By all accounts, the South Dakota winter has been a mild one thus far. While many farmers and ranchers are focusing on all the ‘extra’ outdoor projects they are getting done this winter, and having to feed less hay to their cow herds, South Dakota cattle and corn markets have been influenced by several weather events outside the state.
When it comes to the cattle market, the major weather event drawing attention has been the extreme drought in the Southern Plains. No doubt, this drought is severe and devastating for effected producers and the impact on national herd numbers will be felt for years to come. What gained less attention though was the fast, but crippling blizzard across the Southern Plains cattle feeding belt in the week before Christmas. Cattle feeders noticed a jump in prices of more than $5/cwt that week due to disruptions in cattle movement and lower dressed weights. But, as quick as the storm moved through, prices lost half that gain the following week.
Drawing attention to this serves to makes two points. First, winter weather conditions can change almost in an instant, and for Northern Plains producers, a change to more normal conditions will require more feedstuffs and lead to higher feeding costs. Second, the ‘supply disruption’ caused by that winter storm shifted our focus away from what was perhaps the bigger cattle market weather story going into the holidays. Major metropolitan areas, particularly in the eastern U.S., experienced very mild weather conditions compared to last year that served to improve beef sales at both supermarkets and restaurants. This, in turn, provided strength to the wholesale beef market and to fed cattle prices. This type of domestic demand improvement has somewhat been eclipsed by terrific export business this past year; however, with domestic consumption accounting for almost ninety percent of U.S. commercial beef production, it is the side of the demand equation that generally has the bigger impact on cattle and beef prices. Expectations going into 2012 are that domestic demand will support higher prices. Of course, a myriad of factors, including more seasonal weather conditions in the next few months, could challenge beef demand going ahead.
Weather has also been the major driver behind the rally in the grain market since mid-December. In this case, it was extremely hot and dry conditions in key South American corn and soybean regions – right during corn tasseling. The prospects for a smaller crop in South America led to a rally of more than $0.60/bu in the corn market and $1.17/bu for soybeans (both basis March CME Group futures). This rally was an important one for both grain producers and cattle feeders. For the cash grain seller, this provided an opportunity to make additional incremental sales of both old crop and new crop. Cattle feeders hopefully locked in some of their immediate corn needs during the lows posted in late November or early December (if not, there could possibly come another pricing opportunity following the USDA reports on Thursday of this week). Regardless, livestock feeders looking for some basis weakening at the beginning of the year didn’t find much in most markets. Despite moderate cash corn movement off farms (again, due to good weather) and an anticipated slowdown of ethanol grinding following the elimination of the blenders credit subsidy on January 1, 2012, corn basis has held remarkably steady for the last couple of weeks. Thus, buying a weaker basis (which is typically seen in January) hasn’t really happened yet, and it may not if the corn market retraces its recent advance and farmer selling slows (which would be likely if the reports on Thursday are bearish to prices).
By Thursday of last week, it was appearing that the South American weather market was weakening. Addition of some moderate chances of rain to the South American forecast resulted in a drop of $0.15/bu and $0.21/bu to the corn and soybean market, respectively. On Friday, corn prices held relatively steady while soybeans dropped another $0.12/bu. As alluded to above, USDA will release its monthly World Agricultural Supply and Demand Estimates (WASDE) report and its Quarterly Grain Stocks Report this Thursday, January 12. Markets early this week will trade in anticipation of those reports, which have been big market movers for the past several of years, prompting both limit up and down moves in prices following the reports’ release. These reports will likely dampen the emphasis on South American weather as the trade focuses on new supply and demand figures.
USDA provides its final estimate of the 2011 national corn yield in the January WASDE report. Thus, it is often one of the most-anticipated features of these January reports. Current analysts’ expectations going into the report are for the yield to be about 146.2 bu/acre, compared to USDA’s previous estimates of 146.7 bu/acre. While a significant departure from this expected yield is possible, it is more likely that USDA will revise its demand numbers. The Quarterly Grain Stocks report will provide an estimate of the number of bushels of corn, soybeans, and other commodities were held in commercial and on-farm storage as of December 1, 2011. Comparing the draw-down in stocks across these reports that are available every three months provides the basis for estimating consumption (i.e., quantity demanded) of grain over the market year and are reflected in the feed, industrial use, and export use figures in the WASDE report. The reason that this might be the bigger market-mover following the January 12 reports is that corn consumption during September-November 2011 quarter languished. Exports were well below the pace needed to reach USDA forecasted levels, particularly during harvest time when exports tend to be brisk. Further, reductions in livestock numbers provided less demand support as well.
Anecdotally, it appears like there may be more corn market bulls out there than bears relative to this week’s anticipated reports. A reasonable case on both the bullish and bearish side of the market following these reports is quite possible, therefore making it difficult to forecast and to trade. For a cash grain seller that has made few or no old crop sales yet and is concerned about the downside risk, pricing some bushels prior to the reports would be prudent (remember, these are still profit prices!). Should the market rally instead, more bushels could still be priced. Either way, planning to price some bushels both before and after the report may be one way to deal with the uncertainty, remembering that in the overall scheme of things, these are quite profitable corn prices. The livestock feeder looking to buy corn will probably have some better pricing opportunities later in January or February on market retracements and strong cash movement, so short term needs should be the focus of any immediate purchases. Again, making small purchases before and after the report could potentially help manage the uncertainty surrounding the reports. Corn buyers should, however, remember that a corn market rally going into the March Prospective Plantings report and then into spring planting is quite possible, so buying 3-4 months worth of corn should be considered on any major lows that would materialize in January or February.
The information in this report is believed to be reliable and correct. However, no guarantee or warranty is provided for its accuracy or completeness. This information is provided exclusively for educational purposes and any action or inaction or decisions made as the result of reading this material is solely the responsibility of readers. The author and South Dakota State University disclaim any responsibility for loss associated with the use of this information. There is substantial risk of loss in trading commodity futures contracts and traders should consult their brokers for a full disclosure of these risks to determine whether such trading is suitable for them in light of their circumstances and financial resources.