Impact of Rising Feed Prices on Cattle Finishing Profitability
AgMRC Renewable Energy Newsletter
Co-director, Ag Marketing Resource Center
Iowa State University Extension
(second in a series of two)
Feed cost is a significant component of the cost of producing beef. So, the price of feed ingredients has a substantial impact on the profitability of beef production. Higher feed prices can quickly convert profits into losses.
Corn and soybean meal are the major feed components for beef production. These feed costs have varied over the years based on supply and demand conditions. As shown in Figure 1, there have been years of price spikes for corn and soybeans. These spikes have been the result of reduced crop supplies due to drought or other adverse growing conditions. After the rise, prices returned to normal levels the following year due to a return to normal growing conditions.
Recent corn and soybean prices have risen to record levels and remained at these levels for two years. In contrast to previous price rises, current price levels are a result of expanding demand and have occurred during a period of good growing conditions. The future direction of these price levels is a question of open debate. American agriculture has seldom found itself in a position of demand driven shortages for an extended period of time.
Higher corn and soybean prices in recent years have had a significant impact on the cost of feed for swine operations. Iowa corn price has increased from an average of $1.90 in 2005 to $4.77 per bushel in 2008. Likewise, Iowa soybean price has increased from $5.88 to $11.33 during the same period.
If feed prices remain at elevated levels, a return to profitable beef production can only be achieved through higher beef selling prices. In the long-term, reduced beef supplies will lead to higher beef prices and a return to profitability of the remaining beef producers. However, the transition period can be extremely difficult for all beef producers.
Finish Steer Calves
The impact of increased feed prices for a typical steer calf finishing operation is shown in Figure 2. This is an economic data series created by Iowa State University Extension. It tracks changes in profitability due to changes in feed prices, steer calf purchase price and finished steer selling price.
Breakeven selling price has increased from approximately $1,000 per head ($87 per cwt.) in 2005 to $1,163 per head ($101 per cwt.) in 2008. However, if feed prices would have stayed at the 2001-2005 average price during 2008, the breakeven selling price would have remained at $1,000 as shown in Figure 3.
This $163 per head ($15 per hundredweight) change in cost has had a substantial impact on profitability, turning periods of profitability into periods of losses. The bar chart in Figure 4 shows this change. The navy colored bars show the monthly profits (losses) if feed prices would have been maintained at their 2001-05 levels. The orange colored bars show the monthly profits (losses) actually incurred due to higher feed prices. You can see that the difference in profitability becomes much more evident from 2006 onward. This shift in profitability has had a major impact on the viability of steer calf finishing operations.
Finishing Yearling Steers
The impact of increased feed prices on finishing yearling steers is shown in Figure 5. This is a monthly economic data series from ISU that tracks the impact of changes in feed prices, yearling steer purchase price and finished steer selling price.
Breakeven selling price has increased from approximately $1,100 in 2005 to $1,264 per head in 2008 ($88 to $101 per cwt.). However, if feed prices would have stayed at the 2001-2005 average price during 2008, the breakeven selling price would have remained essentially unchanged at $1,100 per head ($88 per cwt.), as shown in Figure 6.
This $164 per head ($13 per hundredweight) change in cost has had a substantial impact on profitability, turning periods of profitability into periods of losses. The bar chart in Figure 7 shows this change. The navy colored bars show the profitability if feed prices would have been maintained at their 2001-05 levels. The orange colored bars show the profitability actually incurred due to higher feed prices. You can see that the difference in profitability becomes much more evident from 2006 onward. This shift in profitability has had a major impact on the viability of yearling steer finishing operations.
Causes of Feed Price Increase
Many factors have conspired to cause corn and soybean prices to increase in recent years. Expanding world economies and decreases in the value of the dollar are two examples that have affected prices. However, the major factor has been the expansion of the ethanol industry. Without the expansion of the corn-ethanol industry, corn and soybean prices would be similar to the levels before the ethanol expansion. This is discussed in a September, 2008 article in the AgMRC Renewable Energy Newsletter titled Impact of Biofuels on Corn and Soybean Prices. Without the increased corn demand due to the corn-ethanol expansion, corn and soybean prices would be low and carryover stocks would be growing. Although this would be beneficial for the pork industry, continued government support would be needed to maintain the viability of corn and soybean producers.
With corn and soybean trend yields expected to increase at a substantial rate in coming years, it is important that the biofuels industry continue to expand to utilize the increased supplies of corn and soybeans. However, the biofuels industry needs to ride the fine line between utilizing excess supplies of corn and soybeans but not driving corn and soybean prices to levels that are unduly harmful to the livestock industry.