Cattle profits

A sharp drop in feed corn prices caused by the huge U.S. harvest last month has put the nation’s cattle feedlots in the black for the first time in more than two years.

But analysts warn those profits could soon disappear as the prices they pay for scarce lightweight calves remain near record high.

Feedyards and packing plants -Cargill Inc. and Tyson Foods Inc. – are drawing from a shallow pool of cattle after multi-year droughts in the country whittled the herd to its lowest in more than 60 years.

The Denver-based Livestock Marketing Information Center calculated that feedlots in October, on average, made about $39 per head on cattle sold to meat companies. That compares with a loss of $21 per head in September, which was the29th consecutive month of losses.

Feedlots last month saw less red ink on their books largely because farmers reaped a bountiful fall harvest, which sank the price for corn, the main ingredient in livestock feed, to its lowest in three years.

In October, the price for 651-to-700-pound yearling steers at the benchmark Oklahoma City National Stockyards Co. peaked at their highest ever at $174 per hundredweight, according to stockyard sources.

Those prices have since come down to an average of about $169 per cwt last week, based on USDA data. That price reduction coincided with costs for slaughter-ready cattle that pulled back from last month’s record-high of $132 per cwt to roughly $130 to$131 last week.

Feedlots made money on feeder cattle that they purchased four to five months prior to them surging in October, said the Denver-based LMIC’s director Jim Robb.

“We have ratcheted up feeder cattle prices to such high levels that we won’t see that euphoria for placing cattle in feed lots in the months ahead,” Robb said.

Armed with less-expensive corn, feed yards continue to snatch up available feeder cattle to offset surplus feeding pen space. They are also guided by the belief those animals will be worth even more as ranchers restock herds amid tight supplies.

“With roughly 10 million cattle on feed in feedlots that can hold more than 1,000 head, you’re only using about 60 percent of bunk or feedlot capacity,” said Elaine Johnson at CattleHedging.com in Denver, Colo.

Uncertain hog supply

Hormel Foods said investors have pitched expectations for its 2014 profits about right as it cautioned that higher beef costs and “uncertainty” in hog supplies would erode somewhat the boost to margins from lower grain prices.

The meat group, whose brands include Spam luncheon meat and Jennie-O turkey, said that its earnings in the quarter ending Oct. 27 had soared by 18 percent, on a per share basis, to $0.58, helped by a rise in retail pork prices.

In Hormel’s refrigerated foods business, its biggest earner, the group said that a 30 percent rise in operating profits reflected “enhanced margins in our retail bacon business, along with improved pork operating margins as compared to last year’s challenging pork operating environment.”

The comments tally with those from the USDA which highlighted a succession of record highs for U.S. retail pork prices over the summer, reaching $3.76 a pound over the summer, up 6.5 percent year on year.

And of that, $2.54 a pound represented costs beyond the farmgate, to processors and retailers.

“While both components of the total spread widened – wholesale-to-retail component and the farm-to-wholesale component – the wholesale-to-retail component increased the most,” the USDA said in a report last week. “It is possible that record-high retail beef prices emboldened retailers to increase pork prices, on the assumption that even if they raised pork prices, consumers who treat beef and pork as substitute goods would still pay less per pound for pork than for beef.”\

CORN ANALYSIS

Corn closed the week $.04 3/4 lower. Last week, private exporters did not report any private sales.

Weekly export sales of corn showed a total of 39.8 million bushels, well above the 11.2 mb needed each week to reach the USDA forecast of 1.225 billion bushels.

Annual exports total 1 bb of the 1.225 bb that was forecasted and is 490 mb, better than last year’s export pace.

The USDA reported U.S. crop progress has now reached 95 percent harvested.

The five-year average pace is 91 percent complete.

Argentine corn planting advanced to 44 percent complete as of Nov. 21, up from 41 percent the week earlier, but remains significantly behind average of 70 percent.

The late start to planting given early dryness has been followed by heavy rains of late, which ultimately will likely prove beneficial, but are keeping activity slow at the moment.

Corn looks more likely to fall into a trading range for the winter months with $3.87 downside price support and the upside limited until springtime, when the possibility

exists for a weather-related rally.

Strategy and outlook: Producers are 100 percent sold of 2013/14 crop. Producers are 10 percent sold of the 2014/15 crop.

SOYBEANS ANALYSIS

Soybeans closed the week $.17 higher from last week.

Last week, private exporters reported a sale of 230,000 metric tons of soybeans to China, cancellations of 300,000 mt of soybeans to China and 585,000 mt of soybeans sold to an unknown destination.

Weekly export sales of soybeans showed a total of 51.8 mb, well above the 8.1 mb that is needed each week to reach the USDA forecast of 1.370 bb.

Total export sales of 1.352 bb is 93 percent of the USDA’s forecast.

Brazilian soybean planting continues to move along at an excellent pace, with 78 percent planted as of Nov. 21, up from 73 percent the previous week and compares to 76 percent average.

Argentina advanced to 44 percent complete, up 16 percent from the previous week and in line with the average pace of 44 percent.

Weather looks nearly ideal in South America, but any stretch of adverse weather should send prices soaring. If this occurs, producers should look to sell remaining inventory levels and make 2014/15 sales.

There remains no incentive to storing soybeans this year with the market signaling prices are better now than expected next summer.

Strategy and outlook: Producers are 80 percent sold of the 2013/14 crop. Sell 10 percent at $13.53 and 10 percent at $13.74.

Producers are 10 percent sold of the 2014/15 production. Sell 10 percent at $12.10.

This material has been prepared by a sales or trading employee or agent of Midwest Market Solutions and is, or is in the nature of, a solicitation. This material is not a research report prepared by Midwest Market Solution’s Research Department. The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that Midwest Market Solutions believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such.

Brian Hoops can be reached at (605) 660-1155.