Higher corn futures cause feeder calf prices to dip

Beef Outlook: The USDA crop report creates uncertainty in cattle feed costs; it’s time to lock in a price.

Scott Brown

July 8, 2019

3 Min Read
Hereford calves at feed trough
EXPENSIVE FEED: Cattle producers face higher feed costs as the actual amount of harvest corn crop acres remains in flux. emholk/getty Images

As if the recent uncertainty surrounding trade agreements, future economic growth, and forage availability and quality were not enough, one of the relative constants during the past few years has now become the largest potential source of risk for feeder calf prices this fall: corn prices.

After remaining in a narrow monthly average range of $3.15 to 3.82 per bushel from August 2014 to May 2019, U.S. corn prices hit their highest level in nearly five years in many cash markets within the past month.

The result for feeder cattle futures has been predictable, as the prospect of more expensive cattle feeding has lowered the amount that feedlots are willing to pay for calves.

Just as December corn futures rocketed upward from a close of $3.72 per bushel May 10 to more than $4.68 on June 17, the October feeder cattle futures price fell from $148.75 to $137.15.

Meanwhile, October live cattle futures fell by just more than $2.30 during the same time period, indicating that changes in feed price expectations far outweighed cattle industry dynamics in feeder cattle futures.

Where will corn prices go?

Given the historically slow pace of corn planting and continued wet weather facing this year’s crop, industry analysts and the futures market struggle to identify just how much corn will be harvested this fall.

While the USDA acreage report released at the end of June helped clear up some of this year’s planting data, the fact that USDA collected much of that information before the crops were planted — given this year’s slow planting progress — lowered the reliability of this survey data, necessitating an announcement that updated information on planted acreage would be gathered in July and published Aug. 12.

Throw in the fact that USDA already had announced earlier this year (and unrelated to this year’s weather challenges) that the first release of objective yield data now will be provided in September as opposed to August, and the amount of uncertainty facing future feed price prospects is likely to drag on for many more weeks.

Decision time

So, what does this have to do with a marketing strategy for calves this fall?

With the level of uncertainty regarding feeder cattle prices in a few months, think about strategies that you can use now to protect yourself from events that are out of your control between now and sale time.

While it is always more difficult to lock in a futures price that is now much lower than a few weeks ago, understand there is a real possibility that corn prices could continue higher, further eroding feeder cattle values.

This is not about trying to outguess the market to maximize profitability, but rather foregoing some potential highs to avoid suffering through potential lows.

Opportunities exist not only in futures markets but also in programs such as Livestock Risk Protection, which offers subsidized premiums and the opportunity to buy coverage on a per-head basis rather than a fixed standard of poundage.

Unfortunately, the outlook for fall feeder cattle prices is more uncertain than in recent years because of issues for this year’s corn crop. Protecting your operation against some of this uncertainty could well be worth the cost of doing so.

Brown is a livestock economist with the University of Missouri. He grew up on a diversified farm in northwest Missouri.

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