Corn prices have increased since mid-May, and Michael Langemeier, agricultural economist at the University of Illinois, expected them to remain quite volatile for the rest of the year.
In the Illinois Farmdoc, Langemeier examined the effect of higher corn prices on feeding cost of gain for cattle finishing. As a rule-of-thumb, each $0.10 increase in corn price results in an increase in feeding cost of gain of $0.87 per cwt.
Using that formula, corn prices of $4.50 and $5.00 would result in feeding cost-of-gain increases ranging from $3 to $8 per cwt, depending on how much corn prices increase and whether feed conversions stay above their seasonal averages, he said.
GAIN COSTS SENSITIVE
Dec corn futures increased to $4.55 a bushel for the week ending June 28 from $3.79 for the week ending May 10, he said. Even though corn futures prices weakened after the release of the June crop acreage report, there was still a 13% chance on July 1 that corn futures prices would be above $5.00 a bushel.
Moreover, due to continued questions related to US corn acreage in 2019, there is tremendous uncertainty regarding corn prices for the rest of the year, Langemeier said. To address this uncertainty, he examined the effect of potentially higher corn prices on feeding cost of gain for finishing cattle.
Feeding cost of gain is sensitive to changes in feed conversions as well as corn and alfalfa prices, he said. In May, corn and alfalfa inventory prices were $3.91 a bushel and $184 a short ton, respectively, he said.
Feeding cost of gain since January ranged from $82.35 in January to $91.67 in March and averaged $86.50 per cwt, Langemeier said. Feed conversions for the first five months of this year were about 9.0% more than their seasonal averages, resulting in a feeding cost of gain that was about $8.00 per cwt higher than projections.
The estimated feeding cost of gain for placements in May was $87 per cwt, he said. (It is important to note that this estimate was made before the recent increase in corn prices.)
As of July 1, there was a 14% probability that fall corn futures prices could be below $3.50 a bushel and a 13% probability they could be higher than $5.00, Langemeier said.
If corn prices for the last six months of 2019 are $4.50 a bushel and feed conversions are 5% above their seasonal averages, feeding cost of gain for the third and fourth quarters are expected to range from $84 to $87 and from $87 to $91, respectively, he said.
If corn prices are $5.00 a bushel, feeding cost of gain is expected to range from $89 to $92 in the third quarter and from $92 to $96 in the fourth quarter, Langemeier said.
Plus, the relatively high third quarter feeder-to-fed-price ratio does not bode well for net return prospects, he said.
CATTLE, BEEF RECAP
Cash cattle trading was reported in the Plains last week at $109 to $113.50 per cwt on a live basis, steady to up $2 from the previous week’s action. On a dressed basis, trading was reported at $180 to $181 per cwt, steady to up $1.
The USDA choice cutout Friday was down $1.58 per cwt at $217.67, while select was off $0.56 at $194.80. The choice/select spread narrowed to $22.87 from $23.89 with 83 loads of fabricated product sold into the spot market.
The CME Feeder Cattle index for the seven days ended Thursday was $133.21 per cwt, down $1.19 from the previous day. This compares with Friday’s Aug contract settlement of $138.82, up $2.25.