The government’s latest crops outlook brought unwelcome news for Mike Engler, a Texas feedlot operator who’s watched profits evaporate in recent months as corn prices soared to records and the cattle market slumped.
There’s no apparent end in sight for tight corn supplies and high feed costs for Engler and other beef, pork and dairy industries, based on the U.S. Department of Agriculture’s monthly Supply and Demand update June 9: http://bit.ly/jScNnT.
A wet, cold spring delayed fieldwork in parts of the Midwest, prompting the USDA to cut estimated corn plantings 1.6 percent from a previous forecast, to 90.7 million acres. More troubling for livestock feeders, the USDA slashed its forecast for corn stockpiles near the end of the 2012 summer by 23 percent from an earlier projection. Supplies are already expected to reach a 15-year low at the end of this summer.
“The report was alarming,” said Engler, who’s president of Amarillo-based Cactus Feeders, which has capacity for about 520,000 cattle at 10 locations in Texas and Kansas. “There’s hardly enough corn to go around this year.”
Corn futures in Chicago rose to all-time highs for two consecutive days, coming just shy of the $8 mark, as the USDA data fueled supply concern. In trading June 10, July corn futures rose 1 ½ cents to settle at $7.87 a bushel, after earlier reaching $7.99 ¾, an all-time high for a closest-to-expiration contract.
The USDA’s outlook is “potentially explosive” for corn prices, livestock analysts Steve Meyer and Len Steiner said in a June 10 report.
A primary feed ingredient for most of the livestock industry, corn typically comprises two-thirds to three-fourths of the rations to fatten chickens, pigs and cattle to slaughter weight. Corn prices have doubled over the past year, deflating a profit resurgence for beef and pork producers after the 2008-09 recession hurt meat demand.
Engler said he’s losing money on the cattle he’s fattening in his feed yards, based on futures prices, though he declined to say how much. That’s the case for many beef and pork producers who had enjoyed strong margins as cattle and hog prices rallied to record highs earlier this spring.
U.S. cattle feeders lost an average of $53.42 per animal during the week ended June 4, compared with a profit of $137.36 a month earlier and a profit of $155.96 a year earlier, according to Sterling Marketing, Inc.
As margins erode, Engler and other feedlot operators say they’re buying fewer young cattle, known as feeders, to fatten.
Feedlot placements during May fell 8 percent from the same month in 2010, according to an estimate from the Livestock Marketing Information Center. That compares to a 10 percent jump in April, the eighth year-over-year increase in the previous nine months.
“You can’t buy feeder cattle and corn today at these prices and go to the (futures market) and come even close to hedging a break-even” price, Engler said. “We are significantly under water going forward.”
Engler said his feedlots are “significantly” under capacity. “It’s going to be very difficult for feed yards to keep head counts up,” he added.
In trading June 10, CME Group live cattle futures for delivery this month fell 1.9 cents to $1.02725 a pound, down 16 percent from a record above $1.22 in early April. Futures traders expect higher cattle prices later this year, with the December contract settling $1.1485.
Hog prices have also tumbled over the past two months, but remain up so far this year. August lean hog futures on June 10 ended at 92.825 cents a pound, up 3.7 percent for the week. Hog futures hit a record $1.042 in April.
Despite the reduced acreage outlook, U.S. farmers are still expected to produce a bountiful harvest this year, assuming they can avoid further weather problems. The USDA pegged the 2011 corn crop at 13.2 billion bushels, down 2.3 percent from a previous forecast but up 6 percent from 2010 and a record.
But competition for the nation’s corn supply has intensified amid rapid expansion by the ethanol industry, which is challenging livestock feeders as the single-biggest consumer of the grain.
In the 2011-12 marketing year, which begins Sept. 1, ethanol distillers are expected to consume a record 5.05 billion bushels of corn, the USDA said in the report, while livestock feed and residual use is expected to total 5 billion bushels. That would be the first time ethanol surpassed the feed and residual category.
Estimated corn stockpiles at the end of the 2011-12 marketing year were lowered to 695 million bushels from a May estimate of 900 billion bushels.
“Higher energy prices and tight world corn supplies remain long term bullish for corn prices and will further pressure already razor thin pipeline supplies,” analysts Meyer and Steiner said.
Engler is also bracing for higher and more-volatile corn prices in the months ahead, noting there are “huge ramifications” not only for livestock producers, but also for U.S. consumers, who have been increasingly pinched by rising costs for meat, milk gasoline and other goods.
“We’re looking at a wild ride this summer,” Engler said, referring to corn prices. “We could be facing a situation where there’s an actual shortage of corn. We have to ration demand.”