This is shaping up to be one of those falls when sooner could be a more profitable time to sell calves than later. The reason is the growing economic glow surrounding corn.
According to Randy Blach, executive vice president of Cattle-Fax, the Corn Stocks to Use Ratio for this year is anticipated to be 8.3 percent; that would be only the fifth time since 1960 that ratio has dipped below 10 percent. That's a key reason corn prices rocketed ahead during the past month rather than taking a typical seasonal dip. Of course, the October 1 USDA corn estimate added fuel to the fire—down two percent from the September estimate at 10.9 billion bushels.
Though 10.9 billion bushels would still be the second largest corn crop on record, that figure represents a tow percent decline in USDA's October estimate compared to the month prior.
“The market will be on pins and needles,” explained Blach at the recent annual meeting of the Texas Cattle Feeders Association. “This is not a short-term spike (corn prices). There won't be a correction overnight.” 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.
“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,” said analysts for USDA's Agricultural Marketing Service (AMS) the middle of last month. “Losses have been most severe on the fleshy unweaned 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/bu. 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.”
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 three percent less than the 2000-2004 average. In early October, Omaha corn prices were over $2.40 per bushel.
In fact, LMIC analysts explain that in their calf and yearling price forecasts for 2007 and 2008, most of the forecasted price declines are due to higher corn prices.
Expanding ethanol production obviously plays into the short and longer trends in corn prices. For perspective, Blach says the percentage of corn used for ethanol production this year will be about 14 percent; it ran about 11 percent the previous three years. Corn usage for ethanol is projected at 19 percent next year. If all of the proposed ethanol plants get built that are being considered currently, that rate could multiply exponentially.
Global corn production is also off the pace, adding further pressure.
Incidentally, while it's true that producers located closer to corn production are enjoying widening basis levels, Blach notes that producers in those areas are bidding about two-thirds of the advantage away in the higher price of calves in those regions.
Beef Production—Cowherd Growing
Though 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.
“We're producing about 25 million pounds of beef per week more than last year,” says Blach. That's the equivalent of the five to six percent 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.”
He's alluding to the fact that while exports are yet to retrieve the entire market share lost in the wake of BSE, the net import/export picture is brighter than a year ago.
Specifically, Blach estimates net beef supplies for the year will only be up about two percent because of increased trade. “This really reflects the importance of trade and continuing the trend of growing exports as our domestic production continues to increase during the next several years,” he explains.
A key reason that beef production will increase—though likely at a more modest rate than predicted last year—is the fact that the cow herd continues to grow, despite the widespread drought that has seen lots more breeding age females shipped to town than could have been anticipated 12 months ago.
“Herd expansion has slowed not stopped,” emphasizes Blach. He expects the January 1 numbers to show a one percent increase in cow numbers, compared to the two to three percent increase most market analysts expected at the beginning of 2006. While it's true that cow slaughter through September was 17 percent more than the previous year, Blach emphasizes the cow slaughter level is the third smallest in the past three decades. Moreover, he says analysts expect the nation's cowherd to grow for the remainder of the decade.
In terms of domestic demand, though aggregate beef demand has declined for the previous six quarters, Blach notes demand for Choice and higher grading beef continues to increase.
Overall, the folks at LMIC say, “Fed cattle prices are not expected to move above the recent price range for the balance of 2006, which would be about 3.5 percent below 2005's fourth quarter. For the year, fed cattle prices are expected to average about $86.00 per cwt., 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 cwt., 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.”