DTN Market Matters Blog

Cattle Crush squeezed.

by Pat Hill, DTN Markets Editor

There’s a lot in the news these days about the mounting losses in the livestock sector. How bad is it?

One measure from DTN is a “Cattle Crush” study, available to DTN instant online subscribers and on DTN subscription satellite services in its Commercial Livestock segment.

The study generates comparisons of fed cattle futures, feeder cattle futures and corn futures. Using a formula that assumes 6 fed contracts minus 3 feeders and 2 corn contracts, which equates to 192 head of 1,250-pound (lb.) steers purchased at 780 lb. and eating 52 bushels (bu.) of corn, values typically range between $115 and $160.

The June 1 report had values from $96.42 (August feeders, December corn and December live cattle) to $136.69 (November feeders, March corn, April live cattle), the other options grouped from $114 to $117.

I asked DTN Livestock Analyst John Harrington for some help in understanding these numbers.

“Feeder prices are significantly overpriced relative to the combo of live cattle (gross hedgable revenue) and corn (gross hedgable feed costs). In other words, the spread between gross hedgable revenue and gross hedgable costs (feeders and corn) is not great enough to afford cattle feeders a profit margin,” Harrington said. “It’s a bit tricky saying where losses start and profits begin on the $115 to $160 scale. It’s really more of an index, and keep in mind that there’s much the crush can’t account for (e.g., non-hedgable costs, local basis levels).

“Yet, the fact that we’re below the general range is a good indication of how poor and inadequate gross margins are within an historical context.

“If corn gets even pricier without feeders breaking, the spread could get even tighter. Yet at some point, specs and commercials will start putting on the reverse spread (i.e., buying live cattle and selling feeders/corn) in combination, betting that bleak margins will have to improve in order to supply minimum beef production needs.”

Harrington — who is usually the model of optimism — added yet more caution. “Hedgable margins are nowhere to be seen, either relative to real time commodities or on paper. Having said that, this makes feeder futures extremely vulnerable if corn goes into orbit. … Ranchers should be paying heed — spec and commercial buyers of feeders could easily become a dying breed of trader.”