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Feed costs fueling bullish cattle returns

Though corn prices are still at relatively high levels, there are half a million more cattle being fed than a year ago.

There are 2 main takeaways from that number, says Purdue University Extension livestock economist Chris Hurt. First, corn has gotten "cheap" relative to forage crops more typically fed to younger cattle under 700 pounds. That means more of these younger animals are being placed on feed, which will likely mean feed usage will provide at least some fundamental support for the corn market for a while.

"The implication of placing such a large number of young calves is that they will be on-feed a long time and eat a lot of feed grains," Hurt says. "The broader implication for the corn market is that most end users of corn saw a similar shift in their industry’s outlooks as corn prices fell."

Add to that a healthy finished cattle market, Hurt says. Live cattle futures have added around $4/CWT in the last few weeks, with April 2012 futures approaching $130/CWT. That's providing plenty of incentive for cattlemen to place younger calves on feed.

"The high level of September calf placements was a demonstration that corn futures prices below $6.00 per bushel was too low and created opportunities for end users such as cattle finishers to lock in favorable financial returns," Hurt adds. "It is the first indication from the animal sector that there is a rebuilding of corn use now due to 'low' corn prices."

When you add continued strong export demand for U.S. beef and there's reason to expect finished cattle to trade at least around $120/CWT for the next few months. And, the same will likely be true for the corn market.

"Finished cattle prices are expected to trade in the low-$120s for the rest of this year and increase modestly in the winter. The 2012 spring price rally is expected to increase prices to the higher-120’s for March, April and May, with summer prices cooling to the mid-$120s. Record annual prices are expected for 2012, averaging in the low-to-mid-$120s compared to the previous record which will be set this year near $115," Hurt says. "The optimism of the cattle industry probably suggests that corn prices will have continued upward mobility to equate costs with potential livestock returns."

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