Positive grainfed trades remain elusive, as budget show a $42 loss

Jon Condon, 30/03/2015

POSITIVE trades in Beef Central’s regular 100 day grainfed trading budget remain elusive, with our calculation put together on Friday showing a $42 loss on our typical feeder steer going on feed now and closing-out in mid-July.

Kurrawong feedlot Morgan cattle grainfedThat’s much the same as our previous trading budget and breakeven conducted back on March 6, as strong feeder prices continue to exert a heavy influence on the outcome.

Before crunching the numbers behind our latest budget, we thought it worthwhile to pause briefly to look at comparative financials coming out of the US feedlot industry at present.

Lower sale prices and higher breakeven levels have pressured US feedyard returns in recent times, after an extended run of very good profitability. According to the Sterling Profit Tracker, which does a weekly US breakeven/trading profit calculation not dissimilar to Beef Central’s, feeding margins dropped another $59 a head for the week ending March 14. That’s left US cattle feeders with losses currently averaging $212 per head.

Fed-cattle prices remained fairly steady last week, with USDA’s five-area direct price for live cattle climbing to US$161.50/cwt from $161.26 the previous week.


Local feeder price 255c/kg

Getting back to our own 100-day trading budget calculated on Friday, we’ve applied a feeder steer (flatback 450kg) purchase price for this budget of 255c/kg.

While that’s back 5c/kg on our previous March 6 budget, the market for feeder steers has perhaps firmed a little this past week, and may continue to do so, given the current dry weather across large parts of Central and southern Queensland and northern NSW.

The latest feeder price has declined from a peak around 275c seen in the market around mid-February, when the earlier rain influence was still in full swing, but it’s still a 20c/kg better than back in our mid-January breakeven, when the figure was 235c.

The current feeder buying momentum appears to be due to two things: general shortage of the right feeder cattle based on weight and breed type, and an apparent tendency among lotfeeders currently to gather as many feeders around them as they can, given the broader concerns about cattle supply in the short-to medium term.

Security of supply appears to be the priority over security of price, under current feeder market conditions.

Even for slaughter cattle, it is very evident that a number of processors have forward pricing options in place, for an unusually wide catalogue of descriptions. That’s highly unusual – perhaps unprecedented, in some areas – for grassfed cattle, but it signals the underlying concern that processors have about slaughter cattle security going forward.

The optimists among us might argue that that is more a symptom of a ‘maturing’ industry supply chain, rather than a short-term grab for supply insurance.

A feeder value of 255c/kg applied in today’s budget values our steer at $1147 at induction – $23 short of our record set in our previous report, since our trading budgets started back in mid-2011. The low-point in feeder steer price in this series came in the depths of the drought in May last year when it reached 150c/kg briefly ($675). That means the steer purchase price has risen $472 a head since. Even this time a year ago, the feeder steer was still worth 175c, making him $360 dearer to purchase today.


Ration price unchanged at $365/t

It appears that the feedgrain market has firmed $10-$15/t for wheat/barley in the past week or two, suggesting ration price will start to creep higher, as lotfeeders move towards mid-year.

The high level of feedlot occupancy, carrying over again this year from 2013-14 as drought continues to force cattle onto feed, will only hasten that movement.

For this week’s budget we’ve left our typical Downs feedlot mixed ration at $365/t, unchanged from our previous analysis, but that’s likely to move upwards by the time our next budget is calculated, as current lower-priced grain stocks disappear.

Finished ration price is still back $20/t on its drought-fuelled high recorded during the second half last year, but full pens mean there is still not a lot of competitive pressure on custom feedlots in terms of how they price their ration to customers.

At this week’s designated ration price, it represents a total feeding cost over a typical 105-day program of $572. Cost of gain, using our chosen variables (2kg/day ADG, for 210kg gain over 105 days) now sits at 272c/kg.

All that delivers a total production cost (steer purchase plus custom feeding price, freight, interest, contingency, levy and induction costs) of $1823. The only consolation is that it’s not as bad as our March 6 record production cost of $1853 a head.

