Lotfeeding

Feedlot breakeven marks time, as grain prices exert impact

Jon Condon, 23/08/2012

 

There has been little substantive change in results in Beef Central’s latest feedlot breakeven calculation carried out yesterday, for 100-day cattle going on feed now and exiting the feedlot in the early stages of December.

The margins on feeding 100-day grainfed cattle remained unchanged from the previous fortnightly trading budget compiled on August 8, indicating a minus-$41 result yesterday on a typical Darling Downs-based grainfeeding proposition.

The figure reflects the recent spike in feedgrain prices driven by the disastrous corn-growing season in the US, where drought is forecast to wipe four billion bushels off the 2012 corn crop, putting upwards pressure on feedgrain prices worldwide.

While there has been a significant jump in feeding cost in Beef Central’s two most recent breakevens, this has been offset by an easing in feeder cattle prices applied in the trading budget formula.

Even factoring in stocks of grain held by feedlots for current use bought earlier at cheaper prices, the current grain movements are impacting on lotfeeding profitability, using our standard 100-day set of variables (see description at bottom of page.) Current spot wheat price ex Darling Downs is about $285/t.

Yesterday’s negative $41 result is based on Beef Central’s typical shortfed beast entering the feedyard August 23yesterday, and closing-out after 105 days on feed on December 7. The outcome has slipped considerably since the recent high point, being two consecutive slightly positive trades back in May.

For yesterday’s trading budget, we’ve kept the feeder steer buy price at 195c/kg. Current signals suggest the market is trading anywhere from 185c through to 195c, with a tendency for decent runs of cattle to be priced at the higher-end of that range. We think that figure is still largely reflective of what is required of lotfeeders to secure consistent placements meeting our feeder spec.

Pricing yesterday’s P&L budget feeder steer (flatback crossbred, ex-Darling Downs) at 195c/kg values him at $877, down from $900 a month ago, but still some distance from our January 9 year-high steer value of $967.

Due to current widely publicised grain price pressures, finished ration price applied in yesterday’s calculation was $285/t, up $15/t on a month ago. Downs lotfeeders are currently quoting ration prices anywhere from $270/t to +$313/t, depending on inputs, stock-at-hand and grain buying strategies.

The current ration price represents a total feeding cost over 105 days of $446 (up $23 on our breakeven back in late July), and a total production cost calculated at $1417 ($1377). That’s the highest seen since March/April last year when grain feeders were paying 210-215c for feeders, and ration price was $250/t.

Cost of gain in the southeast Queensland market, using our chosen variables (210kg gain over 105 days, costing 391c) has lifted from 201c /kg a month ago to 213c/kg yesterday. That figure was only 183c/kg back in April.

That means every day a beast is on feed, it is becoming more expensive, relative to equivalent grassfed or grain-enhanced cattle in the market, compared with positions back in late July.  

Using these variables in our formula suggests a breakeven figure in yesterday’s proposition at 402c/kg dressed weight, up 5c from where it sat a month ago, based on a 360kg hot dressed carcase.

Based on current thin market signals, we have kept the forward contract market price for 100-day grainfeds with major processors at 390c/kg. There is certainly reluctance evident in the market to go above that, given current currency performance.

While the projected turnoff period in early December often represents a calendar year peak in prices for grainfed export cattle, due to general finished cattle supply shortage, this year may not see much strength in that trend, if it occurs at all.

Export processors remain under considerable margin pressure at present with the higher exchange rate and flat demand out of Australia’s big grainfed markets like Japan and Korea, and it’s hard to see that changing much before the new calendar year.

If it stays dry in Queensland and NSW in coming months, it could put feeder steer sellers on the back foot, but there were patches of rain in NSW and Victoria last week, and forecasts of rain again later this week.

If the market was to gain a little forward momentum like it did six to eight weeks ago when the sequence of wet weather was around, processors could be forced to kick slaughter cattle rates a little. But yesterday’s Beef Central report, “Mixed spring rainfall for Australia” would seem to suggest that likelihood of significant rain impact on cattle supply is limited in the run through to Christmas.      

As described in our intro, the forward price applied in yesterday’s trading budget translates into a trading loss of $41 a head on a current 100-day feeding proposition. Apply typical meatworks grid downgrades on shortfed cattle, and the budget could easily blow out by a further $10-$15/head, however.

Looking back to our equivalent trading budget from this time last year, the breakeven figure was 370c, with forward contracts of 10c less. Feeder prices back then were about 180c, still rebounding out of their winter lows, before heading towards 215c around December/January. Currency value this time last year was around 102c.

 

Spot market position

Cattle bought forward back in mid-May, rolling out of the feedlot for slaughter today, had breakevens around 375c, with contracts at around 375-380c. Today’s spot market is marginally above 380c, representing a $10-$15 loss on contracted cattle. Non-contracted cattle would be slightly in the money today, our calculations show.

Grainfed industry attention will now focus on the quarterly feedlot survey for the period to June 30, to be released in coming days. The industry consensus seems to be that it will register quite a high number for cattle-on-feed for the ‘snapshot’ period at the end of June, but that figure is now somewhat dated, given what has happened with feedgrain prices and subsequent cattle placements, through July and August. 

Circumstances like this raise questions about the substantial delay in the reporting for the quartertly numbers-on-feed figures. It's now eight weeks since June 30, and some would argue that whatever figure is produced, it is now somewhat redundent, given the changing circumstances sicne then.  

Having said that, Beef Central remains surprised following recent Brisbane Ekka conversations with several prominent Downs lotfeeders over a beer at how full some yards still are. That is perhaps reflective of normal seasonal winter conditions, when better feedlots tend to get a flow of cattle coming forward, regardless of prevailing market conditions.

They may be isolated cases, however, and the general trend in numbers now appears to be down.  

  •        Beef Central's regular 100-day grainfed breakeven scenario is based on a representative standard set of production variables, ex Darling Downs. They include a 356kg dressed weight; ADG of 2kg; consumption 15kg and a NFE ratio of 7.5:1 (as fed); $25 freight; typical implant program; interest component. It is important to note that variations exist across production models (feed conversion, daily gain, mortality, morbidity, carcase specification); from feedlot to feedlot; and between mobs of cattle. For a more specific performance forecast on a given mob of cattle, consult with your preferred custom feeder.

 

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