Since midsummer new-crop December corn futures prices have declined more than $4 per bushel from the $7.88-per-bushel high. During the same time, November feeder cattle futures prices declined more than $20 per hundredweight (cwt) from highs of more than $119.
This relationship is usually the opposite between feeder cattle and corn prices. So what is making the shift occur this year?
North Dakota State University's Tim Petry a Livestock Economist and Crop Marketing Economist Frayne Olson offer their thoughts:
In 2006 and 2007, sharply increasing corn prices from September into spring of the next year caused declining feeder cattle prices.
A housing slump that turned into a U.S. financial crisis resulted in a collapse of the international credit markets. The problem has caused panic selling on Wall Street and across all agricultural commodity markets.
Live cattle futures plummeting about $30 per cwt is a major reason why feeder cattle futures did not respond favorably to declining corn prices.
Concern about domestic and export demand for beef during the economic crisis caused prices to decline. Then, index funds that held large, long futures positions in live cattle and many other commodities, including corn, were forced to liquidate to cover losses. Massive liquidation in commodity futures meant that no one wanted to take a long position, so prices were forced lower and lower.
Granted, funds were overly optimistic when traders bid prices up to the midsummer's peak, so now prices may decline more than market fundamentals indicate should happen. However, the price run-up did offer excellent sales price opportunities in cattle and corn and the sharp decline might offer good buying opportunities as well.
Even though cattle prices have fallen, the profit potential for backgrounding or feeding calves to market weight, may be better now because it is the margin and not the price level that is important in determining profitability. Heifer calves are being discounted severely relative to steer calves and may offer good backgrounding opportunities.
Sellers of feeder calves and corn this fall will be impacted negatively by the lower prices unless they had prepriced their commodity.
This summer, uncertainty about the size of the corn crop caused price volatility. Early, wet conditions in parts of the Corn Belt, cooler summer temperatures and later dryness in some areas were all concerns. With harvest now winding down, the supply situation is clearer.
The U.S. Department of Agriculture's November supply and demand report estimated the U.S. corn yield at 153.8 bushels per acre, which equates to a 12 billion bushel crop. This crop would be the second largest on record, but 1.054 billion bushels less than last year's record crop.
The USDA continues to adjust usage estimates. The October supply and demand estimates increased feed use due to lower prices, but reduced corn usage for ethanol because of lower energy prices. How much the world financial crisis will affect the corn export demand is unknown. However, the USDA reduced export estimates by 100 million bushels in its November report.
The stocks-to-use ratio is projected to decline to 9 percent from last year's 12.7 percent. That is the third lowest ratio since 1970 and should be supportive to prices. The USDA's current midpoint national average farm price estimate, at $4.40 per bushel (in a range of $4 to $4.80), is 20 cents higher than last year.
Usually, the corn basis is weak at harvest time, but this year the basis actually has strengthened with the sharply declining futures relative to the cash market and the delayed harvest. Corn prices likely will continue to be volatile, especially until the extent of the economic crisis is known. However, prices should show seasonal strength after the harvest because the utilization is expected to be similar to last year.
Most of the seasonal decline in feeder calf prices should be behind us, assuming the economic crisis does not worsen substantially. However, short-term market strength is not expected, either, with the heavy fall marketing run in full swing.
Both cattle and corn markets likely will continue to be volatile in the next several months, so knowing break-even prices and evaluating risk management strategies will be important.Since it is the profit margin and not the price level that is important in feeding cattle, both corn and cattle prices should be protected. Locking in only one side and not the other is very risky in these highly volatile times.