Source: John D. Anderson, Senior Economist, American Farm Bureau Federation
In last week’s ICM newsletter, John Michael Riley summarized the monthly World Agricultural Supply and Demand Estimates (WASDE) report from USDA. Obviously, the highlight of that report was the deteriorating prospects for this year’s corn crop. The market has, of course, been monitoring crop prospects and updating expectations continuously all season long and has continued to do so since last week’s report. The judgment of the market can be quickly assessed by looking at prices. Corn prices have posted an impressive run over the past month. In mid-June, the December 2012 corn futures contract on the CME was trading at around $5.20 per bushel. As of this writing (at mid-day on July 16) Dec 12 corn is trading at about $7.65, a 47% increase.
A corn price increase of the magnitude that we have seen over the last month has major implications for related markets including, naturally, livestock markets. The broad strokes of the adjustments that take place in the livestock and poultry sector are easy to understand: higher corn prices drive up feed costs and higher feed costs result in lower production of livestock related products (beef, pork, chicken, dairy products, eggs, etc.). As a practical matter, though, adjustments to higher corn prices involve the rebalancing of very complex production systems. This process takes time, and it can be quite painful for those involved in it. So, at this early point – still only about a month into this situation – what adjustments are we seeing?
We can start with something easy: feeder cattle prices. When corn prices go up, feeder and stocker calf prices go down (ceteris paribus, of course, as we economists like to say). As increasing corn prices raise feeding costs, buyers attempt to protect feeding margins by paying less for calves to feed. An old rule of thumb is that as corn prices go up by $1/bushel, feeder cattle prices will go down by $7 or $8 per hundredweight. This year’s experience is not too far out of line with that. The nearby Feeder Cattle contract on the CME is currently trading around $136 – a decline of about $24/cwt since mid-June. That’s a drop of almost $9.80 to $1 based on the corn price increase mentioned earlier. That’s worse than the simple rule-of-thumb would imply but it’s important to note that higher corn prices are not operating in a vacuum. Lower feeder calf prices also probably reflect some supply-side pressure in the market from drought-induced selling and some additional demand weakness from a lack of alternative places to go with calves because of a lack of forage.