Weekly Outlook: Cattle Industry
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[OCT. 24, 2006]
URBANA - The era of cheap feed for cattle is probably
over for years to come, said a Purdue University Extension marketing
"Over the past eight crop years from 1998 to 2005, U.S. corn prices
averaged just $2.05 per bushel," said Chris Hurt. "Historically, the
cattle industry has been the animal segment that makes the biggest
adjustments to high-priced feed and that will likely be the case
this time as well.
"The recent decline in calf prices represents a potential for
$1.9 billion in lower annual returns for cow-calf operations.
Excess capacity in feedlots will be costly as well. However,
learning to feed distillers grains at much higher inclusion
rates remains the opportunity."
Hurt's comments came as he reviewed the state of the cattle
industry in light of much higher feed prices, a situation
complicated by the existence of large numbers of cattle in
"The Oct. 1, 2006 inventory is the largest since the current
records began in 1996," he said. "Feedlot managers have placed
large numbers of calves this summer and early fall, and paid
high prices for the privilege of ownership. Now, feed prices
have moved much higher, raising the costs of production and
Hurt said the latest USDA Cattle on Feed report gives a few
clues about how the cattle feeding industry will respond to much
higher feed prices.
"Placements were down 5 percent, indicating less willingness to
put cattle in the feedlot with such an uncertain feed price
situation," he noted. "Younger cattle were the preference for
placements in September with calves under 600 pounds up 28
percent, while placements of cattle over 600 pounds were down 16
"In reality, however, the October Cattle on Feed report is still
not current enough to reflect the direction of feedlots yet.
That report is for the month of September and much of the corn
price increase came in October."
For example, he added, December corn futures traded in a range
from about $2.37 per bushel to $2.50 per bushel from Sept. 1 to
Sept. 20. Even by the end of September, December futures had
reached only $2.625. For the majority of September, feedlot
managers were still hoping for harvest lows.
"The more dramatic corn price action came in October, when
December corn futures reached their high of $3.425 on Oct. 17,"
Hurt said. "The impact on the cattle industry can be seen more
completely by looking at the impacts on cattle prices from
mid-September to the current time period."
Over the last month, finished cattle prices have dipped about $2
per hundredweight, he noted. Most of that decline was due to
forces other than the higher feed prices, however. Where the
impact of higher feed prices is most pronounced is on feeder
cattle and calf prices.
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November feeder cattle futures, as an example, dropped $10.87 per
hundredweight from mid-September through Oct. 20. Cash prices for
500 to 550-pound steer calves at Oklahoma City dropped by $10.59 per
"So, the initial surge of higher feed prices is being felt most
heavily by two industry sectors. The first is feedlot managers who
paid high prices for calves and did not have their needed feed input
costs hedged. The second and biggest losers from much higher feed
prices so far are the cow-calf operations and some backgrounders,"
"The cow-calf segment is particularly hard hit as lower calf prices
can be expected as long as feed prices stay high, or until
distillers grains use can help moderate overall feeding costs."
Hurt said the impact could be large.
"As a simple example, assume that higher feed prices lowered calf
prices by $10 per hundredweight on each 500-pound calf for one
year," he said. "This is $50 per head multiplied by the 37.9 million
head national calf crop or $1.9 billion that moves from cow-calf
producers to crop producers primarily as a result of the growth in
"It's too early to understand all of the impacts and to make
accurate projections, but the reality of higher feed prices has
arrived, and the cattle industry must make major adjustments."
One adjustment comes in utilizing the distillers grains in rations.
Much has been learned already, but inclusion rates probably will
have to move even higher. As feed prices move higher, market weights
will likely drop.
"Generally, in periods of higher feed prices the cattle feeding
industry shifts to much higher placement weights," he said. "That is
likely in coming months. Also, fewer cattle tend to go into
feedlots, and on-feed numbers drop. This means there may be large
excess capacity in feedlots for several years to come.
"Finally, the risk associated with feed ingredient prices has
increased. This means that not only will feed prices be higher and
maybe much higher in coming years, but the volatility of feed
ingredient prices will likely be much greater as well."
Department of Agriculture news release]
of Illinois Extension news release]
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