 “It
appears that buyers are gambling that the fed cattle market will
soon respond to low inventories and increased beef exports to
offset higher cost-of-gains, as current price levels will not
pencil out according to spring CME Live Cattle Futures,” said
analysts for the Agricultural Marketing Service (AMS) January
25.
They were talking about the feeder cattle and feeder calf
market. Even though feeder calf and feeder cattle traded $3-$5
lower that week, plenty of folks expected it to slip further
amid growing negative factors including increasing corn prices
and adverse weather conditions in some major buying areas.
As for the gamble, there are lots of
cattle parked in feedlots waiting to come out in the next
several months; placements ran heavy the past few months, both
in response to drought and continued expansion resistance.
Drought Shifts National Marketing Pattern
In fact, the January 1 Cattle On Feed Report indicates the
largest for the month since the series began in 1996. All told,
12.1 million were reported on feed, which is 1% more than a year
ago. December placements were 1.7 million head, 1% below 2007.
“While some much-needed
precipitation has fallen in areas of the Southeast and Southern
Plains States, it is too late to produce much cool-season forage
or wheat pasture for cattle for the remainder of the winter,”
say analysts with the Economic Research Service (ERS) in the
January 18 Livestock, Dairy and Poultry Outlook.
As such, the folks at ERS
explain, “In a normal year, a portion of calves born in the
spring would be placed on wheat pasture after weaning, where
they would remain until reaching feedlot placement weights in
mid-March, or as late as May if wheat were grazed out. Placement
of these calves in feedlots would normally have been spread
throughout the winter and spring of 2008 as they came off cool
season pastures, especially wheat pasture. Prospects for grazing
on wheat pasture declined as wheat prices increased this fall,
and prices for wheat are currently high enough that there is not
likely to be wheat pasture available for graze-out this spring.
Under present conditions, the greater fall placements will
likely shift some fed cattle marketings ahead of a normal
schedule, with some of these cattle likely to be marketed
earlier in the year than is consistent with typical seasonal
patterns.”
Closer to home, Derrell Peel, livestock marketing specialist at
Oklahoma State University says, “Timing can change the picture
in the feedlot situation and it is important to remember that
the large placements since last September included not only the
anticipated summer yearlings but an unusually large number of
Canadian feeders as well as lightweight feeders that would have
been grazing this winter, if there was any grazing to be had.
Early placement of winter calves means they will not be
available for placement in the first half of 2008.
“Feedlot placements should pull
back in the first quarter of 2008 and feedlot inventories will
decrease somewhat. Feeder cattle numbers will be relatively
tight in the first half of 2008 and feeder markets should
stabilize and probably strengthen through the first quarter,
albeit with a nervous eye on the rollercoaster corn market.”
Among the ongoing causes of
nervousness, ERS analysts explain, “Rising fuel prices, reported
inadequate supplies of some fertilizers, large inventories of
hogs and poultry, and a deteriorating domestic economic outlook
are additional factors exerting negative pressures on the cattle
and beef sector.”
Corn, corn, corn…
You already know that corn prices directly influence calf
prices. The traditional rule of thumb being that for every
dime’s change in a bushel of corn, calf prices run the opposite
direction to the tune of $1/cwt.
For broader perspective, when
corn could still be had for $3/bushel in the Central Plains last
October, Dillon Feuz, livestock economist at Utah State
University explains the cost of gain for a feedlot steer there
was about $65/cwt. When corn contracts reached $5/bushel in
January, Cost of Gain was running $85/cwt. That’s cost of gain
at a level that would have been a coveted selling price not all
that long ago. Back that cost into the breakeven price of buying
a six-weight calf (with fed cattle prices in the low $90’s) and
Feuz says you’re talking $96/cwt. for a six-weight calf; $93 for
an eight-weight.
That’s today. If you believe in
history 2008 could be the lousiest corn production year in a
long while.
According to Elwynn Taylor, Iowa
State University extension climatologist, the La Niña weather
pattern was confirmed January 4, though the benchmark Southern
Oscillation Index for it was reached on Christmas. Typically
this weather pattern means extreme temperatures in the Midwest
and a 70% chance corn will yield below trend in the U.S. Corn
Belt. Of the last 17 major Midwestern droughts, Taylor says 16
were preceded by major droughts in the Southeast. Further he
says major Midwestern drought occurs every 19 years on average;
it has been 19 years since the last one.
Obviously, that doesn’t mean
there will be a drought in the Corn Belt, but it does mean it’s
ripe for one from an historical perspective.
Tim Petry, livestock marketing
economist at North Dakota State University, explains cash corn
prices in the northern Plains averaged about $1.20 per bushel
higher in 2007 ($3.50) than 2006 ($2.30). But that’s only part
of the story.
According to Petry, “2007 corn
prices started the year at about $3.35 per bushel, increased 75
cents to $4.10 by the end of February, decreased 75 cents back
to $3.35 by mid-May and then went back up to $4.10 by mid-July.
A decline of $1.10 per bushel to $3 occurred by mid-September,
but prices went up to $3.45 by the end of September and then
back down to $3 early in October. From the harvest lows in
October to the end of December, prices rallied $1.25 per bushel
to close the year sharply higher at $4.25.” How’s that for
volatility?
Along the way Petry explains prices for 550-600 lbs. steer
calves in the northern Plains averaged about $5/cwt. lower in
2007 than in 2006 because of higher corn prices. He says prices
for 750-800 lbs. feeder steers averaged about $2/cwt. lower in
2007 than 2006, but were $2/cwt. higher during October through
December.
“Prices for both classes of
feeder cattle would have been lower due to the higher corn
prices if fed cattle had not been at a record high in 2007,”
says Petry. “Fed-cattle prices in 2007 averaged about $6.50 per
hundredweight higher than the previous year.”
In the meantime, a feedlot
industry and packing industry—both with at least 25% excess
capacity according to most estimates—will continue to chase
fewer cattle, which should continue to keep calf and feeder
prices propped higher than they would be otherwise.
Heifer and heifer calves accounted for 4.38 million head of the
Cattle On Feed inventory mentioned earlier—2% higher than a year
earlier. The higher on-feed heifer inventory and routinely
higher than typical cow slaughter rates support the fact that
the national cowherd shrunk slightly last year. According to the
January 1 cattle inventory, total numbers are down slightly from
last year at 96.7 million (97 million last year). Beef cows are
the primary reason, shrinking 1% last year to 32.6 million head,
while dairy cow numbers increased 1% to 9.22 million head.
So, packer and feedlot
consolidation and attrition will likely continue until capacity
more closely matches cattle numbers, or until the national
cowherd expands.
Currently, it’s easier to make a
case for the former rather than the latter. |
