Cattle feeders will benefit from lower feed costs in the coming year but will still face an uphill battle on profitability into the first quarter of 2016, according to Purdue University agricultural economist Michael Langemeier.
In his recent study “Feeding Cost of Gain and Net Returns for Cattle Finishing,” Langemeier says that while lower corn prices have been a huge benefit to cattle feeders, the steep drop in fed cattle prices will make it difficult to climb back into profitability in the months ahead.
“The feeding cost of gain has come down quite a bit from what it was six months ago and particularly a year-and-a-half ago, but it just hasn’t been enough,” he says. “[Profitability] was going to be red to begin with before we had the large drop in prices in the last six weeks, but this just made it unbelievably negative.”
Losses have been the norm so far in 2015, Langemeier says. Average losses in the first two quarters of 2015 were $160/head and $190/head, respectively, while losses were trimmed to $85/head and $120/head in July and August. Even before the recent steep drop in fed cattle prices in September, Langemeier had forecast losses to continue through September and October of this year.
Unless fed cattle prices rebound substantially, cattle feeders will see more red ink through the remainder of 2015 with losses figured to be $300/head or higher, he predicts.
The good news is that lower feed prices will likely soften into 2016, with feeding cost of gain expected to fall to $75 to $80 per hundredweight, thanks mostly to lower corn prices. Feeding cost of grain since January ranged from a high of $89.29 in February to a low of $82.96 in August.
However, he warns that negative margins on fed cattle are expected to last well into the spring despite lower feed costs.
“I think there’s probably room for another two-and-a-half to five dollars per hundredweight to come off of feeding costs of gain as we move into the next few months,” Langemeier says. “But, when you’re looking at losses in excess of $300, that reduction of $2 in feeding cost of gain just doesn’t amount to much.”
Looking further into 2016, there’s a chance feedlots could return to breakeven levels if fed cattle prices continue to rebound. “If prices rebound into the mid-$140s, we’re going to be looking at a breakeven as we move into the spring,” Langemeier says. “It’s a combination of lower cost of gain and taking some pressure off the feeder prices that gets it closer to breakeven, but things don’t look so good throughout January and February.”
Langemeier based his projections off feeder cattle and fed cattle prices in Kansas with feeding cost of gain focused on feedlots. Feeding cost of gain is generally over 60% the production cost, making feed by far the most important cost for a feeder. Breakeven prices will remain relatively high through at least the first quarter of 2016, he predicts, noting that feeder cattle that will be fed through the remainder of 2015 were purchased before the recent drop in cattle prices.