Feeder cattle lower due to rising corn

Cattle Market & Farm Reports, Editorials
Oct 30, 2006
by WLJ
Fed cattle trade was again slow to develop in a very cautious market. At mid week, feeders were holding out for $90 and packers were offering $85. Packers have had positive margins over the last few days; that margin was only about $5 a head and history has shown us that it doesn’t take a packer long to give it all back to the feeder.


Only 14,000 head had traded through Thursday at $87 live, $137.00 dressed. Trade was expected to wait until Friday to get underway at steady money.


Slaughter levels were fairly strong even though packers announced that they intended to cut slaughter levels for the next six weeks or so because of weak beef demand. That didn’t seem to last long as daily slaughter levels were in the 126,000-128,000 head range for most of the week. If packers are serious about lowering slaughter levels, it usually shows up on Friday or Saturday, which haven’t been down significantly. Last week the industry processed 639,000 head. Last year, 621,000 head were processed at that time. So far this year, the industry has processed 962,000 more cattle than a year ago, or just a touch over a billion pounds of beef.


Futures markets were fairly flat until Thursday when live cattle jumped $1.70 on the nearby contract and $2 on December to close at $90.65. Some of the speculation for the market strength was the storm market, which was fairly limited and won’t have much effect. The boxed beef cutout values were holding their strength at current market levels and supporting live values. The idea is that cattle feeders may be more current than many thought because slaughter weights have topped out, signaling their seasonal high.
The beef markets have maintained some good strength. The Choice cutout was at $147.68 and Select was at $137.60. Trade volume was very good on the 25th but lackluster for the rest of the week. The cow beef cutout has been much stronger in recent weeks at $106.57.


The trim markets have also been good with 90 percent lean trading at $133.99, but the 50 percent product was at a low price of $36.83.


The corn markets are where everyone’s attention is. Both the futures and the cash markets have a good head of steam on them and are moving the corn markets rather well. According to Dillon Fuze, extension economist at University of Utah, the ethanol industry is on a roll.


Corn


The ethanol industry is in the middle of a major expansion. Government regulated clean fuel regulations and $75 per barrel crude oil prices have created a major incentive for the ethanol industry to expand. There are 97 ethanol plants operating and 35 more plants are under construction. The ethanol industry is now using more than two billion bushels of corn. That represents about 18 percent of corn use and that percent will likely exceed 20 percent in the near future. Ethanol production is expected to increase another 35 percent in the next cropping year. What impact will that have on corn prices and how might that impact the cattle industry?


A look at the Chicago Board of Trade December corn futures provides some insight: December 2006, 2007, 2008 and 2009 prices were $2.43, $2.88, $3.09 & $3.18, respectively on Sept. 11, 2006. From 1960-1972, the farm price for corn averaged $1.13 per bushel and the fed cattle price to corn price ratio averaged 24. Increased exports of corn increased the average price of corn to $2.46 per bushel from 1973-1996 but fed cattle prices also increased and the fed cattle/corn price ratio averaged 26 over that time period. However, the last 10 years have seen corn exports flatten out and corn production increase. Farm gate corn prices have averaged only $2.14 per bushel from 1997-2006. Fed cattle prices have moved to record high price levels over that time period and the fed cattle price/corn price ratio grew to an average of 35. Relatively cheap corn has been a factor in the increase in fed cattle slaughter weights and has influenced the proportion of calf-fed versus yearling-fed cattle.


If the trend towards higher priced corn, as projected based on Chicago Board of Trade December corn futures, is correct, how will sustained higher corn prices impact the cattle industry? Will some of these feeding trends that I just mentioned be reversed? Will we see lighter fed cattle slaughter weights? Will we see calves being grown to heavier weights outside of the feedlots before being placed on feed? If corn price increased and all other factors remained constant, I think I would be safe in concluding that weights would decline and that cattle would be placed at heavier weights. However, there will be competing and offsetting forces at work in the market. If more calves are placed in background and stocker programs, that would tend to increase the price of corn stalks, silage, summer grass, and wheat pastures. Given present cattle numbers, there is an excess feedlot capacity. Owners of those feedlots will not likely want them to be empty. Feedlot economics is like the tourist and motel business; you have got to keep the rooms full to be profitable. Will cattle feeding location shift towards proximity to the ethanol plants (Iowa, eastern Nebraska)? Research has shown that feeding ethanol byproducts can fit well in a feedlot ration. Dried distillers grain, wet distillers grain, and wet corn gluten are some of the more popular by-products. The dried distillers grain can be shipped economically some distance. The wet distillers grain and the wet corn gluten must be fed fairly close to the plants for it to be economical. Will we see an increase in cattle feeding in the Corn Belt and a decrease in the Great Plains? Probably, but I think there will again be competing forces at work in the market that will limit growth in Corn Belt cattle feeding. The current excess feedlot capacity that I already mentioned is one factor and the location of fed cattle slaughter plants is another factor. Environmental regulations in the more humid and more heavily populated Corn Belt region, compared to the high Plains, will likely also curtail feedlot expansion in the Corn Belt.


I don’t have all (maybe none) of the answers to many of the questions that I posed in this article. However, I think we all need to ponder the questions. There is not likely an economist smart enough, or a model sophisticated enough, to foresee all of the changes over the next few years. However, I am a strong believer in the power of the market place to allocate resources based on market prices. The price of corn and the price of soybeans cannot get too far out of equilibrium before acreage devoted to each crop will be altered to bring the prices back into an equilibrium close to the cost of production. I do think we will see higher and more volatile corn prices in the future. That will impact cattle feeding profitability. Cattle feeders will not bear all of that added risk and reduced profitability. They will pass some of it back to cow/calf producers and stocker operators in the form of lower, and perhaps more volatile, calf and feeder prices. I would suggest cowboys do what they always do: pull your hat down, tighten your cinch, and hang on for the ride.


