A Hard Hit, But Not a Knockout Punch

By Emmit L. Rawls, Professor Agricultural Economics and published by University of Tennessee in Beef Cattle Time, Volume 25, Number 1, Winter 2007 - The price decline seen this fall has been one of the largest in recent years, especially over a two month period.
calendar icon 16 March 2007
clock icon 4 minute read

Depending on the weight of calves, prices have declined 15 to 18 percent from September to November. The drop in prices was largely driven by an increase in the price of corn from $2 per bushel in August to about $3.50 in early December, a 75 percent increase. At $3.50 the price is double that of a year ago. We did have a 38 percent decline in prices for 500 to 600 pound steers from December 1995 to January 1996, another year of rising corn prices.

Feeder cattle prices are driven by the price finished cattle are expected to bring when sold, which reflects the 4- to 5-month-distant live (fed) cattle futures price and the expected cost of gain. Spring futures have stayed in the upper $80s to low $90s well into December. However, the projected cost of gain has risen from the low- to mid-50s per pound to near 70 cents per pound. For every 10 cents per pound increase in cost of gain, a 700 pound feeder must be bought for $7 per hundred less.

Those hit the hardest by the downturn in prices were those who bought stockers last spring for plus or minus $125 per hundred only to sell for prices in the $90s in late fall. In addition, those who weaned calves in September and fed them for 45 to 60 days also wish they had sold earlier. Price breaks of this kind are rare and seldom, if ever, predictable. Those preconditioned calves sold quite well given the cattle market at the time. The market continues to reward sellers of calves considered a lower risk as far as health is concerned.

The question on the minds of most producers is, “Where are prices headed from here?” I do not know the answer; but before cow-calf producers throw in the towel, we need to point out a few things. The corn market, despite the third-largest harvest on record, has been driven by anticipated low year-end stocks for 2007. Use of corn for ethanol production is rising sharply, and the market is attempting to bid more acres into corn production in ’07. Can the corn market rise further? Yes itcan. Some estimates see it going to $4 or better sometime during this crop year, which runs from September through August of 2007. The corn market seemed to be topping out, short term anyway, in early December, but we will not have an estimate of acres intended for corn until the USDA report in March. The Livestock Marketing Information Center, of which Tennessee is a member, indicates that on a historical basis, when we have a large crop but anticipate low ending stocks, most of the price increase comes early in the crop year with the remaining increase coming later in the crop year, perhaps when the new crop is less certain.

Please remember that this break in prices has not been due to a build-up in the cow herd. After increasing modestly for two years, it is likely to show no increase in January. The drought and low milk prices have caused an 18 percent increase in cow slaughter this year. It was up 30 percent in the third quarter. Heifers earlier intended for replacements have been sold as feeders, as indicated by the 16 percent increase in heifers on feed over a year ago compared to a 5 percent increase in steers. Although corn may stay above $3 awhile, the worst may be over for feeder calf producers. The lack of growth in the cow herd means that beef supplies will remain relatively tight. High corn prices will cut production of poultry and swine more than cattle, as they cannot use the by-products of ethanol production. The higher cost of gain will probably reduce slaughter weights of finished cattle, thus reducing total tonnage.

In summary, I expect this combination of decline in cattle prices and the drought to lengthen the buildup phase of this cattle cycle, unless we have significant additional price increases for feed grains. If that occurs, we may see a reduction in the herd for a brief period. We badly need to get the export markets open, but that looks like it is going to take months or years. I believe the worst of this price break is behind us. Cows should stay profitable, though less so.

February 2007

© 2000 - 2024 - Global Ag Media. All Rights Reserved | No part of this site may be reproduced without permission.