Since March 31, when USDA released its quarterly Grain Stocks report that showed corn demand has yet to let up, corn futures have soared. May corn futures rocketed from just under $6.95/bu. to nearly $7.70/bu. in just four trading days. That dramatic price move has many in the industry wondering when rationing will begin and which sector of the industry is most vulnerable due to uncovered feed needs.
“We’ve seen very little evidence of demand rationing in corn,” says Joel Karlin, sales coordinator for Western Milling, Goshen, Calif. Corn prices of $6/bu. and $7/bu. did little to ration demand. But now some sectors—particularly those that have not covered their corn needs—could be feeling some pain.
Ross Brainerd, merchandiser with Commodity Specialist Co., Kansas City, Kan., says more end users are hand-to-mouth corn than at any other time in recent history. “The EU consumer, the American consumer, they are so naked, so hand-to-mouth, it is scary,” Brainerd says. “We could be destroying the demand base.”
Foresight in hog sector and poultry sectors
The one livestock sector that has shown insight is the hog industry due to the drubbing hog producers took last year. “They probably locked in a $20 per head profit earlier this year,” says Brainerd.
Over the next several weeks, the trade will be watching USDA’s weekly broiler and layer numbers to see how soon these sectors reduce flocks. “They have a shorter production cycle,” says Karlin. “They can cut back earlier than other sectors.”
Cattle priced right
Many cattle producers appear to have locked in at least a portion of their corn needs, but they now face the decision of whether to sell their herds or continue to buy additional corn needs hand-to-mouth. “With a 700-lb. beef cow bringing near $1,000/head, your choice is to liquidate,” says Brainerd.
Getting out of the industry now is not a bad idea, agrees Karlin, especially for those producers who are older and considering retirement. “Beef producers will be able to lock in a profit for the next 60 to 90 days, though,” Karlin says. “Cattle prices are at record highs and the number of fed cattle are now at a 40-year low.” Once consumer price resistance at retail sets in, though, cattle prices will plummet.
Dairy’s pain continues
While cattle producers, who have few alternatives to corn, will be penciling out whether they’d be better off exiting the industry than paying spot corn prices in upcoming weeks, Brainerd says that dairy producers should be searching for cheaper alternatives to corn such as corn gluten feed.
“Dairy producers have, by and large, not covered their new-crop feed purchases,” says Dave Kurzawski, broker with FCStone’s dairy division, Chicago. For decades leading up to 2008, dairy producers had locked in their feed needs based on traditional seasonal price dips. “All that changed in 2009 when feed prices remained unusually inflated against sharply declining milk prices. A large percentage of producers took a more hand-to-mouth approach and have more or less maintained that philosophy ever since,” Kurzawski adds. “But with profit margins on U.S. dairies as compressed as they have been for the past 24 to 30 months, how can we blame them?”
L. J. “Bees” Butler, agricultural economist with the University of California, Davis, agrees. “Many dairy producers locked in feed in October 2008 when they really should have been reducing cow numbers,” Butler says. Those producers got caught feeding that high-priced feed the following winter and spring after milk markets had collapsed.
This year dairies dependent on purchased feed may not have a choice other than to reduce cow numbers. “Our highest priority these days is to watch our receivables,” says Karlin. “And lending institutions do not have a high degree of interest in expanding loan portfolios.”
Kurzawski notes that the recent milk price rally, if anything, has given the dairy industry a reprieve from bankers who would have otherwise shut the book on more operations during the first quarter of 2011.
Tyson Foods, the world’s largest processor and marketer of chicken, beef and pork, announced recently that it covered most of its corn needs on a break in corn prices. Tyson noted in its quarterly investor call in late March that after being caught by high corn prices in 2008, it has also started to buy call options, which allows it to purchase corn at a predetermined below-market price should prices rise.
“Because so many people are hand-to-mouth, price moves will be more magnified,” says Brainerd, who expects corn to break $8/bu. “There’s not much carryover. Weather problems will send prices higher.”