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How Will A Big Crop Effect Feeder Markets?

26 September 2013

US - Cash corn in the Texas Panhandle had lifted $2/bushel since July and while there is uncertainty about the extent of corn price drops, Derrell S Peel, Oklahoma State University is under no doubt about the effect it will have on feeder price relationships.

Mr Peel writes: 'Overall feeder cattle price levels have risen sharply with prices for most weights of feeder cattle up about $25/cwt., a bit more for the lightweight calves'.

The gain in the stocker market is linked to feeder prices and the margins in buying stockers and selling fat cattle, adds Mr Peel. 

He says it can be illustrated by comparing gain now with the low feeder prices US producers saw in May. 

"Using combined auction data for the week of May 24, 2013, the price of 524 pound steers was $150.97/cwt. and the price of 823 pounds steers was $127.21/cwt," says Mr Peel. 

"This represents a $23.76/cwt rollback between the beginning and ending price and results in a value of gain of $0.85/pound for 299 pounds of gain. Last week, the Oklahoma combined auction price for a 522 pound steer was $173.52/cwt. and the price of an 818 pound steer was $151.76/cwt."

"This is a $21.76/cwt. price rollback and results in a value of gain of $1.14/pound for 296 pounds of gain. Thus, roughly the same price rollback results in a significantly higher value of gain because of the higher selling price."

Although cheaper corn means better feedlot margins, increased competition for corn may increase prices. 

Mr Peel suggests this could be bad news for cattlemen unless fed cattle move above current futures values. 

Analysts are predicting a bushel price of $4.50-$5.00 for the next crop year. This means cost of gains will be at $0.80-0.90/pound. 

"The value of stocker gain at current markets prices is in the range of $1.10-$1.15/pound," says Mr Peel. "The stocker value of gain is a reflection of the feedlot cost of gain which means that the value of gain will likely decrease some in the coming weeks."

"This will be accomplished in the market with higher prices for light weight stockers relative to heavy weight feeders. Of course, it depends on exactly what the corn price is and also on winter grazing conditions and the ability of stocker producers to respond to these market signals. There is, for example, potential for 550-600 pound steer prices to increase roughly another $5/cwt., relative to the current price level for 800 pound steers, before the expected corn price is fully reflected in stocker prices."

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