Bullish Corn Prices Impact on the Feeder Market Debatable
Feeder cattle prices continued lower for the week ending May 13, 2011. However, strength in some auctions were noted later in the week, probably helped by a bearish week in the corn market.
The December 2011 corn contract finished the week approximately $0.15/bu lower. Live cattle futures finished the week lower after spending most of the week range-bound. Drought patterns continue through the southwest region. In contrast the Midwest continues to battle excessive rains and each day the expected acreage loss for the 2011-2012 corn crop increases. As such, corn appears to be resuming its bullish price activity.
The effects on the feeder market are debatable, one side can easily argue that feeders should weaken as long as the live cattle cannot post a rally and corn strengthens. The other argument is that live cattle fundamentals appear to be bullish beginning in the fourth quarter of 2011 and the number of available feeder cattle will become tight.
Hindsight will let us know which argument was correct, but price volatility in all three markets can provide opportunity to manage risk exposure.
Weekly USDA feeder cattle prices for TX and OK were used to calculate projected breakevens on cattle bought last week, week ending May 13, 2011. Breakevens were calculated for each weight group within sex (steer and heifer). Ration price, $/ton dmb, was estimated at $320. Other variables including interest, yardage and % feed financed were estimated to be 6%, $0.05/d and 100%; respectively. As it is known that actual input estimates will vary greatly by region and by yard within region, our goal is to illustrate pricing differentials between weight classes and sexes of cattle.