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Basis for Corn a Concern for Cattle Feeders

June 8, 2011
By: Justin Gleghorn, Brock Thompson Trading, Amarillo, TX
 
 

Live cattle trade for the week ending June 3, 2011 was steady with the previous week. Although the live and feeder cattle markets act lethargic, it appears that a short term support area may be established.  However, as we are only entering the summer feeding season, it is unlikely that the market has seen a bottom in the summer contracts. 

Corn price has continued to rally, but more importantly the basis situation from Kansas to Texas has become a common issue of discussion.  The basis for corn delivered to Hereford, TX averaged approximately $0.70/bu for May. 

Gross arithmetic tells the cattle feeder that cost of gain will be increased approximately $0.04/lb from corn basis alone. Cattle feeders are becoming much more willing to look at alternatives to corn; including wheat and increased use of corn by-products. 

As the drought has shown little sign of easing throughout the Southwest, cattle placements into feedyards have accelerated over the last couple of months.  This may lead to a higher than expected supply of cattle for late summer and early fall.  With that the supply of feeder cattle has kept prices relatively stable as cattle feeders show an appetite to place cattle on feed although grain and live cattle prices do not allow the feeder to pencil a positive breakeven.    

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Weekly USDA feeder cattle prices for TX and OK were used to calculate projected breakevens on cattle bought last week, week ending June 3, 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. 

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