Corn market rises, causes pullback in feeder prices

Markets
Sep 17, 2010
by WLJ

Trade started out mostly steady last week with early reports of $98 live cattle sales in the southern Plains and $153-155 dressed trade in the northern Plains and Corn Belt. The steady trade last week was a positive for the industry, as many analysts were expecting trade to move lower as a result of the erosion in beef cutout values over the previous two weeks. At midday last Thursday, Choice had declined 76 cents from the previous day to reach $157.52 while Select was down 26 cents at $151.17.

Much of last week’s positive action was the result of an improvement in live cattle contract prices, which have been moving higher in the wake of the upward surge in the corn markets, which were nearing $5 per bushel last week. The October live cattle contract last Thursday moved 60 points higher to hit $98.72 while December also gained 60 points to reach $101.37 in midday trading. February added 32 points to reach $102.40 while April rose 60 points to hit $103.50.

Many in the industry were expecting last week’s trade to hold off until after the release of the USDA cattle on feed report last Friday. Analyst estimates showed that they are predicting cattle on feed numbers will rise 1.1 percent from last year. Expectations for placements were also positive, with the average estimate showing a 0.6 percent decline in placements during August. Marketings were expected to show a sharp increase due to the addition of one extra slaughter day during the month. The average of analyst estimates showed expectations of a 6.2 percent increase in August marketings.

Chicago Mercantile Exchange analysts Steve Meyer and Len Steiner said last week that the increase in contract prices during August might have prompted cattle feeders to ramp up placement levels during the month on expectations of an improvement in spring prices.

"Also, rising beef prices and reports of strong export demand were supportive of getting more cattle on feed," they said. "The big negative for feedlots remains the sharp rise in corn prices. December corn prices started around $3.90 per bushel in August and closed the month about 50 cents higher. That may not have been enough of an increase to cause feedlots to fully apply the brakes, but probably enough to temper some of the enthusiasm of $100-plus cattle this winter."

Going forward into fall, that enthusiasm could see additional cause for concern. Not only have corn prices continued to rise toward the $5 level, but there has also been talk that the structure of the futures market could begin to create a backlog of cattle in feedlots through the winter as cattle feeders work to feed into the premiums available in the spring months. If the deferred months continue to trade at a significant premium through the winter, it could cut into those prices, meaning that feeders should look to protect their risk if they are looking to market cattle in the spring. That risk appears high unless consumer or export demand show significant signs of increase in the near future.

However, that demand scenario appears unlikely. Several analysts last week noted that additional downside for composite boxed beef prices was possible over the week ahead as rumors have started circulating that packers will begin to scale back production to support the sagging cutout, according to Troy Vetterkind of Vetterkind Cattle Brokerage.

"The boxed beef markets were softer again (last Wednesday) as spot demand is not meeting expectations," said Vetterkind. "Attitudes within the cash beef trade are that most are only willing to buy at their price, and this showed yesterday with packers offering discounts in chucks, rounds and loins, with sales volumes going up."

He noted that products for the trim and grind markets were also sharply lower last week, creating softness in the cow beef cutout.

"The beef trade feels like it can drift lower going into next week, which is going to keep pressure on packer margins," said Vetterkind.

On top of the softening in the domestic market, exports were also off last week, creating additional price pressure for the beef markets. Net beef export sales were down 35 percent from the previous week and 43 percent from the four-week average, totaling just 6,700 metric tons last week.

Feeder cattle

Feeder cattle markets have come under pressure from the rise in corn prices and were trading mostly lower last week. Fortunately, for producers, live cattle prices have managed to maintain their positive momentum, so price declines have been minimal, however, analysts are urging caution and warning that if fed cattle prices slip back or if corn continues higher this fall, feeder cattle markets could break lower.

On the corn market front, USDA has already lowered expectations for this year’s corn crop. The World Agriculture Supply and Demand Estimate, released Sept. 10, lowered expectation’s for this year’s corn crop to 12.1 billion bushels. Despite the fact that the decrease was widely expected, it still pushed corn prices higher. There are additional increases likely in the future as export demand for U.S. corn appears likely to increase and foreign growers encounter problems with their crops. In addition to demand, supply numbers for the 2010/2011 marketing year may also add to the volatility. There have been widespread reports of disappointing yield numbers coming out of the regions where harvest is already underway. If that trend continues north when Corn Belt harvesters begin, it could send corn prices sharply higher, cutting into feeder calf prices during the peak fall marketing period.

Last week in Oklahoma City, OK, demand was tempered by the rise in corn prices as buyers took a wait-and-see approach to the markets. Feeder steers traded $1-3 lower and feeder heifers were called $2-4 lower. Steer and heifer calves were called $2-5 lower on moderate to good demand. Market reports indicated that despite some rain in areas last week, farmers are having difficulty with this year’s winter wheat crop, with a mixed bag of conditions leading to either too much moisture in fields to get the crop in, or not enough rain to get the crop established in places where fields have been planted. This could cut into southern Plains prices and demand if winter wheat pasture grazing plans are affected.

Meanwhile in West Plains, MO, steers under 400 lbs. and the long-weaned 550-700 lb. steers and yearlings traded steady to $2 lower. Steers in the 400-550 lb. class sold $2-5 lower. Heifers were $3-6 lower with some spots of $7 lower noted on moderate supply and uneven demand. Buyers were reportedly very selective, discounting lots of unweaned calves without vaccinations.

Higher feed costs continue to be an issue here as well, causing some farm feeders to reconsider whether to buy calves or sell corn this go round, according to market reports.

Farther west in Torrington, WY, last week, steers and heifers over 600 lbs. were called steady to $3 lower, with no test on lighter weights. Demand was called moderate to good at the sale. At the sale in St. Onge, SD, feeder steers sold mostly $1-2 lower on a smaller run than the prior week’s sale. Feeder heifers sold mostly $2-3 lower, with good buyer attendance and moderate demand noted.

On the coast, at Madera, CA, stocker and feeder cattle sold steady in a moderate test of the market. Steers in the 500 lb. class sold from $99-120 while heifers were $2-10 back. Steers in the 700 lb. class brought a range of $90-102. Meanwhile, at a special anniversary sale in Cottonwood, CA, a good run of quality cattle saw strong demand last week on the calves and yearlings, which sold $2-8 higher than the prior week’s sale. — WLJ

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