"We're producing about 25-million lbs. of beef/week more than last year," says Randy Blach, Cattle-Fax executive VP. That's the equivalent of the 5-6% increased production expected and seen through September of this year. "Normally that kind of increased production would equate to about a $5 change (decrease) in fed-cattle prices. We're down about $2. I think that underscores the importance of trade," he adds.
Blach is alluding to the fact that while exports are yet to retrieve all the market share lost in the wake of BSE, the net import/export picture is brighter than a year ago.
In offering perspective to participants at the annual meeting of the Texas Cattle Feeders Association, Blach explained, "Herd expansion has slowed, not stopped." He expects the Jan. 1 numbers to show a 1% increase in cow numbers, compared to the 2-3% increase most market analysts expected at the beginning of 2006. While it's true cow slaughter through September was 17% more than the previous year, Blach emphasizes the cow-slaughter level is the third-smallest in the past three decades.
Also, while domestic consumer demand has been down for the previous six quarters, Blach notes demand for Choice and higher-grading beef continues to increase.
The primary wild card for cattle prices is corn.
According to Blach, the Corn Stocks to Use Ratio for the year is expected to be 8.3%, marking only the fifth time since 1960 that the ratio dipped below 10%. That's a key reason corn prices rocketed ahead during the past month rather than taking a typical seasonal dip. Of course, the Oct. 1 USDA corn estimate added fuel to the fire -- down 2% from the September estimate at 10.9 billion bu.
"The market will be on pins and needles," Blach says. "This isn't a short-term spike (corn prices). There won't be a correction overnight." He explains increasing the cost of corn about 50¢/bu., typically decreases the price of feeders about $6/cwt. and the price of calves about $7/cwt.
Expanding ethanol production obviously plays into the short and longer trends in corn prices. For perspective, Blach says the percentage of corn used for ethanol production this year will be about 14%; it ran about 11% the previous three years. Corn usage for ethanol is projected at 19% next year. If all the proposed ethanol currently being considered are built, that rate could multiply exponentially.
Shorter term, corn's weight on calf and feeder prices is becoming more pronounced.
"Calf prices have been steadily losing ground for a full six weeks, basically since the spring calf crop started hitting the midwestern auctions early this fall," say analysts for USDA's Ag Marketing Service (AMS). "Losses have been most severe on the fleshy unweaned calves that lack their vaccinations, while the market for pre-conditioned calves and yearlings was able to stave off the bulk of the pressure.
"However, the last three weeks of sharply higher CBOT grain prices have taken their toll on yearling feeders; even the fanciest longtime-weaned calves with multiple series of shots are not immune to the market pressure that $3/bu. corn has brought. The sudden surge in the corn market was not expected (especially right during harvest) and has caused cattle feeders to refigure their cost-of-gains," AMS reporters write.
According to AMS, "Steer and heifer calves sold $1-$5 lower last week, with instances as much as $8 lower on unweaned offerings weighing over 500 lbs. "
-- Wes Ishmael, BEEF Stocker Trends