“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 one percent more than a year ago. December placements were 1.7 million head, one percent 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 percent 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 percent 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. At least they will until either packer and feedlot consolidation attrition and consolidation continues to the point that 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.
Heifer and heifer calves accounted for 4.38 million head of the Cattle On Feed inventory mentioned earlier — two percent higher than a year earlier. The higher on-feed heifer inventory and routinely higher than typical cow slaughter rates continue to suggest January 1 cow inventory numbers will show a decrease in the national herd.