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RIDING THE GAP
Good as Gold |
By Wes Ishmael |
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 So,
this is what a modern-day gold rush looks like.
According to the Livestock Marketing Information Center (LMIC),
based on weekly data, for the first three quarters of this year,
Omaha corn prices averaged $2.04 per bushel compared to $1.81
last year; about 3% less than the 2000-2004 average. In early
October, Omaha corn prices were over $2.40 per bushel. By the
first week of November, December corn futures at the Chicago
Board of Trade (CBOT) hit a 10-year high at $3.44.
“Cash grain prices were up 25 percent during the month of
October and are now twice year-ago price levels,” said analysts
for the Agricultural Marketing Service (AMS) at the time. “It’s
not that there is a shortage of America’s favorite cattle feed;
estimates are projecting this year’s crop to be the third
largest in history. CBOT corn contracts are selling on
excitement from the growing ethanol industry and an increase in
export demand. Speculators have jumped on the bandwagon and are
said to hold an estimated net-long futures position greater than
250,000 contracts. Cattle feeders can only watch in disbelief as
they continuously refigure their projected cost-of-gains.”
True enough, but there are also supply-side fundamentals in
play.
At the annual meeting of the Texas Cattle Feeders Association
earlier this fall, Randy Blach, executive vice president of
Cattle-Fax, explained the percentage of corn used for ethanol
production this year will be about 14%. It ran about 11% the
previous three years. Corn usage for ethanol is projected at 19%
next year. If all of the proposed ethanol plants get built that
are being considered currently, that rate could multiply
exponentially.
While U.S. corn production continues to defy the odds, global
production was down this year. All told, Blach explained, the
Corn Stocks to Use Ratio for this year is anticipated to be
8.3%. That would be only the fifth time since 1960 that ratio
has dipped below 10%.
The Weight of Corn
“This is not a short-term spike (corn prices). There won’t be a
correction overnight,” explained Blach. He points out increasing
the cost of corn about 50 cents per bushel, typically decreases
the price of feeders about $6/cwt. and the price of calves about
$7/cwt.
In fact, by the end of October, AMS analysts observed, “Calf
prices have been steadily losing ground for a full six weeks,
basically since the spring calf crop started hitting the
Midwestern auctions early this fall. Losses have been most
severe on the fleshy un-weaned calves that lack their
vaccinations, while the market for pre-conditioned calves and
yearlings was able to stave off the bulk of the pressure.
However, the last three weeks of sharply higher CBOT grain
prices have taken their toll on yearling feeders; even the
fanciest longtime weaned calves with multiple series of shots
are not immune to the market pressure that $3 corn has brought.
The sudden surge in the corn market was not expected (especially
right during harvest) and has caused cattle feeders to refigure
their cost-of-gains.”
In mid-October the folks at AMS pointed out calf prices in some
areas had dropped as much as $20/cwt. during the previous four
weeks.
LMIC analysts explain that in their calf and yearling price
forecasts for 2007 and 2008, most of the predicted price
declines are due to higher corn prices.
At the same time, Blach emphasized, “Herd expansion has slowed
not stopped.” He expects the January 1 numbers to show a 1%
increase in cow numbers, compared to the 2-3% increase most
market analysts expected at the beginning of 2006. While it’s
true that cow slaughter through September was 17% more than the
previous year, Blach emphasized that rate still made for the
third smallest in the past three decades. He added that analysts
expect the nation’s cowherd to grow for the remainder of the
decade.
Domestic demand has lost some ground, too, though exports are
growing slowly. More precisely, Blach noted that while aggregate
domestic beef demand had shrunk for the previous six quarters,
demand for Choice and higher grading beef continues to increase.
“We’re producing about 25 million pounds of beef per week more
than last year,” said Blach. That’s the equivalent of the 5-6%
increased production expected and seen through September of this
year. “Normally that kind of increased production would equate
to about a $5 change (decrease) in fed cattle prices. We’re down
about $2. I think that underscores the importance of trade.”
Specifically, Blach estimates net beef supplies for the year
will only be up about 2% because of increased trade.
Despite all of that the cattle market has performed
remarkably—who would have guessed they could sell calves for
more this fall than last—price-pressuring supplies are
increasing, too.
Overall, the folks at LMIC say, “For the year, fed cattle prices
are expected to average about $86.00 per hundredweight, down 2
percent from 2005. Fed cattle prices are forecast to return to
the lower $90’s at times in the first half of 2007. For
calendar year 2007, fed cattle prices are forecast to average
$85 to $88 per hundredweight, up slightly from 2006.”
“We’ll still end up averaging $84 to $85 on fed cattle in 2007
and have a practical range from the low $90s to the upper $70s,”
predicts Blach. “I would look for a more significant price
correction on feeder cattle and calves. A lot of that will be
attributed to higher grain prices along with shrinking margins
and to the loss of equity we’ve experienced at the fed cattle
level.” |
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