Top Farmer Conference: January 10, 2025

As one of the most successful and longest-running management programs specifically crafted for farmers, the Purdue Top Farmer Conference is a one-day event for agricultural producers and agribusiness professionals looking to navigate the complexities of today's agricultural landscape. Participants will have the opportunity to network with peers and hear from farm management experts and agricultural economists from Purdue, Farm Credit Services of America, the University of Illinois Urbana-Champaign and Acres, a land value data analytics company.

September 30, 2019

Impact of Recent Changes in Corn and Fed Cattle Prices on Cattle Finishing Net Returns

by Michael Langemeier

Variability in corn and fed cattle prices has certainly been the norm in the last few months. Corn futures prices for the nearby contract were approximately $3.70 in mid-May, $4.35 in mid-July, and $3.50 in mid-September. Average fed cattle prices in Kansas for the first and second quarters of 2019 were $125.06 and $117.32, respectively, and are expected to average only $106.21 in the third quarter. This paper updates estimates made in an earlier article (here). Specifically, this paper discusses trends in feeding cost of gain, the feeder to fed price ratio, net return prospects for the next several months.

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

Feeding Cost of Gain

Figure 1 illustrates monthly feeding cost of gain from January 2009 to July 2019. Feeding cost of gain averaged $78.10 per cwt. in 2018 ranging from a low of $74.87 in May to a high of $80.31 in December. During the first 7 months of 2019, feeding cost of gain ranged from $82.35 in January to $91.67 in March. Feeding cost of gain for July, the latest month for which data is available, was $82.61. Given current corn and alfalfa price projections, feeding cost of gain is expected to range from $78 to $82 for the rest of 2019 and the first few months of 2020. Feeding cost of gain is sensitive to changes in feed conversions, corn prices, and alfalfa prices. Regression analysis was used to examine the relationship between feeding cost of gain, and feed conversion, corn prices, and alfalfa prices. Results are as follows: each 0.10 increase in feed conversion increases feeding cost of gain by $1.43 per cwt., each $0.10 per bushel increase in corn prices increases feeding cost of gain by $0.87 per cwt., and each $5 per ton increase in alfalfa prices increases feeding cost of gain by $0.55 per cwt.

Figure 1. Feeding Cost of Gain for Steers, Kansas

Figure 1. Feeding Cost of Gain for Steers, Kansas

Feeder to Fed Cattle Price Ratio

The ratio of feeder to fed cattle prices since 2009 is illustrated in figure 2. During the ten-year period, this ratio averaged 1.21. The feeder to fed price ratio was one standard deviation below (above) this average for 16 (18) months during the ten-year period. The average net return for the months in which the ratio was below one standard deviation of the average was $144 per head. In contrast, the average loss for the months in which the ratio was above one standard deviation was $226 per head. The average ratio for the 18 months with a feeder to fed price ratio that was above one standard deviation of the ten-year average was 1.45. The feeder to fed cattle ratio is expected to be 1.46 for September, resulting in large losses. Given current price projections, the feeder to fed price ratio is not expected to reach or exceed 1.45 for the fourth quarter of 2019 and the first quarter of 2020. However, the projected ratio for the fourth quarter is expected to be 1.31, well above the ten-year average ratio. The above average ratio for the fourth quarter has a large impact on net returns, which are discussed below. Of course, an unexpected increase in fed cattle prices would create a downward spike in this price ratio and would improve the outlook for net returns.

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

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

Net Return Prospects

Monthly steer finishing net returns from January 2009 to July 2019 are presented in Figure 3. It is important to note that net returns were computed using closeout months rather than placement months. Net returns averaged $111 per head in 2017 and a negative $45 per head in 2018. Net losses for the first six months of 2019 averaged $52 per head. For the third quarter, net losses are expected to range from $97 in July to $275 in September, and average $180 per head.

Figure 3. Historical Net Returns for Finishing Steers, Kansas

Figure 3. Historical Net Returns for Finishing Steers, Kansas

Before examining net return prospects for the next six months, we will discuss breakeven prices. Historical and breakeven prices for the last ten years, as well as projected breakeven prices for 2019, are illustrated in figure 4. Breakeven prices in the fourth quarter of 2019 and first quarter of 2020 are expected to range from $115 to $120 per cwt. with the highest breakeven prices expected to occur in December and January. Current fed cattle price projections suggest that breakeven prices during the fourth quarter of 2019 will result in average losses of approximately $150 per head. Due to higher expected fed cattle prices, net returns for the first quarter of 2020 are expected to be positive.

