Because of the rise in grain price over the previous year, many farmers who raise cattle are keeping a close eye on the situation and trying to estimate the impact it will have on their financial situation. An agricultural economist from the University of Illinois at Urbana-Champaign investigates the effect that relatively high maize prices have on the cost of gain in feeding and the overall net return for cattle that are being finished.
Corn cost futures for the July 2022 deal (December 2022 contract) surged to $7.75 per bushel ($7.30 per bushel) by the middle of April, having been priced at $6.00 per bushel ($5.55 per bushel) at the beginning of January. In addition, while utilizing the iFarm Price Distribution tool on April 26, it was possible that the expiry price for the December corn futures contract would be above $8.55 per bushel or even below $6.05 per bushel. Both of these outcomes had a 25 percent probability of occurring. There is significant unpredictability surrounding corn prices for the remainder of this year because the ratio of corn stocks to use in the United States is currently only 9.6 percent. Additionally, there are ongoing questions relating to the corn acreage in the United States in 2022.
Gain Feeding Cost
The cost of gain per unit of feed is susceptible to variations in maize and alfalfa prices and feed conversion rates. The Focus on Feedlots newsletter publishes monthly articles that provide data on the above mentioned topics. The feeding cost of growth is depicted in Figure 1 for the period beginning in January 2012 and continuing through February 2022. Corn was priced at $6.58 per bushel, and alfalfa was priced at $207 a ton in inventories during February 2022. After averaging $80.50 per cwt. in 2020 & $100.40 in 2021, the price of gain due to feeding was $113.10 and $113.75 for January and February, respectively. According to the February edition of Focus on Feedlots, the projected cost of gain associated with feeding was $125 per cwt for placements in February. It is essential to remember that the price of maize has been steadily climbing since this estimation was produced.
The cost of feeding for gain for the remaining months of 2022 was approximated using forecasts of corn and alfalfa prices taken at the midpoint of April, as well as seasonal average feed conversions. Because the feeding cost of gain is estimated using corn prices from the time cattle are placed until they are sold, the exceptionally high maize prices we are presently seeing will affect the feeding cost of gain for the remainder of 2022. With this information in mind, the cost of gain due to feeding will be anticipated to vary from $112 to $115 per cwt. During the second quarter of 2021, the highest cost comes in June. In the third quarter, it is anticipated that the price of gain due to feeding would vary between $118 and $121. The anticipated range for the feeding cost of gain for the fourth quarter is from $120 to $123 per cwt. The highest price is in October. If these expenses are achieved, they will constitute the best feeding cost of gain since before the first quarter of 2013. This will be the case if and only if they are realized.
Net Gains from Cattle Finishing
Figure 2 depicts the financial profits of cattle finishing operations every month from January 2012 through February 2022. It is crucial to keep in mind that closeout months were used in calculating net returns instead of placement months. The calculation of net returns utilized a variety of data sources. Using the Focus on Feedlots newsletter, the Livestock Marketing Information Center, and interest rates from the Federal Reserve Bank of Kansas City, we calculated the average daily gain, feed conversions, the number of days on feed, and the total cost of revenue.
The net returns have been going in the wrong direction after a successful performance in the fourth quarter of 2021 and the first quarter of 2022. It is anticipated that the average losses will fall between $10 and $50 during the second quarter of 2022. If the cost of feeding and gaining weight stays at the levels described above, it is anticipated that losses will continue throughout the remainder of 2022.
The Influence that Variations in Corn Prices Have on Feeding Costs of Gain & Net Returns
Using data from the previous ten years, a regression model was used to assess the level of sensitivity of the feeding cost of gain to shifts in the prices of corn, alfalfa, and feed conversion. This allowed for determining the sensitivity of the feeding cost of gain. The findings are as follows, according to the research: The cost of feeding animals rises by $0.86 per cwt for every $0.10 per bushel rise in the value of maize, while the cost of feeding animals rises by $0.59 per cwt for every $5 per ton rise in the value of alfalfa. Increasing feed conversion by 0.10 increases the feeding cost of revenue by 1.10 dollars per hundredweight. The economist calculated the coefficients of separate determination to understand better the influence that feeds conversion, corn price, and alfalfa price had on the cost of feeding gain (Langemeier et al., 1992). The impact of each independent variable on the dependent variable may be measured with the help of these coefficients, which can be employed in the process. In the feeding cost of gain regression, the R-square goodness of fit measure was 0.956, and the total of the coefficients of independent determination for each variable equalled that value. According to this goodness-of-fit statistic, 95.6% of the variance in feeding cost of gain was described by changes in feed conversions, corn prices, and alfalfa prices. It is indicated by the fact that the statistic was applied. According to the results of independent determination coefficients that were computed, the price of corn explained roughly 71 percent of the variance in the feeding cost of gain.
As was mentioned before, there is now a differential of more than $2 per bushel in the price of December corn futures at expiry between the lowest and top 25 percentiles of the market. In the forecasts presented above, corn prices were assumed to fall somewhere in the middle of the range. As an illustration, it was anticipated that the monthly closeout price for maize would be $7.25 on average. If the price of maize were $1 less ($1 higher), the cost of gain from feeding the animal would be $109.55 ($126.75) instead of $118.15.
In addition to the cost of gain associated with feeding, the ratio of the price of the feeder to the price of the fed product is sensitive to fluctuations. A regression analysis was carried out to investigate the nature of the connection between these variables. The following are the findings: a $3.12 decrease in net returns for finishing cattle occurs for every head for every $1 rise in the feeding cost of gain, and an $8.24 decline in net returns for finishing cattle occurs for every 1% increase in the ratio of the value of feeder cattle to the price of fed cattle. According to the sensitivity analysis results shown above, there is an $8.60 change in feeding cost of gain for every $1 change in maize prices. It amounts to a change in cattle finishing net returns of $27 per head.
The price of corn has shown consistent growth during the first part of this year, and analysts anticipate that it will continue to have a high degree of volatility throughout the remainder of the year. The effects of rising maize prices on the feeding cost of gain and net returns for cattle finishing were analyzed in this paper. When the price of maize goes up by $0.10, the cost of feeding cattle to acquire weight goes up by $0.86 per cwt, and the net returns that cattle earn from finishing go down by $2.70 per head.