May 12, 2017

Cattle Finishing Net Returns in 2017 – A Bit Different from a Year Ago

With the exception of May 2016, monthly fed cattle net returns were negative from December 2014 through November 2016. As noted in Langemeier (2016), prospects for 2017 appear much brighter. This article discusses prospects for feeding cost of gain, the feeder to fed cattle price ratio, and cattle finishing net returns.

Several data sources were used to compute monthly net returns. Average daily gain, feed conversion, days on feed, in weight, out weight, and feeding cost of gain were obtained from monthly issues of the Focus on Feedlots newsletter. Futures prices for corn and seasonal feed conversion rates were used to project feeding cost of gain. Net returns were computed using feeding cost of gain from monthly issues of the Focus on Feedlots newsletter, feeder cattle prices and fed cattle prices reported by the Livestock Marketing Information Center (LMIC), and interest rates from the Federal Reserve Bank of Kansas City.

A recent farmdoc article discussed the importance of feeding cost of gain and the feeder to fed price ratio to cattle finishing net returns (Langemeier, 2017). Given this importance, we discuss trends in feeding cost of gain and the feeder to fed price ratio before elaborating on net return prospects. Figure 1 illustrates monthly feeding cost of gain from January 2007 to March 2017. Feeding cost of gain averaged $85.16 per cwt. in 2015 and $77.20 per cwt. in 2016. In the first three months of 2017, feeding cost of gain ranged from $71.83 to $73.05 per cwt. Given current corn and alfalfa price projections, feeding cost of gain is expected to range from $70 to $75 for the rest of 2017.

Figure 1. Feeding Cost of Grain for Steers, Kansas

Figure 1. Feeding Cost of Grain for Steers, Kansas

The ratio of feeder to fed cattle prices from January 2007 through March 2017 is illustrated in figure 2. During this period, this ratio averaged 1.19. The feeder to fed price ratio was one standard deviation below (above) this average for 10 (20) months during this period. The average net return for the months in which the ratio was below one standard deviation of the average was $87 per head. In contrast, the average loss for the months in which the ratio was above one standard deviation of the average was $251 per head. Of the 20 months with a ratio above one standard deviation of the average feeder to fed price ratio, 17 of these months have occurred since January 2015. Now for the good news. In March 2017, the feeder to fed cattle ratio was below one standard deviation of the 1.19 average. Moreover, given current price projections, the feeder to fed price ratio is expected to remain at or below the ten-year average through August 2017. For April, May, June, and July, the feeder to fed price ratio is expected to remain below 1.10. These relatively low ratios, along with relatively low expected feeding cost of gain, translate into some excellent net return prospects for these months. Of course, an unexpected drop in fed cattle prices would create a spike in the price ratio, dampening net return prospects.

Figure 2. Ratio of Feeder Prices to Fed Cattle Prices, Kansas

Figure 2. Ratio of Feeder Prices to Fed Cattle Prices, Kansas

Before discussing monthly cattle finishing net returns, let us briefly discuss why the feeder to fed cattle price is expected to be so low from March 2017 through July 2017. Months in which the ratio is close to average translate into net returns that are around the breakeven level. Months in which the ratio is relatively low or relatively high translate into large losses or large positive net returns. In general, ratios that are relatively low or relatively high result from unexpected changes in fed cattle prices. Large negative shocks in fed cattle prices, as occurred from August to December 2015 and from August to October of 2016, create spikes in the price ratio. Conversely, large positive shocks, such as those experienced in early 2011 and the first few months of 2017, create sharp declines in the price ratio. Fed cattle prices improved from approximately $120 per cwt. in January 2017 to approximately $130 per cwt. in April 2017. At the same time, feeder cattle prices for January through April closeouts fell from $145 per cwt. in January to $130 in April. The price changes noted above resulted in a sharp decline in the feeder to fed cattle price ratio and a dramatic improvement in net return prospects.

Monthly steer finishing net returns from January 2007 to March 2017 are presented in Figure 3. It is important to note that net returns were computed using closeout months rather than placement months. Average losses in 2016 were $126 per head, and ranged from a loss $362 per head in January to a net return of $57 per head in May. Net return per head for January, February, and March of 2017 were approximately $56, $149, and $308, respectively. The net return in March represents the first time since November 2003 that monthly net return has been above $300 per head.

