Counting beans... or is it corn?

Apr 5, 2013

USDA’s most recent corn inventory report pulled the feeder cattle markets out of a nose dive last week. USDA seemed to find another 400 million bushels of corn to supplement the industry’s current supply, which is at 5.4 billion bushels. Most market analysts were quite surprised at USDA, mostly because the average analyst’s guess was not even close to the mark. US- DA is also being questioned over their ability to count.

The corn report sent corn prices into a tail spin, losing nearly $1 in the three days that followed Thursday, March 28. Conversely, feeder cattle were up the limit, $3, that Thursday and have been quite strong since, which suggests that the low for feeder cattle may have arrived.

Forecasts for this next summer’s corn crop are optimistic, but they always are before the corn is sowed.

The major consensus is that farmers will plant 97 million acres of the golden grain. The last time that much corn was planted was in 1936, back when they used mules to do much of the work and most of the population was still in agriculture; yields were perhaps a third of what they are today.

If USDA and the market watchers are close to right, we will see a 2013 corn crop of over 14 billion bushels. Then there should be plenty to go around. The current estimated inventory of 5.4 billion bushels was over 150 million bushels above the highest pre-report estimate and over 400 million, or 20 percent, above the average pre-report guess.

This suggests far less corn usage since Dec. 1. Corn usage for ethanol production has been sharply lower but this also suggests a much lower feed usage as well, even though meat and poultry production has been much higher. I have to echo the thoughts of Steve Meyer and Len Steiner at CME Group. “To say the least, the grain stocks numbers still mystifies us a bit.”

They also said that, “New crop futures are now within $0.70 or so of USDA’s forecast 2012-13 season average corn price of $4.80. With so much risk still ahead for this crop, it is probably time to start pricing feed needs for 2012-13 — not all feed of them yet, but some. If the weather is good, $5.50 corn futures will be corn that feeders buy this year but they may also be the cheapest.”

The relationship between corn markets and feeder cattle markets found their normal trading relationship; I suppose the numbers were too big to ignore.

But feeders have found a stronger cash market since the big corn dive. Feeder cattle in California were reported trading $10-15 stronger on calves and yearlings while most Midwest auctions were reporting a $4-8 stronger market. It’s good to see the feeders pick up after a two-and-a-half month decline.

Cattle feeders have clearly pulled back on buying replacement cattle, which showed in the March 1 placements of feeder cattle down 7 percent over a year ago and the lowest February placements ever. Profitability may return to the cattle feeding sector with lower-priced feeders and lower feed costs. Jim Robb at the Livestock Marketing Information Center said that their estimated average closeout for January-placed cattle was at $1.40, February was at $1.36, and the close out for March-placed cattle is $1.31.

With smaller supplies of finished cattle anticipated over the next few months and the cyclical demand expected to pick up as well, we can only hope we’ll see the rest of the cattle industry heal. However, that consumer demand thing is still over our heads.

The typical increase in beef demand going into early summer is 6 percent, and then around July, consumers start to back away from beef. Much of the increase in consumer demand will depend on the volume of retail beef featuring. Last year, featuring was poor because of weak retail beef margins. Margins could only support $122 live cattle prices. This year, margins have improved. Current retail beef prices can support a cash price of $128, which we are currently at.

It could still be a rough summer for beef sales but it appears that the feeding sector is inching closer to some profitability. If we get the corn crop that the forecasters are anticipating and we know that the nation’s cow herd is still getting smaller, there will be no supply side issues and feed should be much less expensive. But there is still concern that hay prices may not be that much lower, especially if this drought persists. — PETE CROW