With $4/bu. corn, we should see cattle prices 20-25% higher than they were a year ago,” contends Michael Swanson, head economist for Wells Fargo Bank in Minneapolis, MN.
Swanson, speaking recently at the Panhandle Grain & Feed Association annual meeting in Amarillo, TX, says based on a ratio of comparing cattle prices to corn prices, producers should see “$115-$120 (cwt.) fed cattle if you’re going to have $4-plus corn.
“I looked at that ratio of futures prices for both the past 20 years,” he says. “The ratio of cattle prices to corn prices is about 29. We’ve dipped down as low as 14. That doesn’t work. In good times it has been as high as 40.
“With $4 corn, cattle prices have to be higher. Compared to that 29 ratio, right now, it’s like buying $4.25 corn and selling it for $3.75. You’re going to go broke with that model. The cattleman can’t afford to put $4 corn into $85 cattle.”
Examine your stats
He encourages producers and feeders to examine their production and marketing statistics over a long period. “Go back and look at your records,” he stresses. “If you don’t have those records, you’re not doing your job. See what you sold cattle for from the corn you bought and put into those cattle. You need a benchmark to help determine what will work for you.”
The Greek financial crises that had Wall Street briefly crumbling in mid May was an example of today’s violent volatility. “And it’s built into the commodities,” Swanson says. “We’re going to have to live with that volatility in our businesses going forward.
“If you think you can get by with the same leverage and the same risk management as in the past, you’re going to be out of business. The market isn’t going to change to accommodate you. You have to change to accommodate the market.”
He says crop and livestock producers should lock in commodity prices at the same time they lock in land, fertilizer and other major inputs. “Why would you lay $100,000 on the table to buy something and not commit yourself to selling something ahead of time at a price that makes money?” he asks. “Just because you have (taken that approach) in the past doesn’t make sense in today’s economy.”
Ethanol’s here to stay
As for cattlemen hoping Congress might eliminate the ethanol subsidy – forget it, he warns. “You have Illinois, Nebraska, Iowa, Minnesota, North Dakota and South Dakota, where there are a lot more corn farmers than there are cattlemen,” he says.
“I don’t care how liberal a senator you are in those states, you’re not going to go back and tell the corn farmers you didn’t support ethanol. Once it’s in place, it’s going to take something just this side of Armageddon to get rid of it.”
Larry Stalcup is an Amarillo, TX-based freelance writer.