Feedlot margins for finishing cattle have been largely mixed over the past few months, although one particular dynamic has been featured. Margins for animals already on feed remain much more depressed compared to deferred margins, where feeder cattle contracts have yet to be priced. The reason why has to do with the fact that if the cost of feeder cattle has already been determined, the sharp decline we have experienced in cattle since the beginning of the year has not been matched with a similar cost savings in corn.

As we begin the new year in 2013, dairy producers have a lot to be hopeful for as forward margins through next several quarters are projecting profits at relatively high historical percentiles.

Contrary to what many may have believed to be the case given the circumstances, projected forward profit margins for dairy producers actually improved over the summer as the increasing value of milk has more than offset surging feed prices due to this year’s historic drought. This puts dairies in an enviable position relative to their counterparts in the swine and beef cattle industries, where profitability at relatively high historical percentiles can presently be secured through the second half of 2013. In fact, forward profit margins currently exist at or above the 80th percentile of the past 10 years from Q4 2012 through Q4 2013 based upon our model dairy analysis.

Profit margins for dairy producers have improved significantly over the past quarter since our last update in October, due primarily to an increase in the value of milk. While feed costs did come down over the last couple months due to lackluster demand, a recent sharp advance in price has been noted in both soybean meal and, especially, corn due to weather concerns in South America. From a historical standpoint, margins are stronger in nearby periods through the first half of 2012, but above average throughout the entire year. While not overly profitable, it is still possible for a dairyman to protect a positive margin throughout the entire year with flexible strategies that would allow for improvement over time.

Profit margins for dairy producers have remained relatively steady over the past few months since our last update in July. While the forward margins themselves have not changed much, movement in the individual markets has been significant. From a historical standpoint, margins remain below average within the context of the past five years, although they are positive through Q3 of 2012. Given this outlook, it will be important for producers to carefully manage their forward profitability such that they preserve a positive margin without giving up the opportunity to participate in stronger returns should that materialize over time.