Watch Out for the Market's Wild Cards

April 27, 2012 07:28 PM
 

Call them black swans, outliers or wild cards, they give the market fits. We may see a few this year, because farmers and ranchers are at the center of some historical production swings. While grain trading and meat counter prices are determined within a large supply-and-demand market, it’s the wild cards thrown into current tight supplies this year that will add volatility and possibly change on-farm production dynamics as we know them.

Thanks to a bullish environment and agree-able spring weather, USDA is expecting more corn acres. Overall supply is an important marketing factor, but demand from China and other overseas markets has an even greater impact, says Farm Journal economist Bob Utterback. "We are in a time period when the supply and fundamentals for corn and soybeans are still important but will indicate only about 40% of the price direction," he says.

The Chinese wild card could be played. The U.S. Grains Council reports: "USDA has confirmed more than 3.9 million metric tons (MMT) of U.S. corn has been sold to China during the 2011/12 season. It’s possible that the current season could surpass the 1994/95 record of 4.287 MMT of U.S. corn sold to China." That makes for a shaky corn market.

Another wild card is the Environmental Protection Agency’s recent approval of applications for registering ethanol in 15% gasoline blends. This is a significant step forward for E15 fuel—will more U.S. corn go to ethanol production this year?

The effect of $6-plus corn and the dip in the cattle production cycle have feedlot operators eating dust. With the total U.S. cattle herd the smallest in 60 years and the high price of feed, it’s all about staying competitive with slimmer profit margins.

The price of corn is causing a paradigm shift in the ways cattle are being raised, fed and marketed. Feedlot placement weights may increase 100 lb. to 300 lb., says Derrell Peel, Extension livestock marketing specialist at Oklahoma State University. Seasonal prices will reflect forage production with more spring price peaks.

"The question is not how to get cattle to eat more grain, but rather how to produce high-quality beef using the least amount of grain," Peel says.

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