As corn supplies and basis levels shift based on local ethanol plant activities and the availability of distiller’s grains, cattle feeders can be expected to alter their feeding rations to maintain energy and nutrition, said Extension Agricultural Economist Elliot Dennis of the University of Nebraska in a letter to Extension agents from the Livestock Marketing Information Center called In The Cattle Markets.
THE SITUATION
Much of the past crop year focused on the larger-than-normal uncertainty of supply in the grain markets brought on by delayed planting, slow crop progress and prevent-plant acres, Dennis said. As corn supplies decrease, basis (sometimes called the true price) increases. Rising basis is favorable for grain producers but less favorable for ethanol plants.
Because of tightening supplies and increasing basis coupled with small-refinery waivers issued by the Environmental Protection Agency, many ethanol plants have chosen to stop operating temporarily, he said.
Dennis took the Sioux Center, (Iowa), ethanol plant as an example to illustrate the lack of supply and the corresponding response in the corn basis.
First, Farm Bureau compiled the USDA Farm Service Agency’s corn prevent planting report, and the chart showed the Sioux Center ethanol plant was at the edge where county level prevent plant acres were greater than 25,000, he said.
Thus, current and future supplies for that area likely are low, Dennis said. Using grain elevator bids and the Dec Chicago corn futures contract, Kansas State spatially plotted corn basis levels. Around Sioux Center, the basis increased anywhere from $0.05-$0.15 a bushel in September increasing input costs to corn ethanol plants.
PRODUCTION DECISIONS AFFECT BYPRODUCTS
The effect of an ethanol plant’s decision to shut down or cut production can be seen in the weekly ethanol production report released by the US Energy Information Administration, Dennis said. During September, Midwest production was down about 4% from 2018.
As the value of ethanol declines and corn prices rise, sales of byproducts like distiller’s grains become more important for ethanol plant profitability. For example, for a representative Iowa ethanol plant, distiller’s grain sales accounted for 21% of all gross revenues over the past 10 years.
That production cut ultimately affects the cattle market through dry, modified wet and wet distiller grains – a popular feed in rations for Northern Plains cattle feeders, Dennis said. As the supply of distiller’s grains decreases, prices would rise, causing the sift in ration ingredients.
In Nebraska, the price of dry distiller’s grains relative to corn has been increasing since May and was 7% more expensive in September, he said. Since distiller’s grains are difficult to hedge compared with corn, ethanol industry decisions likely will affect cattle feeders that already rely on feeding distiller grains more than cattle feeders that rely on corn.
Further, tariffs have removed China from the distiller’s grains market, Dennis said. Additional international demand likely will increase the price of distiller’s grians, but this is unlikely in the near term.
CATTLE, BEEF RECAP
Cash cattle trade took place in the Plains last week at $103 up to $107 per cwt on a live basis, up $3 from the previous week, and at mostly $165 per cwt on a dressed basis, steady to up $5.
The USDA choice cutout Wednesday was down $0.50 per cwt at $212.97, while select was down $0.15 at $185.90. The choice/select spread narrowed to $27.07 from $27.42 with 120 loads of fabricated product sold into the spot market.
The CME Feeder Cattle index for the seven days ended Tuesday was $143.09 per cwt, up $0.14 from the previous day. This compares with Wednesday’s Oct contract settlement of $142.07, up $1.10.