A few thoughts by John Nalivka: Record high feeder prices = high break-evens = red ink

This past week brought back memories of 2015-16 when record-high feeder cattle prices
led to significant red ink in feedlots (unhedged). Using a March 6 feedlot placement week,
the first cost of cattle into the feedlot for the 775 lb. feeder steer that was finished and
slaughtered last week was $372.44 / cwt. That steer was on feed for 212 days and fed to a
record-heavy finished weight with a total cost of gain of $714. The Nearby Corn Futures
close last week was $4.11 / bu. and the Prime Interest Rate was 6.75% when those cattle
were placed on feed. With current steer carcass weights running at or near 980 lbs., the
liveweight of 1,550 lbs. leads to a breakeven price of $244/cwt. resulting in a feeding loss
of – $340 against the 5-Area Direct Negotiated steer price of $219.80/cwt.
So, let’s step back in time to 2015. For the week ending Oct. 2, Sterling’s calculation shows
a feeding loss of – $490 for cattle hitting the show list that week against a 5-Area Direct
Negotiated Steer price of $165.77 / cwt. The cost of feeders going into the feedlot in March
of that year when those cattle were placed was $214.63 / cwt with a total cost of gain at
$476. The Nearby Corn Futures close for that week was 3.91 / bu. and the Prime Interest
Rate was 3.25%. The estimated breakeven for those cattle was calculated against a sharply
lower finished weight compared to this year as the carcass weight for steers that week
averaged 924 lbs. suggesting a live slaughter weight of around 1,450 lbs. and 100 pounds
less than the current slaughter weights.
We know the ultimate impact of record-high feeder cattle prices leading to significant losses
in the feedlot resulting from high break-even prices during 2015. There was a sharp
adjustment to both the feeder cattle and slaughter cattle market. We have seen somewhat
the same result in 2026, but certainly not to the same extent as in 2015. The question
becomes whether the current market adjustment will continue down the same path as in 2015.

There are two parts to the answer: (1) the pace of herd building and additional cattle
numbers and (2) beef demand. Regarding (1), increased cattle numbers are not on the
horizon as herd building is slow at best and (2), demand is much stronger than in 2015 and
indications are it will remain solid. Therefore, while high feedlot break-evens are significant,
slow herd building and strong demand are likely to play the dominant role in the market
outlook.
One other important aspect to feeder cattle prices moving forward is feedlot capacity. With
the likelihood of slow herd building, there will be an adjustment. From the packer
perspective, capacity today is about equal to what I have estimated for 2015 and utilization
of that capacity at 80% is about the same as it was in 2015.