Cattle producers should see a bit of relief from high feed expenses over the next few months. The CME DEC ’22 Corn contract has fallen from a contract high of $7.64/bu. on May 16 to $6.23/bu. Some other commodities used in feed rations, such as distiller’s grains, have seen similar downward moves. These feed price changes can have a compounding impact on feeder cattle prices. As inputs become cheaper, feeder cattle become a relatively more profitable investment which lifts their value. It is common to see corn and feeder cattle prices move in opposite directions.
In the chart below, the CME DEC ’22 Corn price (black line) has declined significantly from mid-June to now. Corn is a significant input in feeding cattle and the CME OCT ’22 Feeder contract (green line) experienced a corresponding increase in value.
Since the contract high two months ago, cost of gain (COG) has fallen significantly while feeder cattle also became relatively more profitable. If COG is calculated:
then estimated COG, including yardage, fell from $1.11/lb. to $0.90/lb. from mid-May to the present, providing at least $0.20/lb. additional revenue before even considering the change in value of feeder and fed cattle. This also makes dry-lotting cows and placing lightweight cattle on feed a more feasible option given low pasture availability and historically high price of forage.
Commercial broiler chicken production is a staple of the farming community in the southeastern states, so much so that the area is often referred to as the “broiler belt.” Contract broiler growers have benefitted from the business arrangements between large poultry integrators, lending institutions and themselves for many decades. However, over the last decade or so, the investment cost of housing and the cost of utilities supplied by the growers has risen greatly, resulting in rapidly decreasing grower net incomes. Given the nature of most poultry contracts, growers only have a limited opportunity to positively affect revenues. Most profit improvement opportunities lie in lowering input costs, either by improving efficiency or simply by cutting back on inputs like heating fuel or electricity. However, choosing the latter has the potential to negatively affect the revenue side through bird performance losses, as well as negatively affect the competitive contract pay rate. As houses age, they typically become less efficient, requiring major house maintenance and equipment replacement or upgrade, adding to the cost of operation. The variable cost for a poultry farm is made up mostly of utility costs. On new farms, variable cost can be as low as 20% of revenue, while older farms can see as high as 40% or more. Therefore, a contract grower could be faced with shortages on the revenue side caused by lowered bird performance possibly linked to housing deficiencies, coupled with increased input costs stemming from the same deficiencies – all resulting in a fast drop in net farm income.
By surveying southeastern poultry financing institutions for averages across farms, we see what seems like a tight range of revenue per square foot of broiler grow out space per year. However, when you apply these numbers to the thousands of square feet on a typical broiler farm, then apply known ranges for variable costs, the resulting spread in net incomes can be significant.
Estimated Broiler Farm Income, 4-40’x500’ Houses
Broiler Farm income Estimate 4-40’x500
Square Feet
“Old/Less Efficient”
“New/More Efficient”
80,000
Gross Revenue per SF Range
$2.75
$3.25
Gross Revenue
$220,000.00
$260,000.00
Variable Expenses (High 35%, Low 25%)
$(77,000.00)
$(65,000.00)
Income Before Debt Service
$143,000.00
$195,000.00
Debt Service Assignement (50%)
$(110,000.00)
$(130,000.00)
Net Farm Income
$33,000.00
$65,000.00
Net Income per SF
$0.79
$1.55
Sometimes growers face unforeseen risks from market changes and other outside forces, like the recent HPAI outbreaks, and COVID19 before that. Instances where fewer birds are placed or when out times increase between flocks negatively affect revenue. Some contracts have provisions that help mitigate these risks for the grower; however, some contracts have no such provisions and growers can suffer greatly. Poultry companies absorb much of the normal risks from changing markets and volatile feed prices. However, for the individual grower, a small change in bird density or placement schedule, for example, can have great impact on their individual farm operation which typically operates on a much tighter margin with little working capital to buffer the impact. Current proposed changes to the GIPSA (Grain Inspection, Packers and Stockyards Administration) regulations may offer some mitigation of these and other areas of risk, as well as provide for greater financial disclosures related to the tournament system. Growers should carefully read the proposal and offer comments at:
Uncertainty and volatility are dominating most commodity markets given the current environment, which includes increasing inflation and interest rates. Despite the cash price of many goods escalating rapidly, cash cattle prices have done no such thing as can be confirmed by the CME feeder cattle index and the 5-area weighted average price for live cattle. However, the futures market, options market, and Livestock Risk Protection insurance (LRP) have been offering several opportunities to hedge cattle prices at much higher prices than have been physically experienced for several months. For instance, the August feeder cattle contract has traded between $163.93 and $186.65 per hundredweight over the life of the contract. During that time, the August futures price has held a $10.53 to $27.29 per hundredweight premium to the CME Feeder cattle index. These premiums appear to encourage hedging cattle, but convergence has been an issue with cash prices and the futures market. This is where LRP has an advantage in that it is indemnified based on the CME feeder cattle index and the 5-area weighted average price for live cattle. Figure 1 illustrates the number of days the daily settlement price for each feeder cattle contract exceeded the final settlement price from 2015 through 2020. The point of this figure is that the futures market often offers opportunities to benefit from hedging.