Figure 4. Fed Cattle and Breakeven Prices, Kansas

Figure 4. Fed Cattle and Breakeven Prices, Kansas

Conclusions

This article discussed recent trends in feeding cost of gain, the feeder to fed price ratio, and cattle finishing net returns. Average cattle finishing losses in the first six months of 2019 were $52 per head. Current breakeven and fed cattle price projections suggest that losses will continue for the rest of 2019 before becoming positive in early 2020. Net return projections for the next few months are primarily driven by the feeder to fed price ratio. A spike in fed cattle prices during the next three months would have a large impact on net return projections. Previous analysis suggests that each 0.01 change in the feeder to fed cattle ratio results in an $8.63 change in net returns. It is not uncommon for the feeder to fed cattle price ratio to change from 0.05 to 0.10 in consecutive months.

 

Citations

Focus on Feedlots, Animal Sciences and Industry, Kansas State University, www.asi.k-state.edu/about/newsletters/focus-on-feedlots, accessed March 6, 2019.

Langemeier, M. “Impact of Higher Corn Prices on Feeding Cost of Gain for Cattle Finishing.” Center for Commercial Agriculture, Purdue University, July 2019.

Livestock Marketing Information Center, www.lmic.info/, accessed March 6, 2019.

TAGS:

TEAM LINKS:

RELATED RESOURCES

Indiana basis strengthening slows to end 2024

December 20, 2024

It has been six weeks since the November Crop Basis Update was released. In that window, harvest has wrapped up across Indiana, and corn and soybean basis levels have been relatively stable compared to September and October. In all parts of the state, crop basis levels were higher on December 18th than they were on November 6th. This includes basis levels for Ohio River delivery points, ethanol plants, and soybean processors.

READ MORE

2025 Crop Cost and Return Guide

December 12, 2024

The Purdue Crop Cost and Return Guide offers farmers a resource to project financials for the coming cropping year. These are the December 2024 crop budget estimations for 2025.

READ MORE

Crop Budget Spreadsheet

November 12, 2024

This spreadsheet can be used along with the Purdue Crop Cost & Return Guide to examine gross revenue, costs, and earnings for crop enterprises.  The user can evaluate up to three full-season crops, and the wheat double-crop soybean system. Updated December 2024.

READ MORE

UPCOMING EVENTS

Top Farmer Conference 2025

January 10, 2025

A management programs geared specifically for farmers. Surrounded by farm management, farm policy, agricultural finance and marketing experts, and a group of your peers, the conference will stimulate your thinking about agriculture’s future and how you can position your farm to be successful in the years ahead.

Read More

Purdue Income Tax School: Ag Tax Webinar

December 19, 2024

The 2024 Ag Tax Webinar, part of the Purdue Income Tax School, will provide in-depth coverage of selected agricultural and farm income tax issues to supplement material provided at the two-day in-person or virtual tax schools. The 2024 webinar will be taught by Guido Van Der Hoeven, an expert on agricultural tax issues and one of the authors of the 2024 Agricultural Tax Issues book, on Monday, December 19, 2024, starting at 9:00 am ET.

Read More

(Part 1) 2024 Indiana Farmland Values & Market Trends

September 11, 2024

Interested in the latest trends and insights on U.S. & Indiana farmland values? This AgCast episode shares insights from the Farm Sector Balance Sheet, USDA data collection methods, regional variations in land values, and the influences of factors such as interest rates and development pressures on farmland prices. Gain an in-depth understanding of trends, market dynamics, and future expectations for farmland values.

READ MORE

August 2024 PAER issue: Farmland Prices Increase Despite Downward Pressure

August 9, 2024

Indiana farmland prices have continued the trend of record highs in 2024, according to the latest Purdue Farmland Value and Cash Rent Survey. The average price of top-quality farmland reached $14,392 per acre, a 4.8% increase from June 2023. Average and poor-quality farmland also saw gains, with prices increasing 3.7% and 4.4% to $11,630 and $9,071 per acre, respectively.

READ MORE

Comparing Net Returns for Alternative Leasing Arrangements

August 7, 2024

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. 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 or threshold.

READ MORE