A few weeks ago, we covered the impressive lack of drought across the country. That, of course, means there’s been impressive amounts of precipitation. And that has implications for feeder cattle.
Generally speaking, wet conditions delay corn planting. Delayed corn planting may mean less corn harvested. Less corn usually means higher prices. Higher corn prices historically mean feeding cattle to market weight is more expensive, which makes cattle feeders less inclined to pay for feeder cattle. End result: less money to cow-calf producers for their calves.
According to the most recent Crop Progress report (May 28), only 58 percent of the corn crop has been planted. This is 32 percentage points behind the 90 percent that is usually in the ground by this point over the past five years.
The states that are lagging behind the worst compared to their five-year average—South Dakota (at 25 percent planted/-65 percentage points from average), Indiana (22/-63), Illinois (35/-60), Ohio (22/-56), and Michigan (33/-40)—are the same states currently suffering flood conditions.
Corn production, price predictions
The May World Agricultural Supply and Demand Estimates (WASDE) report expected 92.8 million acres of corn to be planted (+4.15 percent of the 2018 crop), 85.4 million acres of corn to be harvested (+4.53 percent), and 15.03 billion bushels of corn produced (+4.23 percent). The flood-stricken states mentioned above were all projected to plant steady to greater number of corn acres.
However, these predictions came from the 2019 Prospective Plantings report, which assumes “normal mid-May planting progress.” This year’s corn planting progress is far from normal. Rather, it is the slowest corn planting progress since 1980.
Various groups have begun estimating what this slow planting might mean. Andrew Gottschalk and Bob Wilson of Hedgers Edge, for instance, estimate that actual planted acres will be down 3 million from the Prospective Plantings/WASDE estimate, with average yield down 7 bushels per acre. Such acreage and yield losses would result in an ending stocks for the 2019/20 corn crop of 1.453 billion bushels, compared to the USDA’s estimate of 2.485 billion bushels.
Katelyn McCullock, director of the Livestock Marketing Information Center (LMIC), stressed that it is still a bit early.
“In my mind there’s still quite a bit of uncertainty in the corn and soybean market, relative to plantings,” she told WLJ. “We’re not quite to the point where all is lost or anything like that, but we are talking about shaving acres that would have gotten planted versus harvesting, so we are fading our forecast down.”
She said that LMIC is estimating corn acres around 90.5-91.5 million at this point, with some drop in yield being likely.
“In terms of price—of course price is going to hinge on how many acres we get planted and what that yield number will be.”
The May WASDE report projects the average farm price of $3.30/bu. However, the December CME corn future contract settled Thursday at almost $4.53/bu.
Corn’s impact on cattle
Historically, the assumed interaction between feeder cattle and corn is an inverse price relationship; when corn prices go up, feeder cattle prices go down, and vice versa. But is that the case?
“Historically feeder cattle prices have been determined by several factors, with corn price and fed-cattle price having the greatest impact,” noted Dr. Brenda Boetel, professor of agricultural economics at the University of Wisconsin-River Falls, in a recent market review.
She noted that past market research by Dr. Dillon Feuz examined historical idea that a $0.10 decrease in corn prices resulted in a $1/cwt increase in feeder cattle price. However, he found that in 2007-2011 overall feeder cattle prices were less responsive to changes in corn prices than historically thought.
Boetel similarly looked into the price relationship between feeder cattle and corn prices recently. She looked at weekly feeder cattle prices from Oklahoma from September 2010 through August 2016.
“I broke the data into two time periods: September 2010 through August 2013 and September 2013 through August 2016,” she explained. “I used the current nearby corn futures for each month and used the live cattle futures eight months out for four 600-lb. feeders and four months out for six 900-lb. feeders.”
She described her efforts as “a quick analysis to see if and how the industry is changing.” Her findings suggest that the historical relationship between corn prices and feeder cattle prices might be changing.
“I found that from September 2010 through August 2013, the corn and feeder cattle relationship appeared as expected, with feeder cattle price sensitivity to corn price declining as weights increased.
“For September 2013 through August 2016, this relationship no longer held as heavy weight (800-900 lbs.) feeder cattle price is the most sensitive to changes in corn price. Additionally, feeder cattle price for cattle weighing 600-800 lbs. is found to be not affected by changes in corn price as the coefficients are not statistically significant.”
She pointed out this apparent change is relevant since a lot of current price forecasting between corn and feeder cattle prices assume the inverse price relationship.
“Additionally, most price slides used assume that heavy weight feeders are less responsive to changes in corn price than light weight cattle.”
Boetel said more research is necessary to determine if historical assumptions about market relationships between corn and feeder cattle still hold true. — Kerry Halladay, WLJ editor
