Marketing

Corn Market Poised to Establish New Trading Range

By Jeff Stole

    The cattle industry’s rollercoaster ride called 2006 will soon draw to a close, but not without one last good reason to reach for the king-sized container of Tums. Skyrocketing demand from ethanol producers has helped fuel a dizzying harvest-time rally in the corn market that has caught the majority of the feeding industry off guard and ill prepared. Furthermore, economics indicate that this could be the beginning of a new trading range for the corn market, as fuel producers become as (or more) important in establishing the price of #2 Yellow than protein producers. The days of rationing corn usage by simply squelching livestock-sector demand are gone, and so too is the ability of cattle feeders to comfortably pencil in $2 grain and $50 per hundredweight costs of gain.

Short term, cattle feeders are being forced to reach for their pencils or computers to re-run breakevens on contracted calves and ponder when and how to get some feed-cost protection in place. Longer term, cow-calf operators are likely to face an even bigger challenge in determining how to trim costs and capture additional income as the increase in feed costs are passed down the industry’s production chain.

As of this early November writing, most cattle feeders are looking down the barrel of breakevens on incoming, summer-contracted calves that are $6 to $7 per hundredweight higher than original assumptions. In late June and early July it was still possible to get corn delivered to some eastern Nebraska feedyards for under $2 per bushel. As of late October, the same feed fetches $3.10 to $3.20 per bushel.

To help quantify the impact of the sharp escalation in feed costs, consider this: A 625-pound steer calf costing $125 per hundredweight delivered to the feedyard and fed to a 1,300-pound finish weight with $2 corn, breaks even at roughly $84.50 per hundredweight (assuming a 3.3-pound average daily gain and a conversion rate of 6.1 pounds of feed to 1 pound of gain). Over the past few years, a mid-$80s breakeven has been no sure-fire winner, but hasn’t been the worst risk either. However, the same 625-pound calf going to 1,300 pounds using $3 corn with the same average daily gain and feed conversion must fetch about $91 per hundredweight at marketing time just for the cattle feeder to hold his money together. $3.50 corn takes the breakeven sale price to $94, and $4 corn pushes the breakeven to over $97 per hundredweight. From another angle, to get the breakeven back to the original $84.50+/-, the calf must be delivered roughly $13 per hundredweight cheaper on the front end with $3 corn, $19 cheaper with $3.50 corn, and $25 per hundredweight (or $156.25 per head) cheaper with $4 corn. Yes, corn can go to $4 per bushel, and the probability is no real long shot given that $4 per bushel still works just fine for most ethanol producers as long as crude oil is worth $50 or more per barrel.

Therein lies the important fundamental difference in this grain-complex rally versus most of the short-lived input cost increases over the last 20 years or so. This is a demand-driven rally. And just as improving beef demand has helped the beef industry recently establish a new trading range in the fed-cattle market, there is a good possibility that we will look back in five years or so and see that the last half of 2006 marked the movement to a new trading range for the corn market, and possibly the entire grain and oilseed complex.

With this year’s corn harvest set to be the third largest U.S. crop on record, according to USDA’s mid-October estimate, there are likely to be plenty golden piles scattered throughout the Midwest by Thanksgiving. However, changes on the demand side of the supply/demand balance sheet push total corn usage for the 2006-07 crop year to near 11.9 billion bushels, leaving fewer than 1 billion bushels of “cushion” before next year’s crop is ready for harvest. As long as the “carryout” remains fewer than 1 billion bushels, $3+ corn prices will be the rule rather than the exception, and further escalation is possible unless corn acres and/or average yields increase at a rapid enough clip to keep pace with the new plane of demand.    Jeff Stolle is vice president of Marketing for the Nebraska Cattlemen. For up-to-the minute market information and analysis, contact Jeff at (402) 475-2335 to join NC’s Market Reporting Service.