When Opportunity Knock, Drop in corn prices signal opportunities for cattlemen
Rapid City, S.D. – Beef producers will see more opportunities in 2014, according to Chad Spearman, an analyst with CattleFax. Spearman recently spoke of changes in the cattle market during his presentation at the Range Beef Cow Symposium in Rapid City, S.D.
“There will be a lot of opportunity for beef producers because of cheaper feed costs and weather improvements in a lot of the beef producing states,” he said. “Things are looking pretty optimistic, especially for the cow/calf producer.”
The news was a welcome change for all segments of the beef industry.
“Obviously, we have had challenges in the packing, feedlot, stocker-feeder and cow/calf operations during the last several years from revolving drought, record high feed prices and over-capacity situations with declines in pacified feeders and feed inventory,” Spearman explained. “Last year, we had good precipitation and forage growth. But, in 2012, we gave up a lot of hay production and ended up losing a significant amount of hay stocks. As a result, we had record high hay prices and tight supplies. In 2013, we started to rebuild that.”
Spearman said conditions have started to improve in the Southern Plains, Southeast and the Northern Plains where more than 80 percent of the beef cow inventory in the U.S. lives. Those areas were all hit hard by recent droughts.
The story for 2014 will be the continuing decline in corn prices.
“Since 2008, we have had record high corn prices multiple times,” Spearman said. “The market has been quite volatile because of the onset of the ethanol industry and the drought in 2012. Those factors significantly limited crop yields.”
The analyst said other countries actually stepped forward to make up for our loss of production.
Brazil, Argentina and Ukraine have been large exporters of corn during the last two years.
To put things in perspective, Spearman said the U.S. exported 750 million bushels of corn in 2012. Typically, the U.S. exports 1.5 to 2 billion bushels of corn each year.
“Those other three countries were able to make up that shortfall in global demand,” he said.
Spearman said the U.S. produced 14 billion bushels of corn in 2013.
“That helped corn supplies recover substantially,” he said, “but, it will limit corn prices for the next couple years.”
He projects $3.50 to $5.50 corn.
For a feedlot operator, this is good news.
In 2013, the cost of gain in a feedyard reached $1.15 to $1.35. Now, that cost has dropped to 80 cents, and Spearman told producers not to be surprised if the cost drops evener lower to 50 cents this year.
“A cheaper cost of gain, in addition to an elevated live calf market, means calf prices will be very well-supported on a live basis for the next two to three years,” he said.
Spearman said he doesn’t see corn dropping to the $3.50 level, at least in the near term.
“The potential for that will be in late summer or fall this year,” he explained. “I anticipate farmers giving up a couple million acres of corn in 2014.”
“But, if yields are still around 159 bushels per acre, compared to 160 in 2013, we will have another 13.6 billion bushel crop again this year that will build stocks and push prices even lower,” he said.
Spot prices for corn are currently well-supported at $4.10 to $4.25, the analyst said. However, there is the potential to see prices jump to $4.75 to $4.90 during the spring rally.
Livestock versus grain
For the livestock producer, Spearman said feed prices look a lot better.
But, it could be a tough road ahead for grain producers. Higher cash rent, increasing land values and commodity prices that are on their way back down will hurt grain farmers, he said.
On the upside, while energy-based and starch-based feeds like corn will be considerably cheaper, protein-based feeds like soybean meal remain elevated in price.
Spearman said dry matter protein is currently in the 45 to 65 cents-per-pound range. He anticipates the price will continue to be elevated until spring when it will be confirmed if the South American soybean crop will be as large as projected.
“Stocks are tight for soybeans and soybean meal,” Spearman said.
These high protein costs are also propping up hay prices and distillers grain, he added.
While feedyards could purchase distiller’s grain at 55 to 75 percent of the price of corn, distiller’s grain is now at 120 percent of the cost of corn, he explained. Because of the price, most feedyards are utilizing less distiller’s grain and purchasing more corn.