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Net return prospects for cattle finishing in 2017

Strongest prospects for positive net returns in 2017 associated with March through May closeouts.

With the exception of May 2016, monthly fed cattle net returns were negative during 2015 and 2016, but Purdue University agriculture economist Michael Langemeier said current prospects for 2017 appear much brighter. Langemeier recently discussed net return prospects for cattle finishing in 2017 as well as trends in feeding cost of gain and the feeder-to-fed price ratio.

Several data sources were used to compute net returns. Average daily gain, feed conversion, days on feed, in weight, out weight and feeding cost of gain were obtained from monthly issues of Kansas State University’s “Focus on Feedlots” newsletter. Futures prices for corn and seasonal feed conversion rates were used to project feeding cost of gain for the next several months. Net returns were computed using feeding cost of gain from monthly issues of the “Focus on Feedlots” newsletter, fed cattle prices and feeder cattle prices reported by the Livestock Marketing Information Center (LMIC) and interest rates from the Federal Reserve Bank of Kansas City.

A recent Illinois State University “farmdoc daily” article discussed the importance of feeding cost of gain and the feeder:fed price ratio to cattle finishing net returns. Given this importance, Langmeier said trends in feeding cost of gain and the feeder:fed price ratio were discussed before elaborating on net return prospects. Feeding cost of gain averaged $85.16/cwt. in 2015 and $77.20/cwt. in 2016. In December 2016 and January 2017, feeding cost of gain was approximately $70/cwt. Given current corn and alfalfa price projections, Langemeier said feeding cost of gain is expected to range from $65 to $70/cwt. for the rest of 2017.

During a 10-year period, the ratio of feeder to fed cattle prices averaged 1.19. The feeder:fed price ratio was one standard deviation below (above) this average for 11 (19) months during the 10-year period. Langemeier explained that the average net return for the months in which the ratio was below one standard deviation of the average was $80 per head. In contrast, the average loss for the months in which the ratio was above one standard deviation was $250 per head. Of the 19 months with a ratio above one standard deviation of the average feeder to fed price ratio, 17 of these months have occurred since January 2015.

According to Langemeier, the good news is that given current price projections, the feeder:fed price ratio is expected to remain at or below the ten-year average for the rest of 2017.

“For February, March and April, the feeder to fed price ratio is expected to remain below 1.15,” he noted. “These relatively low ratios, along with relatively low expected feeding cost of gain, improve net return prospects for these months.”

However, Langemeier pointed out that an unexpected drop in fed cattle prices, as occurred from August to December 2015, and from August to October 2016 would create a spike in the price ratio.

Monthly steer finishing net returns were computed using closeout months rather than placement months. Average losses in 2016 were $126 per head, and ranged from a loss $362 per head in January to a net return of $57 per head in May. Net return per head for January 2017 was approximately $40 per head.

Langemeier said breakeven prices for February through June are expected to range from $106 to $110/cwt.

“For the last six months of the year, breakeven prices are expected to range from $105 to $108/cwt. Current fed cattle price projections suggest that the breakeven prices indicated above could result in at least modest net returns for most of 2017,” he said.

Consistent with the relatively low expected feeder:fed price ratios noted above, the highest net returns are expected for March, April and May closeouts, he added.

“Current breakeven and fed cattle price projections create an environment that is at a minimum cautiously optimistic. After a disastrous 2015 and 2016, this is certainly welcome news. The strongest prospects for positive net returns in 2017 are associated with March through May closeouts.”

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