Weekly Outlook: Cattle Industry  

[OCT. 24, 2006]  URBANA - The era of cheap feed for cattle is probably over for years to come, said a Purdue University Extension marketing specialist.

"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 feedlots.

"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 breakeven levels."

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 percent.

"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.

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 hundred.
 
 "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," he said.
 
 "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 ethanol production.
 
 "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."

[News release]

[Illinois Department of Agriculture news release]

[University of Illinois Extension news release]

[University of Illinois College of Agricultural, Consumer and Environmental Sciences news release]