Harrington's Sort & Cull
John Harrington DTN Livestock Analyst

Friday 07/06/12

SPF 500?

While they say you should be careful under the hot summer sun, I'm beginning to wonder if they even make protective gear strong enough for hapless feedlot managers currently sweating before the fiery realities of skyrocketing corn prices and impossibly tight feeder cattle supplies.

After the board closed on Thursday, I took a snapshot of late-year risk management potential. The resulting picture was certainly not a happy keepsake worthy of the family album.

Between June 5 and July 5, the commodities that make up the three-legged stool of cattle feeding scored the following changes: December corn, up $2; August feeder cattle, off $13.22, and December live cattle, steady.

Did I mention that this particular feeder-fat spread stumbled into June already $50-plus per head underwater?

While market historians may long remember 2012's early summer explosion in corn prices, they are less likely to recall how stoically feeder cattle prices took the news.

Yes, Mr. Rancher, a $13 break in just 30 days is nothing to sneeze at. Indeed, such a negative adjustment amounts to roughly $106 per 8-weight yearling. Mr. Romney might call it pocket change, but most of us would definitely take the time to turn the couch upside down.

Nevertheless, such a small price break in the face of sharply higher corn prices and absolutely no help in terms of additional fed cattle revenue makes the feeder cattle market look like the Rock of Gibraltar.

Obviously, the cost of gain implied by corn price is a major factor in determining feeder cattle value. Here's the basic rule of thumb in explaining the relationship between changes in corn and feeder prices: For every dime movement in corn, the intrinsic value of yearling replacements is impacted by $1.10 per cwt (i.e., if corn falls, feeders are worth more; if corn moves higher, feeders are worth less).

Of course, such dead reckoning assumes that fed revenue potential (i.e., hedgable live futures) remains constant.

Now you can see how my snapshot of June markets turned out so hideously out of focus. In a perfectly balanced universe, a $2 explosion in corn prices should have translated into a $22 break in the yearling trade (i.e., nearly $9 more devastating than what we actually saw).

For anyone who been tracking the shrinking cow herd over the last decade or so, it's not difficult to explain the remarkable resilience of feeder prices in the face of rocketing feed costs.

In short, the hard fact of incredibly tight feeder cattle supplies continues to soften the theoretically bearish news of sharply higher corn prices.

How long will the feeder market stay relatively oblivious to corn priced like caviar?

Until either ranchers start producing bigger calf crops or more cattle feeders decide they can no longer risk their financial hides playing in the dangerous sun.

John Harrington

DTN/Progressive Farmer, a Telvent Brand, Chief Livestock Analyst

Phone: 402.462.8897

http://www.feelofthemarket.com

(AG)

Posted at 1:57PM CDT 07/06/12 by John Harrington
Comments (2)
Very good, JOhn. The entertaining remarks take some of the sting out of the facts.
Posted by PAUL ENGLER at 9:51AM CDT 07/16/12
Appreciate the obvious rationale, always a good word smith. Just read this comment today, and albeit today's 1st upturn in FC, the feeder market did subsequently last week recognize Econ 101 rule of if something can't last, it won't. Feeder pain is awful, though have to state no one I'm aware of was forced to buy feeders 150 days ago at indefensible costs. Can add that rancher's are doing a little sweating today as well in hot summer sun, standing on parched/burnt pastures, adimt those having contracted 4 weeks ago taking much better. Have to wonder what Dr. Froid might think of your choosing to use Romney as reference to pocket change, and why not Obama's deficit ?
Posted by Pat Capser at 1:23PM CDT 07/18/12
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