It’s not all bad

Jul 20, 2012

The cattle business is in the midst of a profitability alignment. Feeder cattle are getting cheaper, fed cattle are going higher. The only problem is what to feed them, especially for the rest of this summer. Cattle feeders certainly have their summer feed bought, but have to deal with this hot weather when cattle don’t perform as well. There is really nothing to like in the cattle feeding business right now with the heat and the estimated break evens between $200 and $280, which would be the Livestock Marketing Information Center’s estimate.

Last week, the markets pulled a fast one that I’m still having a hard time figuring out. Corn moved up the limit, feeder cattle moved up the limit, and fed cattle moved up near the allowable trading limit. When corn goes this high, feeder cattle just aren’t supposed to go limit up. Talking with some analysts, the only thing they could come up with is institutional traders simply thought feeders were too cheap and over sold. Let’s hope they keep thinking that way.

The big news all week has been corn. The national news has picked up on the story and the government has put over 1,200 counties on disaster alert and opened up some grazing ground. I would imagine that the insurance payouts will be pretty big on some of this farm ground.

USDA started their forecasting on a very optimistic note, but has been readjusting their crop forecasts drastically every time they come out with one. Just last week they were forecasting yields at 144 bushels an acre, and this next week were expecting to see yields move down to the 130 zone. We’ve gone from a 14 billion bushel forecast to an 11 billion bushel forecast in just six weeks. There is going to be a real battle for feed going forward. We even heard one report that some outfit plans to import 1.1 tons of corn from Brazil. Now that would be a first.

The last big widespread drought was in 1988. This last week, the amount of corn in good to excellent range was 31 percent, down 9 percent from the prior week. The same week last year, the corn crop was at 55 percent good to excellent, and the 10-year average for this week is generally at 63.8 percent of the corn crop in good to excellent condition. To date, 38 percent of all corn acres are now rated at 38 percent in poor or very poor condition. Last year at this time it was only 10 percent.

On top of it all, the ethanol industry is sitting on the fence. There have been plenty of reports of multiple ethanol plants shutting down. The price of oil and the price of ethanol just isn’t working either. Some of the cattle feeders are concerned that they won’t be able to buy any distillers grains, which will also have an impact on those guys with the little grow lots.

The fuel refiners have a little known tool in their tool box known as Renewable Identification Numbers (RIN). With a 50 percent surge in corn prices stirring fears of global food inflation and threatening to revive the debate over using crops for fuel, traders are using the RINs to demonstrate to the government that they are meeting the government mandate on their ethanol to use a set amount of renewable fuel every year. It’s kind of like a trading card worth a set amount of ethanol and was set up for situations like we’re currently in.

The cattle business nationwide is in drought mode. Calves are already being weaned and cows are going to market. The corn that is already ruined that has a little volume is being chopped up and going into a silage pit just to keep the herd together.

There are going to be a lot of light calves offered and if a guy has the feed, there is a big opportunity lying ahead.

This drought is rated as one of the worst on record and it’s going to take a lot of creativity to keep an operation going, depending on where you’re located. But there are some parts of the country in good shape. Several folks have told me that along the Texas Gulf they’re getting along pretty well, when last year they were in dire straits. Demand for cows is pretty good in that country. And I would bet they are able to re-stock at the same price levels they had to liquidate at.

You should also expect hay prices to get a little higher, too. I would expect there will be a lot of light calves that will need to eat something, especially if we’re not able to make any winter feed. And I suppose we should forget about seeing the national cow herd grow at all this year. We will more than likely see another significant drop in the national cow herd. — PETE CROW