Corn prices continue to move higher

Cattle Market & Farm Reports, Editorials
Oct 30, 2006
by WLJ
— Additional price increases expected to further pressure market.

The recent run up in corn prices has had corn users scrambling to lock in prices if they haven’t already done so. Analysts are encouraging the move, saying the price could be set to rise higher when USDA releases the next corn crop update next month. Many analysts are predicting the harvest estimate to be revised lower as a result of lower than expected yields, particularly in portions of Iowa.

Dan Childs, ag economist with the Noble Foundation at Ardmore, OK, speaking at the Greater Oklahoma Farm Show recently said producers are going to have to look more closely at supplemental feeding programs and put a pencil to cost of gains as a result of the rise in grain prices. He said a recent price rally and tight corn supply report may be attributed to the ethanol boom and could put downward pressure on feeder cattle.
“We may not see $1.80 corn for a long time,” Childs said. “I don’t think we will be able to send calves into the feed yard like we have been. We’ll have to find some way to keep these calves at home.”

Robert Wisner, agricultural economist with Iowa State University, said the Oct. 12 corn crop report put total yield almost a billion bushels below expected market demand for the marketing year despite being the second largest crop on record, if yields reach the report’s projections. The yield, at 10.9 billion bushels, had pushed prices past $3.30 per bushel on the Chicago Board of Trade last week, with some analysts predicting it could go higher during the marketing year.

“This year’s shortfall can be met by drawing down the large carryover stocks that were built up in the 2004-2005 marketing year. However, USDA currently projects August 31, 2007, U.S. corn carryover stocks at 996 million bushels. That is only a 4.4 week supply available a little more than a month before the main Corn Belt harvest season gets into full swing,” Wisner said. “Reducing the carryover stocks by another 200 million bushels next season, with prospects for total use in the 12.5 to 12.6 billion bushel range, would put the carryover at a 3.3 week supply. That would be a very tight old-crop situation.”
He said there is a possibility USDA would move the estimated national yield lower again when it issues the Nov. 9 report next month.

He said there were 14 years between 1965 and 2005 when the yield estimate declined from September to October.

“Seventy-one percent of those 14 years had a further decline in the season final estimate. The average 2.8 percent decrease, if it occurred this year, would lower the U.S. corn crop by another 310 million bushels and would create a 1.3 billion bushel production-use deficit unless prices rise enough to ration use,” Wisner said. “That would bring August 31, 2007, U.S. corn carry over stocks down to about a 3.2 week supply. In 1995-96, the year when central Iowa cash corn prices were above $5 per bushel for six months, the U.S. corn carry over stocks were a 2.6 week supply.”

Those projections are making many corn growers wish they still had corn left to sell since much of the crop this year has been forward contracted.

For cattle producers, the result of the price increases means additional pressure on feeder calf markets and increasing costs of gain for feedlots. According to Chris Hurt, Purdue University extension economist, the rise in corn prices and subsequent drop in calf value has resulted in a $1.9 billion decline in annual returns for cow/calf operations. He also said excess feedlot capacity has also been costly for that segment raising feedlot breakevens.

“However, learning to feed distillers’ grains at much higher inclusion rates remains the opportunity,” Hurt said.

How the industry will respond to higher feed grain costs is yet to be determined, however, Hurt said the effects were already becoming evident.

“The latest USDA cattle on feed report gives just a few clues (to how the industry will respond). Placements were down 5 percent, indicating less willingness to put cattle in the feedlot with such an uncertain feed price situation,” he said. “However, the October cattle on feed report is still not current enough to reflect the direction of feedlots yet. It is for the month of September, and much of the corn price increase came in October.”
Hurt said over the last month, feeder cattle prices have shown the effects of the rise in price.

“November feeder cattle futures, as an example, dropped $10.87 from mid-September through October 20. Cash prices for 500-550 pound steer calves at Oklahoma City, OK, dropped by $10.59 per hundredweight. So the initial surge of higher feed prices is being felt most heavily by two industry sectors. The first is feedlot managers who paid high prices for calves and did not have their needed feed costs hedged,” Hurt said. “The second, and biggest losers from much higher feed prices so far, are the cow/calf operations and some backgrounders. The cow/calf segment is particularly hard hit as lower calf prices can be expected as long as feed prices stay high, or until distillers’ grain use can help moderate overall feeding costs.”

According to Wisner, ethanol production, creating the opportunity for feeding distillers’ grains, is only going to grow. According to him, ethanol production is expected to use 34 percent more corn during the upcoming marketing year than during the current year. Although the expected short fall can be met with the carryover stock from the 2005/2006 marketing year, the number of acres planted in corn next year will likely increase to meet future demands, according to Wisner. He said next year’s planted acreage will likely grow by 9 to 11 percent to meet the growing demands of the industry, although that number is subject to market forces and growing conditions at home and abroad. — John Robinson, WLJ Editor