For the week ending Sept. 23, 2011, the corn market closed $0.53/bu. lower, with the December 2011 contract at 638. This is the lowest weekly close since June 2011.
While the drop in price is welcomed by cattle feeders, it is important to keep in mind that this type of volatility makes planning and implementing risk management strategies extremely difficult. The plummeting corn price can be directly tied to the sharp increase in the U.S. Dollar Index and long liquidation from investment funds. It has been known for some time that funds were long corn and, as they have to balance their portfolios, we see price activity like we experienced in the corn market this week.
With that discussion, the drop in corn price has given some much needed relief to cattle feeders. Prior to September, the projected cost of gain was historically high and the appetite for owning and feeding cattle was dim. However, within three weeks projected cost of gain has decreased 11% to 14% across most weight classes of cattle.
This coincides with a slight reduction in live cattle futures prices, but the pullback in live cattle is marginal compared to the reduction in corn price. A larger problem that continues to warrant discussion is the lack of available forage for feedyard diets, especially in Texas, Oklahoma and Kansas. The summer drought has depleted hay and there will be little if any cotton byproducts available to use in feedyard diets. This has left some feedyards scrambling to lock up forage and beginning to use nontraditional forages in their diets.
The cattle markets have taken some heat over the last two weeks from outside markets, but they continue to hold their own and look favorable as we end the month of September. The Cattle on Feed report (Sept. 23, 2011) was bullish, with COF at 105%, placements at 99% and marketings at 107%; all values are year-on-year comparisons. The marketings were considered the most bullish, as it appears that demand remains strong and our industry continues to move product rather impressively.
We are entering a period in the cattle market where year-on-year placements should continue to decline, as most cattle have been placed because of the drought. As such, we look for this number to decline in future reports. The key will be to maintain strong marketings in the near term.
Weekly USDA feeder cattle prices for TX, OK and KS were used to calculate projected breakevens on cattle bought last week, week ending September 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.