Lotfeeding

Run-away feeder cattle prices push grainfed trading budget loss out to $93

Jon Condon, 28/06/2016

THERE have been some massive shifts in variables in Beef Central’s regular 100-day grainfed trading budget calculated this morning, but their effects on the outcome somewhat cancel each other out.

Unless readers have been living under a rock for the past four weeks, it’s been impossible to miss the massive rise in all cattle prices, both store and slaughter, across Australia since the start of June with the arrival of widespread, substantial rain.

feedlot-grainfed-cattle-southernThe eastern Young Cattle Indictor yesterday hit yet another all-time record, threatening to push through the 650c/kg barrier for the first time in history. A pen of 340kg Charolais cross feeder steers offered as part of the Kindee Pastoral 1500-head offering at Roma store sale this morning reached an unprecedented 400c/kg.

That trend is clearly reflected in feeder pricing applied in this morning’s grainfed trading budget, based around representative flatback steers 450kg (see full description at base of page) entering our typical Downs feedlot today and closing-out after 105 days on feed in mid-October.

Savage price correction takes entire market by surprise

Today’s budget carries a feeder price of 340c/kg, a massive 50c/kg rise since our previous budget compiled five weeks ago, on May 19. But just a few weeks before that, the market for feeders matching our spec was still 270c, so in fact the market has shifted a colossal 70c, or $315 a head, in exactly eight weeks.

Certainly in NSW, there’s evidence of a 10-20c premium being paid over and above that figure, as southern demand outstrips supply even more so than in Queensland. Rain, of course, has been the big catalyst.

The previous high-point in feeder price was 330c/kg achieved in November last year, when it still looked like being a normal summer season. It’s not uncommon for feeder prices to peak around that time of year, though.

What’s becoming increasingly apparent is that the recent sequence of market adjustments has taken all players in the supply chain by surprise.

Current tightness in supply and strong demand means stakeholders are just aggressively buying young cattle, across the board. Many feedlots are currently buying cattle in an unprecedented range from lows around 300kg to 500kg liveweight, in order to secure numbers. Buyers apparently just do not want to miss cattle when they present themselves, almost regardless of weight. Some of the lighter descriptions appear to be going into slower growing programs, which is a little easier to do considering many feedlots now have a little more pen space around them.

One typical large-scale Darling Downs feedlot’s feeder grid this week has a price of 340c for steers +350kg, whereas cattle under 350kg are +10c. Counter-intuitively, it means paying a premium for steers 300-350kg for 100-day programs – weights that traditionally are quite unsuited to export lotfeeding.

Has panic set in?

Has it yet reached panic stage? Perhaps, but at very least it clearly shows that operators are working overtime to gather as many cattle around them, in an incredibly hard supply landscape, as they can.

At very least it has caught most, if not all large operators (as well as producers) off-guard, in just how quickly and how dramatically the market has moved. Sure, there was an underlying belief that feeders would rise in value as the year unfolded and the supply challenge intensified. But nothing like this.

Making the situation worse, prior to the recent unseasonal rain when supply tightened, most large grainfed operators did not have large numbers of young cattle on-hand in their systems, to fall back on. That is in stark contrast with the past two years, where every player who wanted young cattle in hand in June had an abundant supply.

It’s hard to gauge occupancy levels in yards at present, but anectdotally, it appears there is some pen space starting to open-up in a few of the larger yards, both custom-feeders and corporate. That’s because there just isn’t the volume of cattle now being offered that there was previously – regardless of buy-price.

Valuing today’s example feeder steer in our budget at a record 340c/kg values him at a record $1530, a $45 rise since our previous May 19 report.

Go back three years to May 2013, during the depths of the drought-driven over-supply, and the same steer was worth less than half that, at $675 (150c/kg). Breakevens back then were just 360-365c, however.

Ration price unchanged

The only variable to remain unchanged in this week’s trading budget is ration price, which we have left untouched at $320/t. A few yards may have lifted prices above that rate, but with the ‘pens vacant’ signs starting to appear, sharpening competition among custom-feeders, we feel that price remains relevant in today’s environment.

Today’s quoted ration price is still well off the near-record highs seen back in July last year, when ration reached $385/t – representing a $65/t slide since. Even this time last year, ration was still worth $360/t, but some of that, at least, was due to feedlots operating at near capacity due to drought, and not having to work too hard, margin-wise, to attract business.

