Dillon Feuz: Do cattle & corn prices respond to supply and demand?
June 3, 2011
Let’s take a look at what has happened to box beef prices, fed cattle prices, feeder cattle prices and corn prices over the last year. There will be a few more numbers in this article than what I typically I write, but I think it is necessary to show what has happened in the markets.
I will start with USDA Choice box beef prices. In June of 2010, the price averaged $157 per hundredweight and increased to $168 by January 2011. In April of this year, the price increased to $188 and on June 1, 2011 the price had decreased to $178 per hundredweight. From June 2010 to April 2011 prices increased by 20 percent and now June 2011 prices are 13 percent higher than they were one year ago.
While I do not have the data to support this idea, I suspect that as retailers began to adjust beef prices higher to reflect the higher box beef prices they were paying, they started to see some push back from consumers. Recognizing that they could not pass a 20 percent increase in the price of beef on to consumers, they reduced their demand for box beef and the price has come down. Given the strong export demand for beef and the relatively short supply of beef, I would not expect box beef prices to decline much further for the remainder of the year.
Nebraska live fed cattle prices were $92 per hundredweight in June 2010. By January 2011 they had increased to $105 per hundredweight, and by April they were at $120 per hundredweight, trading at $124 the first week of April. That is over a $30 per hundredweight increase in less than a year. That is an amazing market rally of 30 percent in less than a year.
As box beef prices retreated from April to June, so did fed cattle prices. The average price for fed steers in Nebraska for the first week in June was $106 per hundredweight. That is still a 15 percent increase over prices from one year ago. As the market adjusts to the relative supply and demand conditions, these price adjustments occur. In April there was a very short supply of fed cattle, so packers were forced to pay more for them. That is why fed cattle prices increased more than box beef prices. However, as the supply of fed cattle have become relatively more plentiful in the last month, fed cattle prices have dropped more than box beef prices have dropped. Now at the first of June, the price change from a year ago for fed cattle and box beef is nearly identical on a percentage basis.
Before looking at feeder cattle prices, let’s look at corn prices. In June 2010, the price of corn in Omaha, Nebraska was $3.34 per bushel. By January that price had increased to $6.06 per bushel and in April of 2011 the price averaged $7.19 per bushel. However, unlike box beef and fed cattle, there has been no downturn in the price of corn. The price of corn in Omaha on June 1, 2011 was $7.35 per bushel. Corn price has more than doubled from one year ago. Think about that for a minute; I said the fed cattle market rally of 30 percent was amazing, but corn is up 223 percent from a year ago. Are the forces of supply and demand working in the corn market? I would say the answer is yes and no.
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The answer is yes in that we do not have enough corn to supply all the users of corn. The year end, ending stocks of corn have been declining the last couple of years. That means we are using more corn than we are producing. That is amazing when you consider we have had record or near record large corn crops the last couple of years. Therefore, since we are short of corn, the market forces of supply and demand are working and the price of corn is increasing to ration the relatively short supply of corn among competing users of corn (ethanol, feeding and exports.)
The reason the market forces are not working is that there is a federal government mandate on how much ethanol must be produced from corn and even though the price of corn has increased dramatically in the last year, the bone-headed, market-interfering federal government mandate states that we must produce even more corn-based ethanol this year than we did last year. Therefore, instead of being permitted to respond to market signals and use less corn, the ethanol industry, the largest single user of corn, must use more corn rather than less corn. The result is that the price of corn continues to increase.
What have feeder cattle prices done over the last year? In June 2010 a 750-pound steer in Nebraska sold for $118 per hundredweight . By January 2011 that price had increased to $127 per hundredweight, and by April the price averaged $138 per hundredweight. That is an increase of 17 percent since June 2010. Prices have now fallen back to $126 per hundredweight, a 7 percent increase over June 2010 prices.
If corn prices had stayed the same over the past year feeder cattle prices would likely have increased even more than fed cattle prices did. Even if corn prices had increased at the same rate of box beef and fed cattle prices, about 15 percent for the year, then it is likely that feeder cattle prices would be more than 15 percent higher than they were a year ago.
But that is not the case, and my biggest concern for cow-calf producers is that feeder cattle prices may still adjust lower, particularly as fall approaches and there is a much larger supply on the market. Consider what has happened to feedlot profitability over the last year. In June 2010, feedlots were probably averaging around $125 per head positive returns to cattle feeding, based on my model predictions. In January of 2011, they were probably around $40 per head returns and in April of 2011 that return was close to $175 per head. Now, five weeks later, they are likely losing about $60 per head. If those negative returns continue, and if the price of corn remains relatively high, then feedlots will definitely try and buy feeder cattle cheaper to get back to positive returns.
So, if you cow-calf producers and stocker operators receive a much lower price this fall for your feeder cattle do not blame the feedlot owners and don’t even blame the “evil” packers. They are both responding to market conditions. Blame your U.S. congressmen and let them know that you do not support the mandates on the quantity of ethanol that must be produced from corn.