Here’s the market landscape for cattlemen – high and volatile corn prices made more uncertain by an unexpectedly optimistic USDA June 30 corn crop estimate in the face of spring and summer flooding; and a cattle market that is desperately signaling expansion in the face of what is perhaps the worst drought in history in Texas, Oklahoma and the Southwest.

In fact, Jim Robb, director of the Livestock Marketing Information Center in Denver, says the current drought is of significant breadth, depth and magnitude that it’s difficult to see how USDA’s numbers come Jan. 1, 2012 won’t indicate further shrinkage of the U.S. beef cowherd. That doesn’t mean, however, that beef cow expansion isn’t underway.

“Nationwide, we have this line that goes across the U.S. where we have people who have more grass than they know what to do with,” Robb says. Then you have cattlemen in the drought areas for whom a blade of green grass can only be seen in a distant dream. “It’s getting clearer and clearer that a buildup in the cowherd will start this year in the Northern Plains. But I don’t think it can overcome the Southern Plains situation. So I think that’s a key in shaping our outlook.”

Weather – the big unknown

While continued liquidation is a key, the weather is but one in a whole fistful of keys hanging from the retractable key ring of this year’s cattle market.

“Wheat pasture is critical,” Robb says. “Given the cost of gain in the feedlot, even with high-priced wheat, we’re going to see quite a bit of interest if we get wheat grazing established. If we do, that will support lightweight calf prices.”

That’s assuming it rains in the winter-wheat belt, and assuming there are any calves around to buy. Robb predicts that cattle in areas where it has rained, such as Nebraska, will be in very tight hands this fall.

“We’re already talking to Central and Northern Plains producers who say that if prices aren’t high enough, if they’ve got lightweight calves and forage, they’ll keep them on the ranch,” Robb says. “You’ll have to bid them out of pretty strong hands.”

Southern Plains calves hit feedbunk

As for Southern Plains calves, it’s likely those are already bellied up to a feedyard bunk. “It’s a reasonable statement to make” that the fall run in the Southern Plains has already occurred, says Don Close, market director with the Texas Cattle Feeders Association in Amarillo, TX.

Much of that forced movement into Southern Plains feedyards was drought-driven. Then the June 30 USDA crop report almost overnight changed the corn market prospects, and consequently, placement patterns in feedyards.

“We went from short-feeding cattle,” in reaction to high-priced corn, which supported yearling prices, “to the other extreme of buying the lightest animal with the fewest net dollars, all within a week” following the report, Close says.

That ratchets up the concern that once the forced movement of cattle is gone, feedyards will be looking hard for feeder cattle the remainder of the year, Close says.

In a high and volatile grain market, feedyards search for any efficiencies they can find, any place they can find them. One such efficiency is to run the feedyard as close to optimum capacity as possible.

“Because of that drive for efficiency in this kind of market, feedyards are going to fight for available numbers. Maybe beyond good logic at times,” Close says.

Then there’s competing meats. “I think the next factor that is more subtle but will be supportive of fourth-quarter prices is that the competing meat supplies are going to be less burdensome as we look ahead,” Robb says, “especially reductions in broiler production in the fourth quarter this year and into 2012.” In addition, he says the latest hogs and pigs report showed hog producers are taking a cautious approach to expansion.

That pullback in competing meats is a reaction to ongoing high corn prices. Unlike ruminants, which can put on much of their gain on grass, poultry and hog producers are more closely tied to corn prices. So, in spite of their relative advantage in cost of gain, Robb poses this question – “How does the industry transition to placing 1,000-lbs.-or-heavier animals as the typical animal entering a feedyard? That becomes part of the comparative advantage of the beef industry compared with chicken and pork.”

And finally, there are consumers. “If the U.S. economy grows significantly, then consumers have money to pay a little more at the grocery store,” Robb says.

Economic growth, however, is uncertain. “We’re still at rather anemic growth in the U.S. economy,” Robb says. “We’re talking 2-3% GDP growth rate, which still doesn’t help very much on unemployment. But we won’t quit eating.”

Given that U.S. consumers enjoy one of the lowest food cost profiles in the world, how much pressure will they absorb before changing their buying habits? Cattlemen may find the answer over the next few years. But Close thinks consumers may be willing to absorb more pressure than many analysts anticipate. “Could consumers be pushed well into their discomfort zone? Yes,” he says. In fact, they already have been. “We saw some pushback at the counter during the spring. But have we really seen that trigger point? I don’t know that we have.”

Adding it up

So, as cattlemen take all the market keys and try to figure out which tumblers will turn, what can they expect for prices this fall?

Given that the corn market is likely the master key that will turn any number of locks in the cattle market, Robb starts there with his forecast. And even if you finagle the USDA numbers in the June crop report, which everybody in the market, including Robb, has done to some extent or another, it still appears we will put a comparatively large crop in the bins this fall. So, Robb anticipates a national average corn price paid to farmers of $5.55/bu.

Robb figures calf and feeder prices on a Southern Plains basis. “We’ve got Southern Plains calf prices, 5- to 6-weight steers, at $1.38 to $1.43 for the fourth quarter. That’s compared with $123.26 last year.” He pegs 7- to 8-weight steers at $130 to $135 in the fourth quarter, compared with $114.50 last year, assuming the drought doesn’t get any worse.

Because the drought has been such a game changer, he says the difference between the Southern Plains and the rest of the country is going to be wider than normal this year.

“In the fourth quarter, the fed cattle market could be pretty strong. It could easily set the high quarterly price for the year, depending on how we place cattle” during the summer, Robb says. Given that fed cattle in the Southern Plains tickled $122/cwt. early in second-quarter 2011, the upside for feedyards looks promising.

High cow-calf returns

Taking all that together, Robb estimates 2011 cow-calf returns over cash costs will be more than $100/cow if you’re not “droughted out.”

What’s more, Robb expects the fourth-quarter market strength to continue in 2012. While he says it won’t match the “irrational exuberance” that feedyard buyers showed in the first quarter of 2011, the first quarter of 2012 will still be strong, with an anticipated range of $140 to $147. “I don’t think we’ll get back to exceeding 2011 prices, given costs of gain, until we get further into 2012.”

Looking ahead, he says the great unknown is the corn market. “We’re going to have to entice farmers to plant a whole bunch more acres in 2012. So, I think the cattle-feeding risk, which feeds back into calf prices, remains. Which makes forage availability ever so critical to the beef industry. It is our saving grace.”