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Blog by Michael Langemeier, Center for Commercial Agriculture, Purdue University

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Corn price futures for the July 2021 contract (December 2021 contract) increased from $4.68 per bushel ($4.31 per bushel) in early January to $6.93 ($5.83) for the week ending May 14. Moreover, using the iFarm Price Distribution Tool there was a 29.5 percent chance on May 17 that the expiration price for the December corn futures contract will fall be below $4.50 and a 28.9 percent chance that the price will be above $6.00.

Given that the U.S. stocks to use ratio is currently only 8.5 percent and continued questions related to U.S. corn acreage in 2021, there is tremendous uncertainty regarding corn prices for the rest of this year.

A recent article (farmdoc daily March 7, 2019) examined the impact of relatively high corn prices on feeding cost of gain. This article will examine the impact of higher corn prices on cattle finishing net returns. The two primary factors impacting net returns are the feeding cost of gain and the feeder to fed cattle price ratio.

Feeding Cost of Gain
Feeding cost of gain is sensitive to changes in feed conversions, corn prices, and alfalfa prices. Information on these items are available from monthly issues of the Focus on Feedlots newsletter. Figure 1 illustrates feeding cost of gain from January 2011 to February 2021. Using regression analysis, each 0.10 increase in feed conversion increases feeding cost of gain by $1.20 per cwt., each $0.10 per bushel increase in corn prices increases feeding cost of gain by $0.88 per cwt., and each $5 per ton increase in alfalfa prices increases feeding cost of gain by $0.45 per cwt.

Using corn projections and seasonal average feed conversions, feeding cost of gain is expected to average $95 in the second quarter, and from $98 to $100 in the third and fourth quarters of 2021. In contrast, feeding cost of gain was $82.30 in January and $88.60 in February.

Feeder to Fed Price Ratio
Figure 2 illustrates the ratio of feeder prices to fed cattle prices from January 2011 to February 2021. Feeder cattle and fed cattle prices were obtained from the Livestock Marketing Information Center. The average ratio over this period was 1.232. The feeder to fed cattle price ratio was one standard deviation below (above) this average for 18 (17) months during the ten-year period. The average net return for the months in which the ratio was below one standard deviation of the average was $122 per head. In contrast, the average loss for the months in which the ratio was above one standard deviation was $265 per head.

As cattle feeders well know, if cattle are not purchased at the "right price", losses will incur. Given the uncertainty in fed cattle prices, this is easier said than done. The strong correlation coefficient between cattle finishing net returns and the feeder to fed cattle price ratio almost guarantees that losses will occur when this ratio is relatively high. Feeder to fed cattle prices are expected to range from 1.15 to 1.17 in the second quarter. For the last six months of this year, feeder to fed cattle prices are expected to range from 1.15 to 1.20 with the lower ratios occurring in the fourth quarter.

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