As discussed in last week’s Cattle & Corn Comments, March placements were 6% higher than a year ago, surpassing most analysts’ expectations. However, most of the increase in placements was in Texas and Kansas while placements in the Northern Plains fell sharply, particularly in South Dakota. This week, we’ll further investigate this geographic divergence in placements.
Prior to the corn price spike in 2007, Texas, Oklahoma, and Kansas typically placed about 52-53% of all U.S. placements from October through June (months which would include placement of the majority of the annual fall calf crop). South Dakota, Iowa, and Nebraska accounted for 24-25% of placements before 2007. After the initial corn price spike in 2007 and rapid adoption of feeding ethanol coproduct feeds, placements in the Southern Plains states fell to 50-51% while the Northern Plains states increased placements to 27-29% of all U.S. cattle placements. The Southern Plains drought in 2011 accelerated this trend towards more feeder cattle being placed in the Northern Plains and less in the south. In fact, from October 2011 through June 2012, Texas, Oklahoma, and Kansas placed less than 48% of all cattle placed on feed and Iowa, Nebraska, and South Dakota placed more than 31%. For last fall’s calf crop, the Southern Plains states have placed less than 46% of total placements while the Northern Plains states have increased its proportion of total placements to over 33%.
In Figure 1, the percentage of feeder cattle placed in the Northern Plains and Southern Plains states are shown in the red and blue lines, respectively (read units on left axis). These lines show the month-to-month and seasonal variation in the geographic placement pattern, unlike the October through June accumulated placement averages discussed in the previous paragraph. In March 2013, Texas, Oklahoma, and Kansas placed 54% of all cattle placed in 1,000+ head capacity feedyards, up from about 46% during January and February (see Figure 1). Meanwhile, placements in South Dakota, Nebraska, and Iowa dropped from about 32% to about 26%.
Figure 1. Northern vs. Southern Plains: Cattle placements as % of total fed cattle price differential, corn price differential.
Data Source: USDA-NASS & USDA-AMS
So, why did the geographic placement pattern change so dramatically in March? A couple of factors likely contributed to the change. First, the proportion of placements in the Southern Plains was lower than normal in March 2012 as a result of the lingering 2011 drought in the area. Thus, a comparison to March 2011 makes the increase to 54% of total placements this March look large. Still, though, the Southern Plains placed more of the national placements in March this year than is typical and the Northern Plains placed less than normal. Two market conditions could potentially be driving this: a) lower relative feed prices in the Southern Plains than in the Northern Plains, and b) higher slaughter cattle prices in the Southern Plains than in the Northern Plains.
Figure 1 also shows the difference in corn price (used as a proxy for feed costs) between Omaha, Nebraska and the Texas Triangle area (see green line in Figure 1 and read units on right axis). While the scale shown on the graph doesn’t highlight the small changes in this north:south corn price spread, this spread generally increases (in absolute value) when corn prices are high and transportation costs are high. From July through November 2012, the corn price spread ranged from -$0.24/bu to -$0.37/bu (meaning Texas corn prices were $0.24/bu to $0.37/bu higher than Omaha prices). Since December 2012, the spread has decreased (in absolute value) to less than -$0.15/bu each month. In March, the corn price spread was -$0.08/bu, about $0.04/bu less than the previous month and March 2011. So, the smaller absolute price difference between the Omaha, Nebraska corn price and Texas Triangle corn price means that the Northern Plains has less cost of gain advantage than it did previously. Small corn production in the Western Corn Belt, strong basis levels, and lower transportation costs contributed to the smaller price spread since the beginning of the year.
A third factor also likely impacted the increase in Southern Plains feeder cattle placements during March. Fed cattle prices this winter have generally been higher in the Southern Plains versus the Northern Plains. The difference between Nebraska slaughter steer prices and Texas/Oklahoma slaughter steer prices is illustrated by the black line in Figure 1 (read units off right axis). Note that from September 2012 through January 2013, this slaughter cattle price spread was negative, meaning that slaughter cattle prices were higher in the Texas/Oklahoma market than in Nebraska. While the north:south cattle price spread jumped to +$0.88/cwt in February 2013, it declined to +$0.39/cwt by March 2013. And, with the slaughter cattle price spread smaller in the last seven months than in 2011 and early 2012, the Northern Plains has less of an advantage in feeding cattle. The changes in this fed cattle price spread are driven by cattle on feed and marketings numbers in the respective states as well as available packing plant capacity. In the last year or two, the Southern Plains has been feeding fewer cattle and thus not utilizing as much packing plant capacity, whereas the Northern Plains states had been placing more cattle on feed (as discussed above) with some small increases in packing capacity.
The extent to which the March 2013 geographic placement pattern is an emerging trend or an anomaly is yet to be seen. Whether or not South Dakota and surrounding states regain cattle on feed inventory will be highly dependent on corn prices this summer and fall – which of course is dependent on the weather during the crop growing season.
Source: Darrell Mark
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