The $320/t ration price in today’s trading budget delivers a total feeding cost of $501, and a cost of gain at 239c/kg. At today’s nominated feeder steer purchase price, total production cost is $2139, which is +$230 on last time.

Surprisingly, we reached almost exactly the same total production cost back in November, except the ration price back then was worth $350/t, and the feeder price slightly less, at 330c (see earlier reference).

Breakevens now above 600c, forward slaughter price skyrockets

All that delivers a breakeven figure in today’s budget of a record 606c/kg – up from 540c/kg a month ago, and 540c this time last year.

While there has been a breathtaking surge on the feeder steer price since our last budget, the sell-side movement is arguably almost as dramatic.

Grainfed forward price grids this week for mid-October delivery sit at an all-time record 580c/kg.

Five weeks ago in our last breakeven, the forward price sat at 520c, and three weeks before that, 500c. That represents a phenomenal 80c/kg rise in price in just eight weeks, which on our standard 356kg carcase, represents an almost unbelievable rise in value of $285 a head.

As large as that slaughter figure is, in real terms it has not kept pace with the negative impact of the even larger rise in feeder steer purchase price. Effectively the feeder steer market has moved even more extremely than the forward slaughter market, reflecting the sheer tightness of supply.

It means that in this week’s trading budget, the big swings in variables delivers a trading loss on our current proposition of $93. It’s not the worst result we’ve ever recorded (-$114 in late April, driven hard by a deteriorating slaughter price at the time), but it’s heading up there.

For the five budgets Beef Central has crunched so far in 2016, the average forecast loss on the trade has been above $90 a head.

Spot market comparisons

Looking at 100-day grainfed cattle heading for slaughter this week, forward contracts written back in mid-March were priced around 560c. Compare that with the spot market this week for grainfeds in the 570-590c range, and it means processors are currently between $35 and $100 a head better off on the forward contracted cattle. In contrast, just a month ago, those forward contracted cattle would have been looking very expensive.

So where does the grainfed supply chain it go from here, given current market dynamics?

It probably comes down to how determined individual processors are to maintain long-term beef product market relationships, and at what financial cost.

Sure, processors have had two exceptional profit years in 2014 and 2015, arguably giving them a handy nest-egg to ride out, and fight through the current cycle. But it’s equally worth remembering that profitability exceptionally poor during the two very wet years prior to that, when beef kills slipped dramatically, and currency did not work in exporters favour.

As discussed in this morning’s weekly kill report, there’s some tough decisions to be made by processors in coming weeks. Many are already operating at only four days a week, and some less than that – despite paying stratospheric prices for slaughter cattle.

The big question: What strategy are processors going to deploy, going forward? Closures, and rationalisations among multi-site processors are absolutely on the cards, in Beef Central’s opinion, given the current financial climate.

 

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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Comments

  1. Andrew KENNETT, 29/06/2016

    While I can see your cost structure in your feeder steer example I am not seeing the wholesale returns to the feedlot the or processor. Are you working off the back of current kill bid sheets which I imagine have a built in margin for the processor, hence your estimated loss is not a true reflection.

    Thank you for your comment, Andrew. Important to understand what the trading budget does, and does not set out to do. It is specifically a forecast of the outcome in buying a feeder today, getting him fed, and selling him at the end of the 105-day cycle. It does not attempt to forecast wholesale returns to the processor. That is a whole different project, well beyond the scope of this report. To link the current level of feeder cattle price, and even exit price, with processor wholesale margins would be extremely unwise, in our opinion i.e. prices paid for cattle currently are NOT a proxy for wholesale meat profitability.

    Readers can take comfort in the fact that we frequently compare our own trading budget result (using our own specific set of variables, set out at the base of the page) with others calculated across the industry. While results obviously vary depending on exactly what figures are fed in to the formula (rate of gain, cost of feed etc can vary from yard to yard), we often find our result is within $5-$10 of other similar calculations. We believe it is perfectly robust, for the purpose it serves. Using rate of gain as an illustration, while it can be argued that a different mob of cattle might gain faster, or indeed slower than the 2kg/day we apply in our formula, the most important feature of our series of trading budgets is the trend. It builds up a picture of trading profitability over time. Editor

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