by: Wes Ishmael

That sound you heard the last week of June was short-bought corn traders hitting the floor amid a rally in corn prices that took the stuffing out of cattle futures, too.

Nearby corn futures moved limit-up 40¢ June 25; they were 65¢-82¢ higher between June 21 and June 28.

August Feeder Cattle lost $13.45 between June 12 and June 26 before rebounding.

Fed cattle prices dropped $6/cwt. in two weeks during the middle of June. Calf and feeder prices—which appeared to have bottomed out earlier than normal—headed South in a hurry.

Blame Mother Nature.

Whereas last year's horrific drought was limited primarily to the Southern Plains, analysts with the Livestock Marketing Information Center (LMIC) pointed out during the last week of June that the lack of moisture this year is widespread. According to the U.S. Drought Monitor at the time, they explained 63 percent of the U.S. was experiencing some degree of drought, compared to 33 percent at the same time a year ago.

“Pasture and Range conditions continue to decline at a steady rate nationally,” LMIC analysts said. “…By mid-June, U.S. poor and very poor conditions had surpassed 2011 and have been climbing every week since at a rate averaging two percentage points per week…A dramatic contrast to 2011 is how quickly conditions have deteriorated in many regions.”


Corn Prices—Early Cattle Marketing Driving Volatility

“Dry conditions across the majority of the United States have sharply lowered expectations for this year's corn and soybean crops; new-crop grain prices have soared and the demand for feeder cattle has weakened,” explained analysts with the Agricultural Marketing Service June 22. “Perhaps this year's drought is not getting near the publicity of the record dry spell across the Southwest a year ago, but the lack of rain is currently much more widespread and includes some of the country's most productive farm land.”

Fears about the impact unseasonal dry, hot conditions will have on pollination in the heart of the nation's corn producing areas began fueling the aforementioned price rally. Then came USDA's quarterly Grain Stocks Report and Acreage report at the end of June. Though farmers planted 96.4 million acres—4.5 million acres more than a year ago—according to the acreage report, harvested area is expected to be 200,000 acres less than last year due to higher abandonment rates and expectations for corn silage. At the same time, corn stocks June 1 came in 33 million bu. less than what analysts expected. The larger issue, though, is the ultimate yield of this year's crop, with some analysts already reducing expectations for average yields below the trend-line of 160 bushels or so.

In other words, growing global demand and the nation's policy of using corn for fuel has meant that each year demands another record or near-record crop of corn. Sooner or later, that doesn't happen.

As corn prices wreaked havoc on calf and feeder cattle value, dry conditions also pushed more cattle to market earlier than normal, reminiscent of last year.

“While yearling and fed cattle markets have been steady-to-higher in recent weeks (first part of June) despite negative cash margins for cattle feeders, prices/markets for lighter and younger calves are becoming unsteady at best, reflecting the rapidly deteriorating summer pasture conditions,” say analysts in June's Livestock Dairy and Poultry Outlook (LDPO). “Cow prices have also begun to slip somewhat as post-calving-season culling gets under way and pasture and hay conditions deteriorate.”

According to LMIC analysts, “As June progressed, calf and yearling prices also eroded because feedlots have become increasingly cautious buyers given their on-going red ink on closeouts and uncertainty about future feedstuff costs. Further, in the last two weeks some regional auctions have been inundated with cattle due to drought. For the week ending June 22, at Oklahoma auctions, USDA-AMS showed the 500-to 600-lb. steer price was $168.44 per cwt., which was down $3.35 per cwt. for the week and had dropped about $8.50 since late May. Yearling steer (700-to 800-lb.) prices declined $4.70 per cwt. for that same week and had eroded by $3.60 since late May.”

LDPO analysts pointed out, “Projected cattle feeding costs through August 2012 range from the low $130s/cwt. to the low $140s. At current fed cattle prices, these costs indicate margins that are well into negative territory, with projected losses of over $200 per head (High Plains Cattle Feeding).”

“…The current financial status of many cattle feeders will greatly limit purchasing calves or yearlings that have little hope of making money,” explained Jim Robb, LMIC Director in the June 27 In the Cattle Markets. Last year, aggressive contracting for cattle on western and High Plains ranches for late summer and fall delivery was widespread; it appears that a repeat this year is not likely.”

All of this occurred on the heels of the June Cattle on Feed Report that indicated 15 percent more cattle were placed on feed in May—bearish to the market—primarily due to a more normal placement pattern of calves from the Southern Plains, more imports and more cattle marketed earlier.

On the other side of the equation, there are indications that wholesale beef prices have hit a temporary price peak.

“Wholesale Choice beef cutout values have again increased, approaching previous record levels of almost $200/cwt. However, prices for 50 percent lean beef are again approaching the low levels reached just after the publicity concerning Lean Finely Textured Beef,” LDPO analysts said. “And AMS-reported weekly five-day moving average byproduct values have slipped by more than five percent since early May. Processing beef prices also may have reached a temporary peak and could decline over the next quarter, although the longer term outlook for all beef remains positive due to declining inventories and prospects for lower feed grain prices this fall.” That comment about potentially lower feed grain prices was made before publication of the aforementioned Acreage and Grain Stocks reports.

All of this reaffirms the old notion that the proverbial bird in hand may in fact be worth more than hoping prices are higher at a particular point in the future. On the other hand, current straits also suggest Mom Nature has quashed any hopes for beef herd expansion this year.

Heading into this year's dry spell, cow slaughter was significantly less in regions hit hardest by drought last year; they were less overall, too. However, Derrell Peel, extension livestock marketing specialist at Oklahoma State University explained in marketing comments the last week of June, “…The limited number of replacement heifers available makes herd expansion possibilities remote, at best, this year…The current pace of decreased beef cow slaughter suggests liquidation could stop or be reduced to a minimal level this year. However, recent deterioration of pasture and range conditions across several regions could easily lead to reduced heifer retention and moderation of beef cow slaughter decreases. A few weeks of dry conditions could push the beef industry back into herd liquidation and postpone heifer retention another year.”

Add it all up and the LMIC folks explain, “Forage conditions and corn prices will be the drivers of calf and yearling prices for the balance of 2012, neither of which has been supportive of calf or yearling prices during the last several weeks. As a result, this summer, prices of calves and yearlings could be more volatile than last year. Calf and yearling prices will remain above a year ago with just a little cooperation by Mother Nature. But, calf and yearling prices could easily drop to year ago levels if both national forage conditions and corn yield potential continue to deteriorate at June's rate.

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