This guest post is written by Brian Perillat, Canfax Manager/Senior Analyst. Visit www.canfax.ca to subscribe to regular analysis of markets and trends.
As the fall run is starting, producers are having to re-adjust their price expectations when marketing calves. Marketing decisions were relatively straight forward the last couple years for producers when they were selling calves at record high profit levels. Given the major price correction, producers are taking a harder look at different marketing/feeding options for this year’s calf crop. At the beginning of October, 550 lb steers are about $100/cwt lower than a year ago, and $85/cwt lower than 2014. On the other hand, they are about $25/cwt higher than 2013.
Disappointing prices and a general abundance of feed has producers considering retained ownership. After such a major price correction, this may seem reasonable to explore, but it is important understand what the market signals are, understand the risk involved, and have a strategy to manage risk.
It is also important to put prices into perspective as they remain higher than past high points of 2001 and 2012. Also, the market remains in a down trend, and despite their major drop, markets are still pointing lower. It can often be weeks or months after the fact until it is known whether the market has actually hit a bottom, therefore retaining calves in the current market is taking a somewhat speculative position that the market trend is going to change. Cattle futures continue to point lower into 2017. Most producers that have been fighting this downtrend for the last two years have lost considerable money and equity feeding cattle.
The important factor for each producer looking to retain ownership is to understand their own cost of production, and make sure to properly account for yardage, death loss, health costs and interest. Cost of gain also varies highly with the average daily gain of the cattle. Based on current market conditions and feeding costs, the projected margins on backgrounding calves are generally negative.
Doing a scenario using a weaning weight of 550 lbs and a selling weight of 850 lbs with an average daily gain of 2 lbs/day, these calves would be marketed in March. Using a rough total cost of gain of $1/lb, and a current market price for a 550 lb steer at $185/cwt, this would put the cost of the 850 lb steer in spring at $1,318 or $155/cwt. Using the feeder futures at $116.30, the CDN dollar of $0.7567, and an adjusted basis (adjusted for heavier weight range in feeder index) of -15, the projected price for an 850 lb steer in March would be $1.39/cwt. This scenario would equate to about $136/head loss on retained ownership.
It is worth noting that while the basis can be quite volatile, it has been stronger than the five year average through most of the summer and fall. That said, there is no guarantee it will continue strong. After last fall’s extremely strong feeder basis, it returned to the five year average this spring.
Markets are obviously going to change, and a sensitivity analysis provides some targets in terms of where different market factors have to be to break-even. In the above backgrounding scenario, the break-even calf price is $160/cwt. In other words, if calf prices fell to $160, then the break-even cost for the 850 steer would be $139. On the futures market side, feeder futures would have to rally to almost $129/cwt, or the dollar would have to fall to 68.4 cents, for 850 lb steers to be $155 in March. Also, the break-even basis is a positive 1.3. These sensitivity break-evens assume all other factors stay the same. It could be a case of a higher futures and lower dollar that aligns the prices with a break-even. On the other hand, if the dollar strengthens, and the futures continue to drop, losses increase.
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Source: Latest from Beef Cattle Research Council