December 2013 Articles

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Cost of Gain Falls as Value of Gain Stays Strong

Cost of Gain Falls as Value of Gain Stays Strong
Source: Ross Pruitt, Department of Agricultural Economics and Agribusiness LSU AgCenter
For the first November in four years, corn futures prices are below $4.50 as a record large corn crop is expected. Total corn production is forecast by USDA to be 13.99 billion bushels and the marketing year average price is forecasted at $4.50/bushel. Additionally, the EPA has recently proposed to lower the Renewable Fuel Standard which would reduce the amount of corn mandated for ethanol usage. Some of the corn forecasted to be used in ethanol production will still be used for that purpose even with the lower proposed mandate, but will be welcome news to many livestock producers.
With corn prices at the current level, feedlot cost of gain would fall to approximately $0.80/lb to $0.85/lb. Kansas State’s monthly Focus on the Feedlots newsletter hasn’t shown a cost of gain that low since the beginning of 2011 with cost of gain being above $1.00/lb since August 2011. Projected cost of gain according to that newsletter have been on a steady decline since earlier this year with cattle placed in October expected to have cost of gain that is less than a $1.00/lb for the first time since April 2011.
With feedlot cost of gain falling, value of gain for stockers will also be under pressure. However, the value of gain has remained strong to date whether a spring feeder cattle futures price or current cash prices are used relative to the value of today’s calves. Value of gain for stockers continues to be above $1/lb, but can remain variable depending on the selling weight. While the market is rewarding any gains placed on cattle, not all gains are rewarded equally. Over the past few weeks, adding 100 pounds to a 500 weight animal results in a lower value of gain compared to adding 200 pounds. The same is true with adding 200 pounds to a 400 pound animal compared to adding the same weight to a 500 pound animal.
As the price for steers has increased since July, the gap between the price of steers and heifers has been narrowing. Tight supplies of cattle combined with interest in expansion are causing the price differentials between steers and heifers to narrow. There are incidents in Kansas, Nebraska, and Oklahoma of heifers bringing more than steers, though this is not the norm. As expansion interest increases, the price differential will be smaller than usual. With price forecasts continuing to call for record high calf prices in 2014 and 2015, what were once unthinkable prices for heifers will continue into next year as expected cow-calf returns continue to support these record high heifer prices.
USDA NASS November Cattle on Feed Report summary: Pre-Report Expectations
1,000 head % of Prior Year Avg. Range
Placed in October 2,394 109.8 108.7 99.0 – 118.0
Marketed in October 1,856 101.0 101.4 99.5 – 103.0
On Feed November 1 10,607 94.3 94.0 92.0 – 95.5
This month’s Cattle on Feed came in close to analysts’ expectations. October placements were higher than expected as lower grain prices were believed to have resulted in feedlots being more aggressive in placing cattle. Twenty-four percent more cattle were placed in Kansas this year compared to a year ago while Colorado and Texas feedlots placed 18% more than a year ago. Estimated placement weight fell below 700 pounds for the first time this year (690 pounds) as cattle weighing 600-699 and 700-799 accounted for over 70% of the increased October placements. October placements were the second smallest since 1996 behind October of last year. This is the second smallest number of cattle on feed in feedlots of at least 1,000 head capacity since 1996.