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Growing Cattle Herd Means Continued Strong Demand for Corn

The March 13 daily livestock report, sponsored by the CME Group, indicated beef production through March 11 was 3.6% larger than a year ago. This report also indicated that year-to-date cow slaughter is down 6.1% and, perhaps most interesting, average dressed weight for the past week was 820 pounds, down from 834 pounds a year ago. A quick summary would suggest that producers are not shipping cows and are pulling fed cattle ahead due to higher cash prices compared with futures. Yet, with April futures well below current cash prices, the expectation is for an increased supply of market animals in the weeks ahead.

Bottom line, the numbers suggest the herd is continuing to grow. A growing herd means continued and stronger demand for corn. Part of the reason the cattle herd may be growing is ample and inexpensive projected supplies of corn, especially in the western Corn Belt. As demand grows, there is less room for error with the upcoming crop. In other words, corn is a relatively cheaply priced commodity, more so after prices slid this past week.

If you are an end user, you should be prepared to more aggressively buy corn or use call options to defend against higher corn prices. The majority of the world’s corn is produced in the Northern Hemisphere and, therefore, with growing demand, weather for the upcoming crop will be a critical factor determining crop size and ultimately prices. In a very short period of time, corn supplies could go from record large to too tight.

If one can accurately outguess the weather, then one can likely guess price direction. Rather than try to guess either, we suggest being prepared in case prices do make a substantial rally due to weather consequences. Consider buying out-of-the-money September and December corn calls against future purchases of corn. Or, with prices still below the cost of production, book supplies for the rest of the year.

 

If you have questions or comments, contact Bryan at Top Farmer Intelligence (800-TOP-FARM, ext. 129).

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