Figure 1. Number of days the daily settlement price of feeder cattle futures contracts exceeded the final contract close price during the life of the contract (2015-2020). (LMIC, 2021; Griffith and Boyer, 2022)
Griffith, A.P., C.N. Boyer, I. Kane. 2022. Producer Focus Groups: Price Risk Management Contributions to Economic Sustainability in the Cattle Industry. University of Tennessee Extension publication. In Press.
Livestock Marketing Information Center (LMIC). 2021. Historic CME Feeder Cattle Futures Prices.
After dealing with incredible volatility for much of 2020 and 2021, dairy producers are benefiting from a sharply stronger milk market in 2022. Prices for cheese, butter, and nonfat dry milk are running significantly higher than last year and are fueling farm level milk prices. The US All Milk price set a record in March of 2022, then exceeded that level to set a new record the following month. From March to April, prices rose by $1.20 to a record level of $27.10 per cwt. Prior to March of this year, the record high milk price was set in September of 2014.
US All Milk Price
January 2014 to April 2022, $ per cwt
Source: USDA-NASS
Like most all commodities, milk prices only tell part of the story this year. Dairy producers are dealing with higher production costs as feed, fuel, fertilizer, and other inputs are also much higher. While feed rations differ across all operations, the assumed ration for the Dairy Margin Coverage (DMC) program has become a common metric to estimate feed costs for dairy operations. DMC feed cost includes assumed quantities of corn, soybean meal, and alfalfa hay for a representative dairy operation.
From April 2021 to April 2022, the estimated cost of the DMC ration has increased by $2.28 per cwt or 18%. The US All Milk price has increased by more than enough offset that increase over the last year, but considering the increase in feed costs does put the historical price levels in a slightly different perspective. While milk prices are setting record highs, estimated returns above feed costs have reached levels comparable to what was seen at times in 2019 and 2020. And, they are not at the levels that were seen during 2014.
DMC Margin – US All Milk Price Minus DMC Feed Cost
The latest estimates for meat trade were released last week by USDA FAS and ERS. These monthly estimates include export and import data for beef, pork, and other meats during April. We’ll focus on pork and beef in this article and the different trends of each sector.
Pork exports were down nearly 20 percent both during April and year-to-date as compared to 2021. Declines in shipments to China are the biggest driver as U.S. pork exports to China are about 70 percent lower, so far in 2022, compared to 2021. Exports totaled 529 million pounds during April. Mexico and Japan were the largest volume destinations for U.S. pork and accounted for more than half of total pork exports.
Beef exports during April were up about 6 percent above April 2021 and totaled 304 million pounds for the month. Japan, South Korea, and China were again the largest volume destinations for U.S. beef during April and were each up about 8 percent compared to last year. Year-to-date, beef exports to China (up 43 percent) and Taiwan (up 44 percent) make up the largest increases compared to 2021. Beef exports to Mexico were about 24 percent lower during the first 4 months of 2022 as compared to 2021.
On the import side, both pork and beef imports were higher than a year ago. Pork imports were up 49 percent in April and beef imports were 7 percent. On the beef side, imports from Mexico (up 19 percent) and Brazil (up 51 percent) showed the largest increases from a year ago. Pork imports from Canada are the primary contributor to the increase and made up more than half of the pork imports during April.
