Analysts predict sustained drop in feed prices, weather willing
Dairy, livestock producers cautiously optimistic, but drought looms
By CAROL RYAN DUMAS
Last week's USDA report showing that more corn will be planted this year and the amount in storage was more than anticipated sent prices tumbling by more than 15 percent in a few days.
That was bad news for corn farmers, who had been reaping near-record prices, but it also sent a wave of optimism through the livestock industry, which has struggled with high feed prices. Corn is not only a major ingredient in livestock feed, but it drives the prices of soybeans and other commodities used in feed.
At 97.3 million acres, corn planting intentions are a little higher than last year's planted acreage and 6 percent above 2011. If realized, this year's corn acreage will be the largest since 1936, said Darrel Good, ag economist with the University of Illinois.
But looming in the background is the prospect of continued drought in parts of the Plains. Nebraska, Iowa and southern Minnesota -- all major corn-producing areas -- are still in the grip of drought.
"In my mind, none of this is going to matter if we have another severe drought," said Intermountain Beef Producers owner Cevin Jones. The Eden, Idaho, feedlot bought corn last week when it dropped. Jones is hoping for relief from high feed prices and better returns on finished cattle but said there's a long way to go before the corn is planted and in the bin.
Time and weather will tell, he said.
Last year, expectations of a large crop outlook and lower prices abounded until severe drought ravaged Midwest crops and corn prices soared, Good said. The cash corn price peaked in late August and early September at about $8.25 a bushel.
More than anticipated
The shock in the market during the past week was not so much the acreage intentions but the grain stocks, said Roy Huckabay, executive vice president of The Linn Group, a Chicago-based Futures Commission Merchant.
At 5.4 billion bushels, March 1 stocks were 350 million to 400 million bushels higher than expected, and soybean stocks, at 1 billion bushels, were 50 million to 70 million bushels higher, he said.
Don Roose, president of U.S. Commodities, a trading and risk management firm in West Des Moines, Iowa, pegs those unexpected differences at 370 million bushels for corn and 53 million bushels for soybeans. Soybean futures also saw an immediate price decline by as much as 50 cents a bushel.
"Your buffer is a little bigger than the trade thought at the start of the day," he said.
That shows users are doing a decent job of rationing stocks -- a plus for the livestock and ethanol industries, both of which depend on corn, he said.
Speculation and every bit of news drive corn prices, and the manipulation and volatility are unsettling, said dairyman Tony VanderHulst, co-owner of West Point Farms in Wendell, Idaho.
He said he'd like to think corn will follow trade estimates of lower prices, but there are always scare tactics -- such as another storm or farmers not being able to get into their fields -- that affect the price.
"It's anyone's guess," he said.
But it's no speculation that all feed costs are driven by corn, and last year's drought and heat led to skyrocketing prices after everyone was expecting $4 a bushel corn, West Point partner Arie Roeloffs said.
He's more worried about weather this year than he was last year, he said.
Most dairymen are not contracting for grains because the markets are too volatile, he said. Those who do also lock in milk prices.
The drop in corn prices is positive, he said. Every $1 a bushel drop represents a $35 decrease in a ton of corn that's now running about $310 a ton.
The dairy's current total feed costs are about $8.80 per cow per day, with about $2.23 going for corn. If corn dropped to $4 a bushel in Chicago -- or $5.50 a bushel in Idaho due to transportation costs -- that corn cost would drop to 73 cents per cow per day, Roeloffs said.
That would bring their cost of production, now running $18.50 to $19 per hundredweight of milk, more in line with the price Idaho dairymen are getting for their milk, about $17.50, he said.
The bottom line for dairy producers is their cost of production is considerably lower than it was the day before the reports were released, said Sarina Sharp, market analyst for the Daily Dairy Report.
The price for new crop corn is now well below old crop corn, and that presents an opportunity to buy feed at lower prices, she said.