The above inputs deliver a breakeven in our latest budget of 517c/kg, a 5c/kg decline on our previous calculation, due to the slightly lower feeder animal component. We’re still in record territory though: our previous budget’s breakeven at 522c/kg was easily the highest ever seen for Beef Central’s regular report.

This time a year ago, the breakeven figure was only 420c/kg, meaning we are still close to a dollar a kilo higher today.


Forward pricing for GF ox 505c/kg

Based on our inquiries among SEQ grainfed beef processors, we’re seeing forward price for July delivery on typical 100-day ox ranging anywhere from 500c/kg to 520c/kg. For this week’s budget, we’ve applied a representative figure of 505c/kg, back 5c on our previous budget.

That’s perhaps reflecting mild change in the market, with a few cheaper cattle getting around, in line with grassfed slaughter trends, as processors kill rosters remain full – but there’s also a firming trend as well, for other cattle.

Today’s GF forward slaughter price is still 20c/kg above our mid-January report, before the rain impact started to materialise, but keep in mind that the A$ has dropped at US3c in value since then. This time a year ago, the forward price for July delivery was still around 415c/kg.

All that delivers a trading budget outcome in today’s calculation of a negative $42 (loss) per beast. That’s a scant $2 improvement on our previous March 6 budget.


So what lies ahead for grainfed supply and profitability?

Solid demand throughout the rest of this year for slaughter cattle should continue to influence strong numbers going onto feed this year, especially if conditions stay dry.

In a year like this, ultimate carcase weight has a value in its own right, as does security of supply – both of which should continue to underpin pricing of grainfed cattle this year, active supply chain stakeholders tell Beef Central.

As prices for grainfed export cattle continue to push into un-chartered territory this year, some participants are finding it difficult to factor-in even higher prices in their budgets for later this year.

But having said that, there’s now widespread agreement that finished cattle are going to be very hard to find in the back half of 2015 – it’s just a matter of how high those prices will go.


More interest in speculative feeding

While it still may be a little early to see it, with current 100-day placements exiting the feedlot in mid-July, there is now growing evidence of ‘speculative’ cattle being put on feed, that are uncommitted at this point. Some of those, at least, are true speculators ‘investors’, not directly connected with the cattle/beef industry.

Other such interest is coming from processors/meat traders themselves, in putting a lot more cattle on feed (both as users of custom feeding space, and company-owned yards) than they ever have before. Their decisions suggest underlying bullishness about the industry and future demand/profitability, especially in the second half of this year.

Eighteen months ago, those processors/meat traders were feeding only limited numbers, but as they have seen the meat market advance, they have continued to “own more cattle for a longer period” in the supply chain.

The limiting factor in that speculative feeding may be that, excluding southern Australia, commercial feedlots are again about as close to full as they can get.


Spot market improves 10c

Recent circumstances in Queensland, including the stoppage of two Central Queensland plants due to cyclone damage, and the seasonal closure of Kilcoy for three weeks appears to have affected the spot market for 100-day grainfed cattle, as well as grass, due to the surplus of supply over capacity.

That’s seen the current spot market for 100-day grainfeds at around 485c/kg among southeast Queensland processors, up 10c since early March.

What’s interesting is that four months ago, our December trading budget (at that point projecting a $50 net profit) was using a forward slaughter price of 465c/kg for slaughter this week. Remember, though, that was prior to the arrival of late December/January’s widespread rain.

Instead, today’s spot market is a full 20c/kg above that, meaning grainfed processors who forward-bought cattle back in December for slaughter this week are a hefty $71/head better off than buying the same steer in today’s spot market, on our standard 356kg grainfed carcase.


Beef Central’s regular 100-day grainfed breakeven scenario is based on a standard set of representative production variables, ex Darling Downs. It is built on a feeder steer of 450kg liveweight, fed 105 days; 356kg dressed weight at slaughter; ADG of 2kg; consumption 15kg/day and a NFE ratio of 7.5:1 (as fed); $25 freight; typical implant program. Bank interest is included. 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. Equally, there can be considerable variation at any given time in ration costs charged by different custom-feed service feedlots. Click here to view an earlier article on this topic. For a more specific performance assessment on a given mob of cattle, consult with your preferred custom feeder.


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