Feedlot profitability is coming under renewed pressure – this time from rising feedgrain prices as global and domestic grain markets produce a big rally in response to gloomy crop forecasts in the US due to another wave of drought.
About 30 percent of the US corn crop is now categorised as ‘poor’ or ‘very poor’ as a result of the drought and heatwave that has hit the Midwest in the past month. This week the USDA wiped 46.2 million tonnes from its supply estimates for this year’s harvest.
As a result domestic corn prices have lifted $50/t since the start of June, and feed wheat delivered Downs up $35 in the past month.
All that has had a pronounced impact on Beef Central’s latest fortnightly feedlot trading budget compiled yesterday.
Even factoring in feedlot stocks of grain for current use bought at cheaper prices earlier, the current movements are pushing lotfeeding profitability using our standard 100-day set of variables further into negative territory.
From a negative $21 trading result on our previous budget, yesterday’s calculation has pushed the trading proposition back further, to negative $36.50 – primarily based on rising ration price.
That’s based on Beef Central’s typical shortfed beast (see full criteria at bottom of page) entering the feedyard yesterday, and closing-out after 105 days on feed in the last week in October.
It’s a long way from two consecutive line-ball/slightly positive results calculated in mid and late May.
For yesterday’s trading budget, the steer buy price stayed the same at 195c/kg, supported somewhat by recent and persistent rainfall which perhaps has held feeder prices across eastern Australia a little higher than would otherwise be expected. Lotfeeders are continuing to find it challenging to secure appropriate feeder cattle due to supply disruptions. The other factor is the presence of a big body of winter feed, elevating competition from grass finishers for the same young cattle, and reducing the urgency for breeders to lighten-off numbers over winter.
While saleyard numbers for feeder type cattle have been strong this week in many regions, some of that is catch-up due to weather disruptions caused earlier, and may not be truly representative of the supply outlook. Roma store sale in Queensland this week yarded 10,000 head, for example, its biggest assembly for a considerable time. Traditional early July ‘Special sales’ in some centres have also helped swell numbers, but that has had little or no downwards effect on feeder prices.
If anything, domestic weight feeder cattle 330-400kg suitable for feeding for the Woolworths/Coles supermarket trade appear to have kicked a little this week, while their heavier siblings +400kg suitable for the 100-day market are largely unchanged. Most are selling around 195c/kg, with isolated patches around 200-205c.
This time 12 months ago, the feeder steer market was still under considerable pressure, sitting at around 175-180c.
Pricing yesterday’s P&L budget feeder steer (flatback crossbred, ex-Darling Downs) at 195c values him at $877, still considerably cheaper than our year-opening, January 9 steer value of $967.
Finished ration price applied in yesterday’s calculation was lifted $10/tonne from a fortnight ago to $260/tonne. That might look moderate, but many yards still have stock on hand, bought at earlier lower prices. Given the current trends being seen in the grain market, it’s not easy to pick a representative ration price this week, because every feedlot’s grain procurement strategy is different. Some may have grain to cover themselves three months out; others much less.
The current grain price is only likely to firm further, going forward.
Based on Luke Walker’s feedgrain commentary published on Beef Central yesterday, feed wheat delivered Downs is $260/t for July and new-crop feed wheat at $275/t delivered downs for January; with F1 barley trading on the Downs at $245 and sorghum $235.
For the benefit of southern readers (not part of Beef Central’s Downs feedlot-based trading budget) Liverpool Plains had sorghum buyers yesterday at $210/t and feed wheat at $250/t; Riverina barley buyers at $210/t, and Goulburn Valley district in Victoria at $240 for barley delivered, new crop at $255/t, and feed wheat buyers at $285/t with limited sellers. Melbourne yesterday had F1 barley buyers at $252/t and Gippsland barley was trading at $267/t.
Getting back to yesterday‘s trading budget, The current ration price represents a total feeding cost over 105 days of $407 ($392 last time), and a total production cost yesterday calculated at $1377.
Cost of gain in the southeast Queensland market, using our chosen variables (210kg gain over 105 days, costing 391c) has lifted from 186c/kg a fortnight ago to 194c/kg yesterday. That’s likely to head above 200c give grain price pressures. The last time that was seen was in May/June last year, when ration price hit $265-$270.
Applying these variables suggests a breakeven figure in yesterday’s proposition at 390c/kg dressed weight, up 5c from where it sat a fortnight ago, based on a 360kg hot dressed carcase.
Based on current market signals, we have retained the forward contract market price for 100-day grainfeds with major processors at 380c. That’s a public price, and there are currently some trades occurring a little above that, however export processors are under pressure at present with the higher exchange rate and flaccid demand out of key grainfed markets like Japan and Korea.
Nevertheless, at the macro level, some commentators think there could be some upside later in the year with higher US grain prices theoretically putting pressure on days on feed in US feedlots, and in turn lower beef production. Offsetting this, the weather could push more US cattle onto feed, but at lighter weights. Whether this translates into higher international grainfed prices for Australia by late October is anyone’s guess.
As mentioned above, the forward price used in yesterday’s trading budget translates into a trading loss of about $36.50 a head on yesterday’s trading budget exercise. Apply typical meatworks downgrades experienced on shortfed cattle, and the budget could easily be a further $8-$10/head in the red, however.
Looking back to our equivalent trading budget from this time last year (July 12, 2011), forward contract cattle were being quoted at 350c-360c at the end of June 2011 – a period of depressed outlook for export processors as US exports and currency issues took hold. Last year’s breakeven figure was in the mid-360s, delivering a loss then of around $40 a head. Currency value this time last year was around 105c.
Spot market position
Yesterday’s SEQ processor grids for spot market 100-day grainfed ox were generally 370-375c for 0-2 tooth cattle, depending on positions with their contracted cattle. Grainfed animals killed this week, going on feed back in late-March, carried a breakeven of about 390c/kg, but were forward-bought then by processors at around 380c. That leaves processors yesterday at $15-$30 in the red on those forward-bought cattle, relative to yesterday’s spot market.
The industry is still some weeks away from receiving the next quarterly feedlot survey report, but at this point, it looks likely that the reported numbers on feed for the period ended June 30 will jump substantially, after a 40,000 head fall to 750,000 head reported in the March quarter. The June 30 figure, of course, will fail to capture the impact of the more recent large grain price adjustments.
With a material change in grain price of $60/t since the start of the year, there must be a fair degree of uncertainty ahead for the grainfed sector. To be fair, though, that is still a long way from the $380/t grain prices experienced during the peak of the market back in 2008. The big difference back then, however, was that trading conditions were much more favourable than they are today.
Lotfeeders and other grainfed industry stakeholders will gather for the biennial BeefEx feedlot industry conference on the Gold Coast from October 9. Beef Central will bring readers more details as the event draws closer. An excellent speaker program has been assembled.
- 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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