...But in this weekly episode, it's all about corn. They F you at the drive-thru! As if we needed any reason for steak prices to go higher, they found another one! Gouging I tell you.
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THE GAME CHANGER
"No year passes without ups and downs in feed prices. These are generally caused by price signals from supply or demand changes intended to cause a market response. Corn is a commodity with lots of depth because of its size and the various uses. The market is very liquid and enjoys broad participation from a large pool of commercial and speculative traders. The shock to markets from the recent skyrocketing prices will have broad implications reaching far beyond CME futures.
Cattle operations depend on corn and corn by products for the lion’s share of their feed needs. Most feedyards acquire corn through an agreed “basis” to corn futures market then, price the corn at will. Basis levels this year in the southern plains have been especially high due to drought and reduced acres that have moved to cotton. Corn is the major component of feed rations and the overwhelming determinative factor is cost of gain for cattle.
Corn prices have moved from $3.40/bushel in August to near $5.40/bushel currently. The increase has been driven by several factors including heavy buying by the Chinese, threats to the South American crop, inflation speculation, and most recently a dramatic reduction in domestic supplies caused by a USDA report dropping last year’s corn yields by 3.8 bushels – the third largest reduction in reporting history. The impact will be a game changer for all meats.
Cattle operations will encounter significant changes. First and foremost, will be the rise in cost of each pound added to the weight of the animal in the feedyard and to a less extent on pasture through supplemental feed. Close outs in the $.70s and $.80s on cost of gain will quickly move to well over a dollar. Incremental pounds during the final phase of finishing will reach $1.25-$1.50/pound gained. This will encourage the placement of heavier cattle leaving lighter cattle for grow yards or grazing where less grain is used and forage cost are lower.
Marketing plans for cattle from the feedyard will change. A tug of war will develop between cattle owners interested in pushing cattle to market rather than suffer economic losses by adding more weight, and processors who need more weight and time on feed to reach the desired quality grades. Processors will need to provide sufficient premiums to attract more cattle into the heavier high grading categories. The choice/select spreads should widen to encourage longer feeding periods. Placement patterns also will change as less cattle are fed in the corn belt with some farmers choosing to sell corn rather than market it through cattle.
Ultimately, higher prices for corn will incentivize farmers to allocate more acres to corn. Cotton gins will be disappointed this coming crop year as farmers on the southern plains switch from cotton to corn or milo. The anticipated increase in corn acres will cause new crop corn futures to fall and create a negative carry in the current corn in inventory at grain elevators and on farm storage. The prospect of lower prices in the future will encourage more farmers to sell now and those pressures will lower the corn “basis”. The combination of inflation pressures and high feed costs will make it likely that all meat prices are due to rise."
---------------------
THE GAME CHANGER
"No year passes without ups and downs in feed prices. These are generally caused by price signals from supply or demand changes intended to cause a market response. Corn is a commodity with lots of depth because of its size and the various uses. The market is very liquid and enjoys broad participation from a large pool of commercial and speculative traders. The shock to markets from the recent skyrocketing prices will have broad implications reaching far beyond CME futures.
Cattle operations depend on corn and corn by products for the lion’s share of their feed needs. Most feedyards acquire corn through an agreed “basis” to corn futures market then, price the corn at will. Basis levels this year in the southern plains have been especially high due to drought and reduced acres that have moved to cotton. Corn is the major component of feed rations and the overwhelming determinative factor is cost of gain for cattle.
Corn prices have moved from $3.40/bushel in August to near $5.40/bushel currently. The increase has been driven by several factors including heavy buying by the Chinese, threats to the South American crop, inflation speculation, and most recently a dramatic reduction in domestic supplies caused by a USDA report dropping last year’s corn yields by 3.8 bushels – the third largest reduction in reporting history. The impact will be a game changer for all meats.
Cattle operations will encounter significant changes. First and foremost, will be the rise in cost of each pound added to the weight of the animal in the feedyard and to a less extent on pasture through supplemental feed. Close outs in the $.70s and $.80s on cost of gain will quickly move to well over a dollar. Incremental pounds during the final phase of finishing will reach $1.25-$1.50/pound gained. This will encourage the placement of heavier cattle leaving lighter cattle for grow yards or grazing where less grain is used and forage cost are lower.
Marketing plans for cattle from the feedyard will change. A tug of war will develop between cattle owners interested in pushing cattle to market rather than suffer economic losses by adding more weight, and processors who need more weight and time on feed to reach the desired quality grades. Processors will need to provide sufficient premiums to attract more cattle into the heavier high grading categories. The choice/select spreads should widen to encourage longer feeding periods. Placement patterns also will change as less cattle are fed in the corn belt with some farmers choosing to sell corn rather than market it through cattle.
Ultimately, higher prices for corn will incentivize farmers to allocate more acres to corn. Cotton gins will be disappointed this coming crop year as farmers on the southern plains switch from cotton to corn or milo. The anticipated increase in corn acres will cause new crop corn futures to fall and create a negative carry in the current corn in inventory at grain elevators and on farm storage. The prospect of lower prices in the future will encourage more farmers to sell now and those pressures will lower the corn “basis”. The combination of inflation pressures and high feed costs will make it likely that all meat prices are due to rise."
