Random Thoughts On Cattle & The Corn Rally

There are a lot of facts surrounding ethanol that aren't facts at all. One, however, has appeared in several industry articles, so let's assume that it, if not accurate, at least has some basis in fact. That is, that at $1.80/gal. for ethanol, the ethanol industry can afford to pay $3/bu. for corn (providing the 50¢ subsidy stays in place). If that's the case, and you believe the projections for gas prices moving forward then, long term, it's hard to imagine corn not maintaining a $3/bu. price level.

On another note, the discussion about corn prices changing emphasis on growth or carcass weights is somewhat misleading. Yes, it may raise the cost of producing Yield Grade 4s, or make feeders far more cognizant of selling cattle when they begin to tip over that efficiency line. But as long as fed cattle are trading at prices above cost of gains, the incentive to add weight remains.

Feeders may market on a timelier basis if they perceive the market to be at risk as their incremental improvement for additional weight will be smaller, but the incentive to make cattle larger will remain. In the near term, this will likely even be more exaggerated; with cost of gains rising so dramatically, breakevens are exploding, encouraging feeding of cattle to heavier weights.

This may be mitigated somewhat by the fact placement weights have been lower. One of the market's age-old sayings is: "light in, light out; heavy in heavy out." This rule is likely to increase weights from a longer-term perspective because, with cost of gains in the feedyard soaring, there will be incentive to put gain on outside of feedyards, which likely will mean heavier placement weights.

Cattle feeders caught in this corn rally will pay the price as they work through these higher-priced feeder cattle. And they've already begun adjusting feeder-cattle prices to reflect higher gain costs.

But there's no escaping the fact the cow-calf segment most directly benefits or is hurt by changes in supply, demand and input costs. This corn situation is especially acute for the cow-calf industry, which faces lower prices, higher feed costs, and eventually higher pasture costs when feeders/stockers compete for grass resources in a shift from calf-feds to yearlings.

It amazes me that producers have taken a far greater hit due to corn prices driven by ethanol production, and most importantly by an artificial demand distorting 50¢/gal. government subsidy, than they experienced with the loss of their beef-export markets. Yet, when it comes down to it, there's very little outcry about a subsidy that's creating a false economic environment and creating havoc on the cattle industry.
-- Troy Marshall