March 1 corn stocks, at 5.4 billion bushels, were 10 percent below a year ago and the lowest since 2004, but traders were anticipating they would be even smaller, and the percentage of use is smaller than in 2004, she said.
"So the market was leaning one way, and it got quite a big surprise," she said.
As for planting prospectives, corn acreage is slightly higher than last year, soybeans are down only slightly and wheat is up slightly. Corn acres would suggest the U.S. could have record high production, barring drought or other weather events, she said.
"So we are facing a record high corn crop even as demand is down dramatically," she said.
Corn usage is 14 percent below a year ago. Some of that could come back, but not all of it, she said. A huge corn crop and reduced demand suggest lower corn prices this fall, she said.
Lower corn prices could trigger more domestic milk production, but lower global production offers more opportunity for producers to see positive margins, she said.
With markets reacting -- probably overreacting -- to last week's USDA reports, the important thing is that dairy producers take advantage of lower-priced corn and lock it in, said Robin Schmahl, commodity broker and owner of AgDairy LLC, Elkhart Lake, Wis.
Trade estimates are that corn prices will continue to fall, but "trade estimates are one thing, real numbers are different," he said.
"We've got a lot of year ahead of us," he said.
Doing nothing and buying hand-to-mouth could put producers in the same situation as last year, and this year is likely to make or break a lot of people, he said.
Milk prices are not responding to the drop in corn prices. Class III futures are following underlying cash prices and were down early this week, he said.
Beef cattle outlook
Lower corn prices could also allow feedlot margins to improve.
Historically, however, as soon as there's a break in corn prices, feeders spend it on feeder cattle, said Bob Wilson, market analyst and broker with HedgersEdge in Denver.
The average feedlot is probably running at losses of $50 to $60 a head. Some might actually be breaking even, but none are in the black yet, he said.
The futures rallied on last week's plantings and stocks report with feeders limit up $3 a hundredweight and fed cattle up $1.50 a hundredweight. Fed cash prices had started the week steady at $125 a hundredweight but were up to $129 in the corn belt and $128 in the Southern Plains by week's end, he said.
Supplies of feeder cattle are still at the low end but above a year ago. He said he'd like to think the market has put in a bottom, and he's expecting a seasonal run on feeder prices but not above last year's record-high price, he said.
The situation is fairly bearish for grain prices, which is good from a livestock perspective. But even with lower corn prices, the only way to get feedlot margins in line is to keep pressure on feeder cattle prices, said John Nalivka, owner of Sterling Marketing, a Vale, Ore., consulting firm for the red meat industry.
The estimated breakeven on fed cattle was $129 per hundredweight in 2012, compared with $111 in 2011. The industry has finally gotten the break-even point down to about $127 this year. The only way to keep things on that same trend is to not let feeder prices get away again, he said.
The general feeling among feedlot owners is they're not going to buy cattle if they can't make a profit. Beef prices are going to be limited on how high packers can push prices, considering the competitiveness of pork and poultry, he said.
Cow-calf producers also stand to benefit, as feeder cattle prices would likely increase if grain stocks increased, said Glynn Tonsor, ag economist with Kansas State University. And a large corn crop coupled with favorable pasture recovery, both of which are currently far from certain, may well set beef cow herd expansion into motion, which would further support feeder cattle prices as heifers would be removed from the supply, he said.
"If another drought was to be experienced in cow-calf regions but not the Corn Belt in 2013, we could see a reduction in corn prices, additional cattle herd liquidation, and tempering of cattle prices in general," he said.
If a drought were experienced both in cow-calf regions and leading corn production states, an escalation in corn prices would be expected, even larger cattle herd liquidation could develop, and cattle prices could weaken further, he said.
Farmers and ranchers know the possibilities a big corn crop would present, but this growing season they still will find themselves looking to the sky for the answer.
"Supply is just tight enough and demand is just high enough. We need a good (corn) crop. We have the ability to do that, but it's up to Mother Nature," said Roose, the president of U.S. Commodities.