January 10, 2015

Riding the Feeder Cattle Roller Coaster

Futures prices were limit-down for 5 days in a row in mid-December 2014, the most limit-move days in a livestock contract since the BSE (mad cow) selloff in December 2003. Daily price limits in feeder cattle futures were increased from 3 cents per pound ($3/cwt) to 4½ cents per pound ($4.50/cwt), with provisions for additional expansions if needed; complete details are presented here.

For the 22 trading days in December 2014, the January 2015 feeder cattle futures contract had 10 days with price moves up or down of 3 cents per pound or more. And on the first trading day of January 2015, prices closed limit-up at the new 4½ cent daily limit, starting out the New Year with a bang (Figure 1). In contrast, February 2015 live cattle futures have had just 2 limit days (both down) since December 1, and February 2015 hog futures have had none.

So why have feeder cattle prices been so volatile lately? It helps to think about feeder cattle prices as the "shock absorber" between fed cattle prices on one end, and corn prices on the other. When buying feeder cattle, feedlots look at the gross feeding margin, which is the difference between the amount received when fed cattle are marketed and the amounts paid for corn and feeder cattle, the two major inputs.

Cattle feeders have little direct influence over fed cattle prices and corn prices, but feeder cattle prices are different. If the gross feeding margin is positive, feedlots have room to bid up feeder cattle prices; if the margin is negative, feedlots eventually back away, which puts downward pressure on feeder cattle prices. A concise overview of cattle feeding margins with detailed examples is available here and the importance of feeding margins was highlighted in an earlier farmdoc daily article (farmdoc daily, September 12, 2014).
 
With this in mind, let's look at what has been happening to fed cattle and corn prices. Fed cattle prices climbed to record levels in 2014 (Figure 2), due to tight supplies of beef and strong demand from domestic and overseas consumers. However, beef prices stalled at the beginning of December (Figure 3), leading to the downturn in fed cattle prices shown by the red arrow in Figure 2, and the selloff in feeder cattle futures in Figure 1.
 
In contrast, beef prices fell nearly twice as much in August and September 2014 (blue arrow in Figure 3) as in December 2014 (red arrow in Figure 3), and lower beef prices dragged down fed cattle prices, but it caused only a blip in feeder cattle prices. What made December different?

The answer is corn prices, which dropped 50 cents per bushel or more between early August and the mid-September harvest lows. Those lower corn prices offset the effects of lower fed cattle prices in the gross feeding margin calculation, so that feeder cattle prices remained firm. It was a much different story in mid-December. Corn prices were $1.00 per bushel higher than the harvest lows and had been putting pressure on feeder cattle prices. When beef and fed cattle prices weakened, feeder cattle prices had nowhere to go but down.

Feeder cattle futures have since recovered about one-half of the mid-December losses, and the question on many minds is, "Where do we go from here?" The events of the past month are a useful lesson to buyers and sellers of feeder cattle. While it's tempting to watch just fed cattle prices or just corn prices, it's important to keep an eye on both markets - or better yet, on gross feeding margins - to gauge the future direction of feeder cattle prices.

January 07, 2015

New Web Site Design

  • WILLAg WEBSITE - Illinois Public Media has updated our website. We'll do some adjusting along the way and are hopeful you'll let us know what changes should be made. Email Dave  with your ideas.


January 01, 2015

International Year of Soils

The United Nations Food and Agriculture Organization has designated 2015 the International Year of Soils. The organization hopes to raise awareness of the need to protect productive soils around the planet. It has entrusted a Global Soil Partnership with this task. The partnership has five pillars of action.

 

The 5 pillars of action

The Global Soil Partnership will support the process leading to the adoption of sustainable development goals for soils.

It will contribute to environmental wellbeing through, for example, preventing soil erosion and degradation, reducing greenhouse gas emissions, promoting carbon sequestration and promoting sustainable use of agricultural inputs for soil health and ecosystems management.

It will equally contribute to human wellbeing and social equity through improved use and governance of soil resources, finding alternatives to soil degrading practices through participatory experiential processes, and being sensitive to issues of gender and rights of indigenous peoples.

The 
In order to achieve these objectives, the GSP should address five main pillars of action:

  • Promote sustainable management of soil resources for soil protection, conservation and sustainable productivity
  • Encourage investment, technical cooperation, policy, education awareness and extension in soil
  • Promote targeted soil research and development focusing on identified gaps and priorities and synergies with related productive, environmental and social development actions
  • Enhance the quantity and quality of soil data and information: data collection (generation), analysis, validation, reporting, monitoring and integration with other disciplines
  • Harmonization of methods, measurements and indicators for the sustainable management and protection of soil resources

December 20, 2014

RFS2 Set to Ramp up Biodiesel Usage

U.S. EPA has stalled the release of the annual usage mandates for bio fuels in the United States. These are due out each November, but neither the 2014 or 2015 figures have been released. EPA says it will put forth new numbers next spring. In the meantime, it might be important to consider just how using the default numbers would play out for the production of ethanol and biodiesel.



The United States congress set renewable fuels mandates a few years ago. It also gave U.S. EPA the power to adjust those mandates. EPA hasn’t done so for the 2014 calendar year, or for 2015. We’ll dispose of the political baggage and simply focus on the results of using the default statutes written into the law.


December 14, 2014

Ethanol Production Profits Dim as Gasoline Prices Plummet

The magnitude of the decline in crude oil and gasoline prices has taken nearly everyone by surprise. NYMEX nearby crude oil futures this week touched $60 per barrel, almost $50 less than peak prices last summer. This is a major economic event with potentially far-reaching impacts for biofuels markets. We examined some of these impacts in two recent farmdoc daily articles (November 12, 2014; December 4, 2014). Our conclusion was that current high ethanol prices relative to gasoline prices, as illustrated in Figure 1, might slow the growth in domestic ethanol consumption, but would not likely result in consumption that is less than the 10 percent blend wall.


December 04, 2014

Growmark Energy Analyst Harry Cooney on Pricing Fuel Needs

Each Tuesday during the Closing Market Report we talk with an energy analyst. This week Growmark's Harry Cooney turned his attention to OPEC, the dramatic drop in the price of a barrel of crude oil, and what to do about pricing 2015 fuel needs. You may listen to the conversation here. 


November 25, 2014

Corn Used for Ethanol Ramping Up

The price of ethanol has rallied over the last month, spurring greater production. If the pace were maintained for the marketing year total consumption could push 5.4 billion bushels says K-State Extension Ag Economist Dan O'Brien, with the caveat that this is not likely to happen. Still, as you'll hear, he concedes it is possible.


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