Cattle market shifting as corn prices climb

Oct 22, 2010
by DTN

Cow/calf producers and backgrounders who can hold onto animals a little longer and add forage-based pounds should be in a sweet spot to sell going into 2011. Corn prices, spurred ahead by lower-than-expected production and a drop in carryout, will now encourage feeders to opt for heavier animals than they may have wanted just a month ago.

That’s according to Glynn Tonsor, agricultural economist at Kansas State University. He believes the value of a 900-pound animal relative to a 400-pounder is higher today than it was a month ago, due to the change in the corn market. That will put some real pressure on fall calf prices.

“As a result, I think you’ll see more cow/calf operators look to retain ownership, maybe through the background stage,” says Tonsor.

“It may well be worth keeping that animal till it gets to 700 pounds, even if this is just a one-time deal for the producer.” Backgrounders, he adds, will think about turning 400-pounders into 900 pounders, due to the price scale change.

The incentives may get stronger as the corn market sorts itself out. To put it into perspective, new crop ending stocks have declined over 200 million bushels to 902 million. That lowers the stocks-to-use ratio to around 6.7 percent. The last time the market saw that, back in the summer of 2008, spot corn prices were $6.42.

While feed prices are the gorilla in this market, they are just one factor. Another one that’s hard to overlook is the decline in overall herd numbers in the U.S. Tonsor says he doesn’t see the trend shifting until 2012 or 2013.

“The main reason for this decline, which is a long-term trend, is that we’re simply producing more meat on fewer hooves. Feedlots are looking at tighter supplies, and that is a positive for feeder cattle prices. But at the same time, with corn prices climbing, their returns aren’t as rosy as they were earlier in 2010. They will put more pressure on feeder prices at the producer level as a result.”

Beef demand, both abroad and domestically, is another market key, and one that is a little mixed. On the plus side, as the dollar weakens, it creates more demand from global importers for U.S. products like beef. Tonsor says he doesn’t expect exports to get a lot better next year. But compared to one or two years ago, they are a positive. The improvement in beef exports and reduced domestic beef production is predicted to lower per-capita net beef supplies by 1.3 percent in the last quarter of this year. That decline is expected to continue into 2011.

Domestically, Tonsor says there is reason to continue to be concerned about beef demand. “The unemployment rate is stagnant and this is a case where, when folks are worried about their jobs, they will hold dollars tighter. Beef demand is always influenced more than pork or poultry by declining incomes or consumer concern over future incomes.” — DTN