It has been a month since we completed our breakeven analysis and what a difference 4 weeks makes. During that time period costs of gain have increased approximately 15%, corn has charged to new closing highs in the December 2011 and March 2012 contracts. Although basis has weakened to $0.85/bu for Hereford, Tex., delivery, it still sits well above historical values and in all likelihood will not weaken substantially through harvest. As discussed in previous posts, this is and will continue to be problematic for cattle feeders. Friday’s Pro Farmer yield estimates came in at 147.9 bu/acre with the overall corn production at 12.61 billion bushels.
Cattle prices have weakened substantially over the last two weeks, both live cattle and feeder cattle have declined 4 to 5 % since the second week of August. This in conjunction with a massive corn rally creates a very unfriendly outlook for cattle placed in August. Furthermore, our performance estimates are very conservative and our cost of gain values may be interpreted as high; but many of these cattle placed will be finished during the winter months and given the volatility in the weather so far in 2011, we prefer to be conservative with our performance estimates.
Beef exports remain relatively strong, however; it remains to be seen if we can sustain current export levels. This is especially true given changes in currency valuation over the last couple of months. That is, typical export customers may have more purchasing power in other countries to meet their beef import demands.
There is as much uncertainty in the market as ever, global macroeconomic factors weigh heavily on cattle feeders’ bullishness while the lack of cattle supply is not forgotten by bears in the market. Grain price remains key to cattle profitability and at this point the grain markets show little sign of weakening.
Weekly USDA feeder cattle prices for TX and OK were used to calculate projected breakevens on cattle bought last week, week ending August 26, 2011. Breakevens were calculated for each weight group within sex (steer and heifer). Ration price, $/ton dmb, was estimated at $370. Other variables including interest, yardage and % feed financed were estimated to be 6%, $0.05/d and 100%; respectively. As it is known that actual input estimates will vary greatly by region and by yard within region, our goal is to illustrate pricing differentials between weight classes and sexes of cattle.