off considerably with substantial discounts in the Southeast. As a result, I have backed off my Northern Plains calf price projections for fall 1998 calves to the low $80s.
The July 1998 Mid-Year USDA All-Cattle Inventory Report shows that the liquidation phase is still underway for the third consecutive year. Beef replacements are the lowest since 1990 and the calf crop is the smallest in recent history. This report confirms that producers will not be building the beef herd through at least Jan. 1, 2000; and, given the biological lag, beef production will not increase before 2002.
While the current calf crop numbers suggest a significant feeder cattle price recovery, some analysts suggest that $80 slaughter cattle may be out of the question for this beef price cycle. During this cycle there is a back-filling in total meat supplies, with pork and poultry filling in as beef production goes down. Many are predicting that instead of fighting the competition, beef's resources will be spent fighting internally to keep the beef check-off.
It will take favorable calf prices in the fall of 1998 to motivate increased 1998 heifer retention. Heifer calves from 1998 would be bred in 1999 and would calve in year 2000. The continued slaughter cattle profit declines in the summer of 1998 suggest that the all-cattle numbers will not increase by year 2000. The southern drought has almost guaranteed that the all-cattle numbers will not increase before the Jan. 1, 2001, inventory and even that projection is now suspect.
Reduced calf crops will eventually drive calf prices up. Reduced feeder supplies will eventually trigger feedlots to start bidding aggressively for feeders, including heifers. In response to reduced calf crops, feedlots will turn to more calf-feeding, as well as to more ownership of light-weight feeder calves outside of feedlots, to ensure a continuous supply of replacement feeders. The key point for cow-calf producers is when will this happen? I am suggesting that it will happen in 1999. Earlier, I thought it would happen in late 1998. When prices do start up again, I expect prices to change fast.
Reduced feeder supplies over the next two years or so will cause some smaller feedlots to close down while the larger feedlots will have the financial resources to add bunk space even in times of low cattle-feeding margins. Clearly, the cattle-feeding industry will consolidate. This will all put additional upward market pressure on feeder calf prices.
Strong feeder calf prices will cause beef cow producers to retain additional heifer calves causing a diversion of heifers from feeding to breeding. When this happens, we will see an even smaller feeder cattle supply, resulting in even more aggressive bidding for feeder calves.
Now, back to marketing 1998 calves and yearlings. I will limit this discussion to the planning prices needed to evaluate typical marketing alternatives for Northern Plains 1998 calves and yearlings off grass.
Yearling steers are projected to come off grass in September in the high $60s. These same yearling steers are projected to finish around the first of the year in the high $60s or very low $70s per hundredweight. This suggests a breakeven buy/sell margin and further suggests that the economics of feeding yearling steers rests entirely with the cost of gain as the marketing (buy/sell) is projected to be a wash.
An 800-pound yearling steer going on feed at $68 and coming out of the finishing lot at $68 would have a breakeven cost of gain of 68 cents per pound of gain. My models are predicting costs of gain as 47 cents per pound for owned lots and 52 cents for custom lots with $2 per bushel corn. Custom lots in the grain-deficit West Central Plains and Southern Plains may well have corn prices above my suggested $2 per bushel. With $2 corn, my models project $65 to $85 profit per head. This, in turn, suggests that profits may return to cattle feeding with this year's grass yearlings. This kind of projected profit may well result in increased bid prices for yearling steers this fall, so stay flexible and push the pencil before marketing your 1998 yearling steers.
Feeder calves weighing 500 to 600 pounds are projected to average in the low- to mid-$80s per hundredweight in the fourth quarter of 1998$5 to $8 less than last year. By first quarter 1999, we should see backgrounded 700- to 800-pound feeders in the low to mid-$70s.
If I use $82 per hundredweight for fall 550-pound calves going into a backgrounded lot and $73 per hundred 750 pounders coming out of the lot, I come up with a buy/sell margin of a minus $9 per hundredweight. This means that the profit from the 200-pound gain will have to offset a marketing loss of $49.50 from the original 550 pounds. Given a gross income of $146 for the 200 pounds gained (2 x $73), subtract out the $49.50 marketing loss, and the remaining gross margin of $96.50 would give a breakeven cost of 48 cents per pound of gain ($96.50/200).
My current backgrounding budgetusing a target average daily gain of 2 pounds, $2 corn and $1.71 barleyprojects a 48-cent total cost of gain at the farm gate. Add in marketing costs for transportation, shrink, and marketing fees and the projected cost of gain goes to 57 cents per pound of gain. Profits are projected at a minus $17.50 per head. Or in terms of marketing feed calves, this projects a market price of $79 for 550 pound steer calves weaned in October 1998.
Given my projected $73 unit cost of producing a hundredweight of calf in 1998, beef cow profits should be 9 cents per pound of calf sold. With a 92-percent calf crop weaning 550 pound steer calves, a typical Northern Plains beef cow producer is projected to net around $45 per cow about equal to last year's per-cow profit.
Given this outlook, my final thought is that beef cow producers need to stay flexible. A lot can happen in this cattle market between the time that you read this and fall weaning. Stay tuned.
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Source: Harlan Hughes (701) 231-7380 hhughes@ndsuext.nodak.edu
Editor: Tom Jirik (701) 231-9629