The recent weakness in the corn market has re-ignited feeder cattle prices, says South Dakota State University Economics Adjunct Professor Darrell Mark, tightening supplies and causing producers to take a second look at their most profitable options for feeder cattle.
In a May SDSU article, Mark reviews the market's impact on beef producers' choices. He points out that at the end of the month, the May feeder cattle futures contract itself had risen almost $20/cwt since the beginning of the year.
While the nearby contract as of the end of May was trading near $189/cwt, the August, September, and October 2014 feeder cattle contracts were flirting with the $200/cwt mark before retreating to the mid-$190s, he says.
Softer corn prices have provided a catalyst to record high feeder cattle prices, he adds, and supplies of feeder cattle continue to grow tighter as a result of cattle feeders' aggressive advancement of feedlot placements in the first quarter of 2014. Meanwhile, cow-calf producers are retaining more heifers for breeding.
As feeder cattle prices reach new highs, an appropriate demand-related question to consider is whether buyers can feed these cattle at a profit. Mark reviews two options: feedyards and summer grazing programs.
Feedyards looking to place a 750 lb steer in South Dakota would likely do so at a loss, when based on October futures, feed costs, health costs and variable expenses.
Summer grazing programs look more attractive when considering inputs and similar variables, although it widely varies depending on pasture availability and cost. While grazing offers a modest return, projected profits have declined as of late spring.
Faced with cattle feeding budget projections like these, it is likely that cattle feeders will not be so aggressive in trying to place cattle in the summer months to come, Mark says. That might be hard to actually observe, though, as feeder cattle supplies continue to tighten further.
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"Many feeders, especially in the Northern Plains, are more apt to take a cautious approach and wait for the fall calf crop to be weaned and to see how much corn is produced this year across the U.S. In the meantime, summer grazing programs offer stockers a small profit opportunity depending upon their cost structure," he says.
"And, if the corn crop is large enough to decrease corn prices, there could develop an incentive to feed cattle this fall. But, high feeder cattle prices will likely offset much of the gain from lower corn prices."