Dealing with High Feed Prices: Economic Considerations

1. Dealing with High Feed Prices: Economic Considerations Greg Halich and Kenny Burdine

2. Outline for Economic Discussion • Market factors to consider • Short-term cow-calf oriented scenarios • Longer-term backgrounding scenarios • Wrap up questions and discussion

3. Kentucky has lost 184K beef cows since 2007 Livestock Marketing Information Center Data Source: USDA/NASS

6. Placement Patterns, but also wheat grazing …

7. Corn Balance Sheet(Million bu) Ethanol will account for about 40% of total use

8. Feeder Cattle Futures(Noon yesterday) Think about margins all the time!!!

9. Scenario # 1 • Weans calves in October, graze until December – calves worth $1.35 • 1.5 lbs per day ADG over 60 days • Pasture costs assumed to be sunk • Tradeoff between calves grazing and winter feeding days on cows • A nickel on placement costs = $27.50

10. Wean now, grass only for 60 days -Weaned steers (550# @ $135) $742.50 -Vet / Medical Expenses $10 -Mineral $3 -Commission diff $3 -Hauling $0 -Interest $6.10 -Death Loss (1%) $7.43 -Inc. Hay Days (29.75 @ $1.05 / day) $31.24 Total Expenses $803.27 B.E Price = $1.26 per lb on 640 lb steer

11. Profit Potential • B.E. on 640# at $126, current prices in low-mid $130’s • Futures suggesting strengthening prices • Nov Board at $141, Jan at $144 Based on Previous Assumptions: @ $1.28 sale price – return to L, C, and M = $13 per head @ $1.32 sale price – return to L, C, and M = $38 per head @ $1.36 sale price – return to L, C, and M = $64 per head

12. Scenario #2 • Wean now, grain on grass until December • 1% BW of 50/50 Hull / Gluten Mix @ $250 per ton • 2 lbs per day ADG over 60 days • Pasture costs assumed to be sunk • Tradeoff between calves grazing and winter feeding days on cows • Discounted 40% for decreasing grazing

13. Wean now, Grass + 1% BW per day -Weaned steers (550# @ $135) $742.50 -Hulls and Gluten ($250 / ton) $45.75 -Grass hay (9lb @ $60 / ton) $0 -Vet / Medical Expenses $10 -Mineral $3 -Commission diff $4 -Hauling $0 -Interest $6.10 -Death Loss (1%) $7.43 -Inc. Hay Days (18.3 @ $1.05 / day) $19.22 Total Expenses $837.99 B.E Price = $1.25 per lb on 670 lb steer

14. Profit Potential • B.E. on 670# at $125, current prices in low-mid $130’s • Futures suggesting strengthening prices • Nov Board at $141, Jan at $144 Based on Previous Assumptions: @ $1.28 sale price – return to L, C, and M = $20 per head @ $1.32 sale price – return to L, C, and M = $47 per head @ $1.36 sale price – return to L, C, and M = $74 per head

15. Scenario #3 • Wean now, drylot until December • 8.6 lbs per day of 50/50 Hull / Gluten Mix @ $250 per ton • 9 lbs per day grass hay at $70 per ton • 2.3 lbs per day ADG over 60 days • Ran for both owned and purchased calves

16. Wean now, drylot 60 days (owned calves) -Weaned steers (550# @ $135) $742.50 -Hulls and Gluten ($250 / ton) $64.50 -Grass hay (9lb @ $60 / ton) $18.90 -Vet / Medical Expenses $10 -Mineral $3 -Commission diff $4 -Hauling $0 -Interest $6.10 -Death Loss (1%) $7.43 Total Expenses $856.43 B.E Price = $1.24 per lb on 688 lb steer

17. Profit Potential • B.E. on 688# at $124, current prices in low-mid $130’s • Futures suggesting strengthening prices • Nov Board at $141, Jan at $144 Based on Previous Assumptions: @ $1.28 sale price – return to L, C, and M = $28 per head @ $1.32 sale price – return to L, C, and M = $55 per head @ $1.36 sale price – return to L, C, and M = $83 per head

18. Wean now, drylot 60 days (purchased calves) -Weaned steers (550# @ $135) $742.50 -Hulls and Gluten ($250 / ton) $64.50 -Grass hay (9lb @ $60 / ton) $18.90 -Vet / Medical Expenses $10 -Mineral $3 -Commission diff $28 -Hauling $6 -Interest $6.10 -Death Loss (2%) $14.85 Total Expenses $893.43 B.E Price = $1.30 per lb on 688 lb steer

19. Profit Potential • B.E. on 688# at $130, current prices in low-mid $130’s • Futures suggesting strong prices now to December • Nov Board at $141, Jan at $144 Based on Previous Assumptions: @ $1.28 sale price – return to L, C, and M = $14 loss / head @ $1.32 sale price – return to L, C, and M = $14 per head @ $1.36 sale price – return to L, C, and M = $41 per head

20. Longer Term Winter Backgrounding Programs

21. Winter 2011-12 Current margins for commodity feeding are very tight (value of gain minus cost of gain). Market needs to change incentives. As grass cattle sold off, price slides will most likely tighten.

22. Who is Bidding on Calves? • Feedlots • Wheat Graziers • Backgrounders No one in position to bid aggressively

27. Evaluate Overall Profitability: • corn gluten – soyhull mix $250/ton. • 500-800lbs • 2.3 daily gain

31. Winter 2011-12 Summary: Profitability looks good and might get better. Need to protect yourself from market drop.

32. What are Biggest Problems? • Cow-Calf sales for fall-weaned. • Volatility in markets.

33. October 2011 CME Futures Contract History

34. Volatility in Markets How much will a $10 drop in markets have on profitability? For 850 lb steer: → 8.5 x (-$10) = -$85 Are your producers protected? Market volatility risk likely exceeds feed cost risk

35. Your Comments and Questions