Wednesday, October 11, 2006

Feed Grains and Feeder Cattle

Those following agricultural commodity markets lately have been watching the correlation between dropping prices for feeder cattle (with fed cattle also falling during this period) and the uptick in markets for feed grains, particularly corn.

The December Corn contract has spiked up more than 50 cents from mid-September lows of 2.35, recently hitting the $2.90 range, an increase of more than 20 percent. Optimism about demand is there, and the grain alcohol business is undoubtedly fueling that optimism.

Feeder cattle, on the other hand, have been dropping significantly. Looking at the October contract, which reached $119 in early September and is now in the $109 range. Fed cattle futures have also had a decline in the period, but not so much. The February contract (a match for October placements) declined from $93 to 89 over a comparable period. Thus, just doing some rough assessment here, it looks like those feed costs are bearing some weight on this market.

But is this really going to be the case? Oddly enough, the expansion of ethanol plants means that there is higher demand for corn, and thus higher prices for corn producers. However, it does not necessarily translate into correspondingly higher feed costs for cattle feeders -- at least not those situated within close proximity to ethanol production facilities. Distillers grains are going to be even more abundant than ever before, as this byproduct needs to be removed as ethanol is being made. In its wet form, it has a relatively short shelf life - say ten days in hot weather - meaning that it will spoil if not used.

Query whether this burgeoning supply of distillers grains will not mean higher feeder cattle prices than this market is otherwise indicating. Feedlots close to the supply of these grains will have a significant locational advantage that translates into lower finishing costs. As they compete for those scarce feeder supplies (made moreso by some herd culling this summer due to drought), it may be the case that the farmer and the cowman will indeed both come out fairly well in this current market. (Does anyone remember that song from Oklahoma!)

Best regards.

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