The world continues to become more complicated.
The cattle industry is not immune to this, and in case you haven’t been reading the popular agricultural press, here’s some hard facts:
Beef cow numbers in the U.S are at their lowest point since the late 1950’s. There’s a huge drought in the soutwestern part of the country and cows are being sold for slaughter or being moved to northern ??climates to producers with more grass and hay. Conversely, hay from the north country is moving south to maintain remaining cows as the grass is gone, and has been gone for some time.
Retail beef prices are high; per capita consumption/disappearance is the lowest it’s been in 20 years, and the weak dollar is supporting export sales. Corn is well over $7 per bushel and $8 in some areas. Hide and offal values are at historic highs, and what we used to call “the 7 to 10 year cattle cycle” is now officially dead. R.I.P. old cattle cycle (which we studied in college and had to regurgitate on tests). We’re long on feedlot pen space, long on shackles at the packing plants, and short on cattle.
All of these factors have contributed to a higher cost of doing business. The cost of gain in feedlots is well over $1.00 per pound, with quotes from some yards (projecting into this fall and early winter) at $ 1.22.
Think about this: an 850 lb steer in central/eastern Kansas is worth $1,062.50 at $1.25 per pound. Deliver him 200 miles to a feedlot, and you’ve added another $12 to $15 per head,easily. Get him up to 1350 lbs (500 lb gain x 1.20/lb) and suddenly his breakeven has shot up to $ 1,674.50! This charge does not include interest, medicine costs, or death loss.
The (now) 1350 lb steer’s breakeven teeters on $1.29/lb live or $1.97 in the beef. If one assumes a 3.5 average daily gain, and he goes into the yard in mid-September, he should be ready by the end of January. February CME live cattle futures are around $1.20 as of this writing.
I’m not going to look at historical basis for the market, but let’s say we’re even a dollar over by then (strong basis). You can do the math, but mine says that it’s a $104 loss per head. We’ve seen a lot of closeouts this summer that are worse than that; and at the bleakest point, a few years ago, we have see in excess of $ 300 per head losses. In contrast, we did see some pretty decent profits this last late winter to late spring, but those have disappeared and we’re driving a different car now.
It’s not only the losses per head, or even profits, though, that I am personally concerned about. It’s the amount of capital required to be in the business. $1,000 for a feeder steer!? Maybe I’m just simple minded, but that’s a lot of dinero to be putting up on something that might die tomorrow. Will corn go higher? Crop estimates seem to be heading lower; the ethanol industry is still alive and well and is a huge factor weighing in on price. You can play with your own figures by going to commercial marketing page and finding the “breakeven calculator.”
I am working on a Supply Chain Management proposal in which investors might pool their money into feeding cattle. When presenting this to lenders, one of their concerns is that the typical $150 to $200 per head up-front money may not be enough in today’s economic climate………perhaps it should be more like $300 to $450 per animal. This increases the capital requirements by those who buy feeder cattle and place them on feed, assuming they are leveraging the cattle. However, agricultural land and commodities are one of the few bright spots for investors when compared to the stock market and CD’s, money markets, etc.
I would offer we’re entering a new era in the cattle business……..heck, I think we’re probably already there! In January, if corn drops to $ 5.00 per bushel and fed cattle are $ 1.40, I’m all washed up, and you can give me a call. I HOPE to hear from you!
I am off to North Carolina this coming weekend for a field day there and the following week to Window Rock, AZ for a conference with the Navajo Nation”s tribal ranchers. Until next time, adios!