Surge in Corn Prices Impacting Cattle Prices

By Todd Kalous, Cattle-Fax

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Click here for graphic of Corn Price Impact

The December 2006 corn futures contract increased about $1/bushel from mid-September to the first week of November, or from about $2.40 to $3.40/bushel.  Looking ahead to next year, the average futures price of all five 2007 corn contracts is currently near $3.60/bushel.  This gives a quick perspective on what the market is expecting for 2007, and is cause for concern for cattle producers.

What does it mean to the feeder cattle and calf segments of the industry if corn remains at current or higher prices into 2007?  The obvious answer is that feeder cattle and calf prices will come down, which is already occurring; the November feeder cattle futures contract dropped from September highs near $120/cwt. to current levels near $100/cwt.  Such a large leap in corn prices has a significant impact on cost of gains for cattle feeders and on the break-even prices in which they can buy feeder cattle.

The chart indicates the varying break-even purchase price levels for feeder cattle and calf prices at five different corn prices.  For example, assuming the fed cattle market is at $85.50/cwt, the break-even purchase price for a 750- pound steer with the price of corn at $2.50/bushel is $108/cwt.  If the price of corn increases to $3.50/bushel, that same break-even price drops to $95.50/cwt. because the cost of gain for that steer increased from 55 to 72 cents.

Bottom Line:  High feed grain prices are anticipated for the foreseeable future as the corn market works to ration the available supply and encourage more acres to be grown in order to satisfy the booming demand.  Producers must realize the impact of that alone, in addition to the impact the drought has had on slowing expansion in the current cattle cycle.  The impact of high feed grain prices on feeder cattle and calf prices will impact cow-calf profitability and could further slow expansion.  The rule of thumb is that for every 50 cents/bushel increase in the price of corn, the break-even price of a 550-pound steer falls $10-12/cwt. or $55 to $66 per head. 

Total costs of gain
w/corn prices at:        

$2.50/bu = 55 cents                 Assumptions

$3/bushel = 64 cents                 Final Weight = 1,300 pounds

$3.50/bushel = 72 cents            Interest Rate = 9.75%

$4/bushel = 81 cents                 2% death loss on calves

$4.50/bushel = 90 cents            1% death loss on feeders