Figure 3. Historical Net Returns for Finishing Steers, Kansas

Figure 3. Historical Net Returns for Finishing Steers, Kansas

This article discussed recent trends in feeding cost of gain, the feeder to fed price ratio, and cattle finishing net returns. Current breakeven and fed cattle price projections create an environment that is optimistic through August and cautiously optimistic through the rest of 2017. After a disastrous 2015 and 2016, this is certainly welcome news.

Figure 4. Fed Cattle and Breakeven Prices, Kansas

Figure 4. Fed Cattle and Breakeven Prices, Kansas

Figure 5. In-Weight for Steers, Kansas

Figure 5. In-Weight for Steers, Kansas

Figure 6. Out-Weight for Steers, Kansas

Figure 6. Out-Weight for Steers, Kansas

 

Citations

Focus on Feedlots​, Animal Sciences and Industry, Kansas State University, accessed May 8, 2017.

Langemeier, M. “Impact of Lower Corn Prices on Feeding Cost of Grain and Cattle Finishing Net Returns.” farmdoc daily (6): 193, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, October 13, 2016.

Langemeier, M. “Net Return Prospects for Cattle Finishing in 2017.” farmdoc daily (7): 40, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, March 3, 2017.

Livestock Marketing Information Center, accessed May 8, 2017.

TAGS:

TEAM LINKS:

RELATED RESOURCES

Impact of Higher Corn Prices on Feeding Cost of Gain and Net Returns for Cattle Finishing

April 28, 2022

Given that the U.S. stocks to use ratio is currently only 9.6 percent and continued questions related to U.S. corn acreage in 2022, there is tremendous uncertainty regarding corn prices for the rest of this year. To address this uncertainty, this article examines the impact of relatively high corn prices on feeding cost of gain and net returns for cattle finishing.

READ MORE

Cattle Finishing Net Returns Prospects for 2022

January 7, 2022

Due to relatively strong fed cattle prices, cattle finishing net returns ended 2021 on a positive note.  Will these positive net returns continue into 2022?  This article examines feeding cost of gain, breakeven prices, and net return estimates for 2021, and provides projections for the first half of 2022.

READ MORE

Factors Impacting Feeding Cost of Gain

November 22, 2021

Purdue ag economist Michael Langemeier discusses the key factors impacting feeding cost of gain in commercial feedlots.

READ MORE

UPCOMING EVENTS

Monthly Corn & Soybean Outlook Webinar Series

Webinar each month following USDA’s release of the updated World Agricultural Supply and Demand Estimates (WASDE). Catch the next monthly update October 14th for the corn and soybean outlook following release of USDA’s October Crop Production and World Agricultural Supply and Demand Estimates (WASDE) reports. Registration is free.

Read More

September Corn & Soybean Outlook Update

September 16, 2022

Recorded September 16 | Purdue ag economists discussed USDA’s September Crop Production and World Agricultural Supply and Demand Estimates (WASDE) reports.

READ MORE

Comparing Net Returns for Alternative Leasing Agreements

September 2, 2022

Obtaining control of land through leasing has a long history in the United States.  Leases on agricultural land are strongly influenced by local custom and tradition.  However, in most areas, landowners and operators can choose from several types of lease arrangements.  With crop share arrangements, crop production and often government payments and crop insurance indemnity payments are shared between the landowner and operator.  These arrangements also involve the sharing of at least a portion of crop expenses.  Fixed cash rent arrangements, as the name implies, provide landowners with a fixed payment per year.  Flexible cash lease arrangements provide a base cash rent plus a bonus which typically represents a share of gross revenue in excess of a certain base value.  Each leasing arrangement has advantages and disadvantages.

READ MORE

Indiana Farmland Prices Grow at Record Pace in 2022

August 10, 2022

It is safe to say that the last year was unlike any other in recent memory. The COVID-19 pandemic caused significant disruption to our lives and the global economy. Surprisingly, many of the current economic forces put upward pressure on farmland prices.

READ MORE