Perfect Storm: Corn and cattle futures see inverted trade
The story of current corn and cattle prices started in 2019 with a slow corn planting season that extended into late June. According to Bryan Irey, senior merchandiser for Greeley-based Crossroads Coop, that left the USDA struggling to estimate corn and soybean production. The estimates, based on models that rely on crops planted in a timely way, drastically overestimated yields.
When the corn belt states turned extremely dry in July of 2020, it resulted in another year of significantly overestimated yields.
In 2020, as Trump was negotiating trade with China, much of the industry didn’t see coming China’s huge corn and soybean purchases. Given the hog herd decreases as a result of African swine flu outbreaks in China, he said it wasn’t anticipated.
With two years of low yields and high demand on a limited supply right as the ethanol industry is firing back up post-pandemic, he said it’s a perfect storm of sorts, creating a demand situation the likes of which hasn’t been seen in a number of years.
A lot of the USDA estimates for 2021 corn carryout are likely 1 billion bushels higher than likely harvest numbers. It is, he said, a trickle compared to demand. May corn futures are trading, as of press time, at $7.75.
Kevin Good, senior analyst at Cattlefax, said the current cattle prices are a story of leverage and lack thereof. The May 4 inversion of June cattle futures and June hog futures, Good said, is rare. Close to record high beef prices are paired with stout hog futures prices, reflecting the fact that pork production is estimated at 2% lower year over year with slaughter capacity 10 percent higher than 2015.
“It’s a bigger story,” Good said. “If you look at the CME live hog index, that’s reflecting a huge gain in leverage compared to the packer on the pork side. Therefore, more of those high pork values are trickling down to the producer and that’s reflected in the futures.”
The opposite, he said, is true on the cattle side. The message comes down to less hogs with increased shackle space over the past five years, and more cattle and no additional shackle space for the cattle industry in the last five years.
“For hog producers, it’s a chance to take advantage of what the futures are giving us,” he said. “For the cattle producer, it’s just a tough message. Until we get more shackle space or fewer cattle going through the system, the leverage component is not going to be very favorable.”
Good said looking at carcass weights and grades, it appears that the processing is in better shape than a year ago, but the leverage remains the problem. According to the May 4 National Daily Cattle and Beef Summary, live steer weights are averaging 1,465, dressed weights are estimated at 830 pounds, beef production is 550.2 million pounds, up from 381.1 million pounds last year, and the current Choice cutout value is 301.22.
Ed Czerwein, an Amarillo-based market analyst, said it’s key now to determine how fat cattle price trends compare to those in 2015 when box beef prices were similar to current levels during a normal grilling season, rather than to 2020’s pandemic prices. Czerwein said the weekly weighted average cash steer price for the week ending May 1, 2021, for the five-area region was $118.89, which was $2.47 lower compared to the previous week and last year the same week it was $98.53 which was about $1.84 higher than the same week last year. The same week in 2015 it was $160.69 even though the daily Choice cutout now was over $40 higher than 2015.
The box beef cutout on May 4 was $301.22 compared to year over year in 2020 at $377.45, which continued to climb as the packing plant shutdowns rocked the industry. However, Czerwein said on the same Friday in 2015, it was $256.90, representing a price $40 above 2015 prices when fat cattle prices were $163.69 for April compared to $99.87 in 2020 and $132.60 in 2021. He said load counts are 211 loads lower for the week ending May 1, which is typical when prices rise, though they are higher than 2020.
According to Czerwein, the five-area formula sales volume totaled 232,998 head compared to about 240,000 the previous week. The five-area total cash steer and heifer volume was 58,280 head compared to about 57,600 head the previous week. Nationally reported forward contracted cattle harvested was over 80,000 head this week and packers had 275,000 head for April along with 247,000 head for May. The nationally reported 15- to 30-day delivery purchases this week were 24,235 head along with 30,000-40,000 head for the previous week. He said the packers already have 90,000-120,000 head each week based on the addition of the the 15-30 day and forward contracts.
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