Rapidly increasing grain prices over the past two years have dramatically changed the dynamics of livestock production. Corn prices have made a historic rally, and feedyard costs of gain have nearly doubled. The same factors also are affecting poultry and pork producers.
To gauge how rapidly the plight of cattle feeders has fallen, a glimpse of the steer-corn ratio provides the answer. The March steer-corn ratio was 17.3, which represents a decline of 40 percent from one year ago, and a drop of 69 percent from the ratio’s highest point of 54.9 in November 2005.
Not familiar with the steer-corn ratio? That’s because it is seldom used by analysts to describe market conditions, but it’s an accurate barometer of the overall profitability trends for the cattle and hog markets.
The steer-corn ratio is the relationship of cattle prices to feeding costs. Simply stated, it is the number of bushels of corn it takes to equal the value of one-hundredweight of fed steer. This ratio divides the price of cattle ($/hundredweight) by the price of corn ($/bushel). Using this formula, a 1,000-pound steer worth $1 per pound and corn at $2 per bushel would yield a steer-corn ratio of 50. Raise the price of corn to $5 per bushel, and the steer-corn ratio drops to 20.
That’s essentially what has happened over the past two years. And a similar decline has happened to the hog-corn ratio. In September 2006, the hog-corn ratio was at 26 but declined about 62 percent to 9.9 in February of this year.
Historically, ratios at or above 20 to 1 for hogs have resulted in expansion of production, while a ratio of 15 to 1 or less has resulted in contraction of hog numbers.
Analysts, however, say using the steer-corn ratio to predict expansion or contraction of the nation’s beef herd is not accurate because of the much longer cycle from conception until a steer is ready for harvest.
Although the steer-corn ratio is not a favorite tool for market analysts, it can provide you with a snapshot of where the industry stands at any given point in time. And the prospect for improvement? A rally in the fed-cattle market would certainly raise the steer-corn ratio, as would any decline in corn prices. Unfortunately, grain prices are likely to remain at relatively high levels.
All winter the grain markets have been encouraging farmers to plant more soybeans, as those prices increased more than corn. (USDA released a Prospective Plantings Report on March 31.) Grain analysts expect as much as 6 percent fewer corn acres this year, and any delays in corn planting will only serve to drive prices even higher. Soybean acreage was expected to be up 10 percent, as farmers shifted some land away from corn to the higher priced soybeans.
Despite farmers’ intentions, much of this year’s corn crop, and any potential improvement in the steer-corn ratio, will depend on the weather in the Corn Belt. Even without weather-related problems, this year’s crop is unlikely to come close to last year’s record 13.1 billion bushels produced from 93.6 million acres.