September 20, 2010

 

Cattle, hog profits to shrink with US$5 corn

US corn prices have now pushed above US$5 a bushel on Friday (Sep 17), the first time since 2008, and cattle and hog producers are facing sharply lower profits.

 

Therefore, the higher feed costs will likely spoil any plans to expand herds and result in lower beef output next year. Trends in the Chicago futures markets suggest it will stay above US$5 well into 2011.

 

However, producers are generally better prepared financially to handle US$5 corn this year than they were in 2008, having banked profits on cattle and hogs for much of the last nine months.

 

And producers are more optimistic than in 2008 as Chicago futures markets indicate cattle and hogs will remain profitable through much of 2011.

 

Two years ago, corn shot past US$7 per bushel which led to losses for cattle, hog and chicken producers. These producers responded by slashing herds and flocks to save on feed costs and to drive up meat prices.

 

The percentage of corn in feed rations will be reduced, replaced by other grains or grain products such as distillers grain which is a byproduct of ethanol production.

 

"They are going to find a lot of ways to try not to use US$5 corn. We have had a lot of people doing a lot of creative things on diets," said Steve Meyer, economist at Paragon Economics.

 

Cattle and hogs will be marketed at lighter weights as producers seek to save on feed costs. That will mean less beef and pork output per animal.

 

"You have less cattle and now you have an even stronger incentive to keep carcass weights down. We were already looking for about 2% less beef production next year," said Derrell Peel, agricultural economist at Oklahoma State University.

 

Feeder cattle, the yearling cattle brought into feedlots for fattening, will be left on pastures longer and spend less time being fed grain rations in feedlots, Peel said.

 

Higher feed grain prices will mean smaller profits on cattle and hogs, but the profits should not turn to losses as they did in 2008.

 

At the Chicago Mercantile Exchange, cattle for February and April delivery are priced at about US$103 per cwt, profitable levels even with US$5 corn, analysts said.

 

CME hogs are at US$80, also a profitable level.

 

"I'm still showing they (cattle producers) could lock in US$30 to US$35 (per) head profit by placing cattle today and marketing them in March and early April," said Dillon Feuz, agricultural economist at Utah State University.

 

The US$35 per-head profit is down from the US$100 to US$150 profit seen at times this year and will likely not be enough to allow producers to build herds.

 

Feuz's calculations include buying corn and feeder cattle at current prices and selling live cattle at about the US$103 per cwt indicated by the CME February and April cattle futures contracts.