Feeder cattle


The cash feeder cattle market moved mostly higher last week, with the exception of the far northern tier, which was impacted by some severe winter weather, particularly in Montana where prices were depressed as a result of the weather. Feeder cattle futures were mostly uneven last week, but remained mostly steady with the prior week.It appeared that the potential for a higher cash fed cattle market last week was lending support to cash feeder cattle in the country. Three consecutive weeks of lower trending Chicago Mercantile Exchange (CME) trade and higher Chicago Board of Trade December corn prices were shrugged off by the cash market last week, despite feedlots having to sharpen their pencils to recalculate breakevens now that the cost of gain has risen. Particularly for feedlots which haven't locked in corn prices for the winter, those costs are significantly higher for the first quarter of 2007. Last Thursday, December new crop corn was trading in a range of $3.25 to $3.30 per bushel, with analysts predicting it could move higher.


According to reports, winter wheat pasture, a favorite ration for southern Plains backgrounders, has now received adequate moisture levels over most of the winter wheat region to give the crop a good stand, but many graziers have yet to purchase their stocker cattle. This demand should come into play soon as temperatures cool down and sickness becomes easier to manage in newly received cattle. The improvement of wheat grazing prospects will be a benefit to southern Plains markets, particularly since last year cattle backgrounders had difficulty finding adequate pasture to graze cattle.


In Crockett, TX, last week, feeder steers and heifers traded steady to $2 higher. Trade and demand was called strong. In Oklahoma City, OK, compared to the previous week, feeder cattle sold $1-2 higher with good demand for limited numbers since most cattle were marketed early in the region as a result of the summer drought. However, the feeder supply was much improved compared to recent weeks. Steer and heifer calves were $2-3 higher also with good demand, especially for long weaned calves.


In West Plains, MO, compared to the previous week, the steer and heifer market was $2-5 higher. Several light steers calves under 450 lbs. at the start of the sale sold $8-12 higher, but only briefly. Supply was called moderate and demand moderate to good, with most buyers being fairly selective for quality and condition with the majority of sales toward the upper end of the price range being weaned or at least having one to two rounds of vaccinations. According to market reports last week, the one thing that will get most order buyers' attention and bring them to the front edge of their seats during these times of high feed costs, depressed futures and fat cattle, is a good set of weaned/vaccinated calves in right flesh showing characteristics of overcoming shipping stress with a minimal cost start-up.


In Dodge City, KS, last week, steers 300-600 lbs. were steady to $3 higher, with some sporadic instances of $6 higher on weaned 400-450 lb. steers. Those in the 600-700 lb. range were steady to $3 lower, while 700-950 lb. steers were called steady to $3 higher. Heifers from 300-450 lbs were steady to $3 higher, with some instances on weaned 400-450 lbs. of $6 higher. Heifers in the 450-700 lb. range were weak to $4 lower and those 700-950 lbs. were steady to $3 higher.


At Loup City, NE, in contrast to the prior week, steers and heifers traded $2 either side of steady with the bulk of offerings trending steady on a lighter than normal run of cattle. Demand was called moderate to good at the sale.


In Aberdeen, SD, at Hub City, compared to the prior sale, feeder steers and heifers sold steady to $3 lower with the best demand for reputation steers over 600 lbs. and fancy heifers which will be working in breeding herds.


As mentioned earlier, Montana feeder cattle markets were hampered by weather early last week. At Billings, MT, compared to the prior week, steer calves were $3-8 lower, except those in the 400-450 lb. class which sold $9-10 lower. Heifer calves were $3-7 lower, except 350-400 lb. heifers which were called rather steady on light demand.


At the market in Jerome, ID, feeder heifers in the 400-500 lb. range sold in a wide spread of $92-110 and 500-600 lb. range from $97.75 to $109. Steers in the 400-500 lb. range sold from $110 to $120. Those in the 500-600 lb. class sold in a range of $104-114 and steers in the 600-700 lb. range sold from $96 to $108. Heavy 700-plus pound cattle sold in a narrow spread of $95-99 last week.


In Davenport, WA, compared the previous sale, a good run of cattle and calves were uneven, with weights less than 600 lbs. and all heifers selling $2-4 higher. Steers over 600 lbs. were called steady to $2 lower. Trade was moderate to active with moderate demand.


In Vale, OR, the market last week was steady on moderate demand for calves in the 300-500 lb. range. Those weights over 600 lbs. were $2-3 lower than the previous week. Cattle in the 500-600 lb. class sold in a range of $104-112 and yearling steers from 700-900 lbs. sold in a range of $87 to $97.

 
Last week, feeder cattle contracts on CME were mostly mixed to lower, with the rising grain market taking its toll on contract trader's nerves. Despite that, the grain market showed some weakness last Thursday and feeder cattle futures rose slightly higher across the board in last Thursday’s session. The October contract closed the day at $107, which was 30 points higher, and even with the week prior average. November was up 30 points as well, closing at $104.75. December was slightly higher at $102.80, March was up 22 points at $101.57 and April, the biggest gainer of the day, closed up 45 points at $101.55. Market analysts last week said any weakness in the corn market could provide a rallying point in the feeder cattle contracts.

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