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Cattle prices caught in a tug-of-war
There are 2 distinct sides to the cattle feeding profitability coin right now.
On one hand, there's the depressed macroeconomy. That's got major implications for cattle prices via consumer beef prices, which have been strained by the average consumer's weakened ability to pay higher prices on account of the recession. So, that's got the potential to keep a lid on prices.
On the other hand, there's the possibility of increased feeder cattle numbers this year. But, for that to happen, corn prices have to decline. There is growing talk, though, of a return to a larger corn crop this year, which would take some of the air out of the corn market.
"Higher prices for fed cattle will require higher beef prices, so a rebound in the U.S. economy will be essential in making this happen. But the most improvement in cattle feeding profitability could come from lower feed prices, particularly corn," says University of Illinois Extension ag economist Paul Peterson. "The futures market is expecting normal yields and a big crop for 2013, so new-crop prices are trading in the mid-$5 area. In addition, each old-crop month is progressively lower than the preceding month, with September more than a dollar below the July contract. Local cash prices should exhibit the same general pattern, and this price structure gives feeders a strong incentive to rely on hand-to-mouth purchases until the 2013 crop is available."
Right now, there are signs that the cattle market's not quite convinced the drought's going to abate enough to allow a near-trend corn crop to roll into the bins this fall. But, as evidence of e return to that trend mounts, Peterson says the cattle trade will react fairly quickly.
"Despite the lower cattle numbers, feeder cattle futures are currently near life-of-contract lows. Apparently the feeder cattle market is discounting the possibility of a large corn crop at this point in the production cycle, and is waiting until yields are assured, or at least the crop is in the ground, to reflect the possibility of lower corn prices," he says. "This situation may provide cattle feeders with some profitable forward contracting or hedging opportunities on expected purchases of feeder cattle."
The seemingly tightened tie between corn and cattle prices points to the necessity of producers to adapt and consider factors like the price of corn as just one part of the whole profit spectrum.
"Cattle feeders are encouraged to consider total returns for the cattle feeding enterprise, rather than focus on expected prices for a single commodity, when making future production decisions," Peterson says.