“The cure for high prices is high prices,” the old saying goes, and rising corn prices will produce belt-tightening among its users to limit costs and ensure adequate supplies.
Derrell Peel, Oklahoma State University agricultural economist, wrote in a letter to Extension agents called Cow/Calf Corner that higher corn prices provide incentives for feedlots to change how cattle are finished, and those decisions then signal the rest of the cattle industry to make production adjustments.
MARKET RESPONSES
Higher feed costs imply lower feeder cattle prices with lighter weight feeders under more pressure than heavier weights, Peel said.
Corn demand comes from many different markets including livestock feed, industrial use (primarily ethanol) and exports, he said. As prices rise, each market will react to reduce corn use. With corn as the driver, other feed grains and by-product feeds generally will rise proportionally.
The cattle industry will react to high feed prices somewhat differently than other livestock species, Peel said. Unlike hogs and poultry, where their monogastric biology means using less feed implies reduced production, the ruminant biology of cattle means the industry will use less grain by changing how cattle are produced more than by changing production levels.
The central decision in that determination is feedlot placements, he said. Individual feedlots often have particular preferences for size, breed and type, gender and overall quality of the feeder cattle they purchase but also have the flexibility to feed others.
In general, feedlots can place feeders weighting from less than 600 pounds to more than 1,000 pounds, Peel said. One of the biggest decisions for feedlots is whether to “buy pounds” or “feed the pounds.”
As high feed prices push the cost of adding pounds, feedlots are incentivized to “buy more pounds,” or place heavier feeder cattle, he said. This uses other (i.e. forage) feeds to add weight prior to feedlot placement.
That is the advantage of the cattle industry, Peel said. If all the cattle finished in feedlots in 2021 (that would have been fed anyway) are placed an average of 100 pounds heavier, the amount of reduction in total concentrate feed use is significant.
LIGHTER FEEDER PRICES DECLINE
When feedlots demand heavier cattle, prices for lighter feeders will decline relative to heavier cattle, Peel said. But higher feed prices likely also mean overall feeder cattle prices will decline as well.
The change in feedlot demand for light versus heavy weight feeder cattle simultaneously provides incentives for stocker producers to add weight to feeder cattle, he said. In one calculation, the value of stocker gain is roughly $0.75 a pound when corn is $3.65 a bushel but increases to $0.97 when corn increases to $5.35.
CATTLE, BEEF RECAP
Fed cattle trading was reported in the Plains last week at $108 to $111 per cwt on a live basis, down $1 to $2 from the previous week. Dressed-basis trading was seen at $172 to $174 per cwt, down $2 to $3.
The USDA choice cutout Tuesday was up $2.45 per cwt at $217.49, while select was up $0.60 at $206.44. The choice/select spread widened to $11.05 from $9.20 with 124 loads of fabricated product and 24 loads of trimmings and grinds sold into the spot market.
The USDA reported Tuesday that basis bids for corn from livestock feeding operations in the Southern Plains were unchanged at $1.21 to $1.27 a bushel over the Mar CBOT futures contract, which settled at $5.26 a bushel, down $0.05 1/2.
The CME Feeder Cattle Index for the seven days ended Monday was $132.90 per cwt, down $0.53. This compares with Tuesday’s Jan contract settlement of $134.40 per cwt, down $0.17.