September 20, 2010

 

Higher grain prices may alter cattle demands

 

 

Current crop production estimates are lower to the extent that feed grain supplies are tighter than previously expected, which may affect demands for feeder cattle because of higher corn prices and livestock costs of grain.

 

Partially offsetting the corn price increases, soymeal prices are forecast lower than they were last month. In some feeding areas, anticipated increases in ethanol production due to ethanol production mandates and higher ethanol prices could also offset some of the increase in corn prices, to the extent that increased ethanol production results in greater supplies of by-products and lower relative feed values.

 

According to reports, cow slaughter continues at an atypically high rate, given the cow herd base, and heifers continue to make up a larger share of cattle slaughter than they did last year. Both of these factors imply the potential for further declines in the national beef cow herd.

 

While expectations for grain crops are declining, pastures have clearly benefited from favourable growing conditions over most of the US this past spring and summer. As a result, feeder cattle have remained on pastures until recently.

 

Also, these cattle could also be heavier than usual, reports have said. If so, the larger numbers of heavier cattle available for fall placement in feedlots could contribute to conflicting dynamics operating in the market for feedlot-ready feeder cattle. The dynamics would be a shift from pulling feeder cattle forward to place in feedlots - at lighter weights-and the potential near-term abundance of heavier cattle available for feedlot placement.

 

Until now, it appeared that feeder cattle were being pulled forward and marketed early. Higher corn prices could slow or reverse the early placements of lighter feeder cattle in feedlots, which would likely spread marketing into the future. Placing fewer feeder cattle this fall would likely push marketing out of feedlots into future periods.

 

According to reports, fewer marketings next spring and summer could also mean reduced beef production for 2011, although this outcome would also depend on dressed-weight dynamics-heavier placement weights would likely result in heavier dressed weights and could affect beef production, despite potentially lower year-over-year slaughter. However, higher corn prices generally provide incentive for shorter rather than longer feeding periods.

 

This relationship between corn prices and feeding periods underlies the logic of placing heavier off-grass feeder cattle when corn prices are relatively high.

 

Labor Day marked the end of the summer grilling season and is typically followed by a decline in retail/wholesale beef prices. Prices will likely follow the same pattern this fall, but on the heels of the recent price spike, the declines may be moderated.

 

Meanwhile, higher fed cattle prices associated with generally tighter supplies of market-ready fed cattle will be offset to some extent at the wholesale level by higher by-product values and continued increases in foreign demand for beef and variety meats.

 

These offsets will allow packers to continue bidding relatively high prices for the tighter supplies of fed cattle. However, shorter beef supplies and higher prices for competing pork and poultry should provide some support for prices throughout the beef/cattle complex through at least the end of 2010.