Corn Prices and Falling Cattle Numbers

I’m a devotee of Market to Market, Iowa Public Television’s farm program. Because Idaho PTV broadcasts it at the ungodly hour of 6:30 a.m. on Saturdays, I seldom see it on TV, but I can catch it on the internet anytime, and even see episodes I’ve missed.  To get in the spirit of the thing, I suppose that by 6:30 I should already have been up and out to check the sheep, or something. Oh, wait, I used to do that during lambing season — and at  midnight, at 2, at 4….it was enough already.  And my in-laws in Illinois, who actually do grow corn, are on the Redneck Riviera this time of year, so they’re not sitting at their kitchen table in their John Deere caps at that hour of the morning, either.

My favorite part of the program is the last segment, where one of several rotating commodities experts pontificate on whether it’s time to sell that big pile of corn that we all have in our backyard silos — fraught with tension, these discussions.  Will prices rise or fall?  Time to buy some puts?  Fun, especially if you have no money invested yourself.  My favorite gurus are Virgil Robinson, Sue Martin, and Tomm Pfitzenmaier.  I love Virgil because he predicted the big run-up in grain prices back in 2008.  I like Sue because I can imagine being her, if I’d been born with better career sense.  Virgil always thinks prices are rising, and Sue always thinks prices are about to fall, so if you alternated acting on their advice, you’d probably break even.   Tomm Pfitzenmaier — well, I just like his name.

So what are these experts saying?   I’ll paraphrase the last few episodes.  Cotton first: where prices have been screaming higher and higher for months and are now over $1.60 a pound.  This after years and years, decades really, of prices between 40 and 60 cents a pound, prices that effectively held down other fibers, like wool. Some of this was due to the subsidies paid to American agribusiness to grow cotton, one of the most soil-draining, pesticide-intensive crops ever.  And it’s not like we actually even make anything from our cotton anymore: we apparently ship almost all of it to mills in Asia.  But the subsidies caused overproduction which in turn bankrupted poor cotton farmers in Africa.

The differences now, the things that are affecting all commodity prices, boil down to climate and China.

Corn is the big player.  The U.S. Grain Council predicts that the Chinese may import up to 9 million tons of corn in 2011-12, up from 1.3 million in 2010-11.   But the U.S. Department of Agriculture still estimates that China will import only 1 million tons in 2011-12.  So if the Grain Council is right and the USDA is wrong, all hell is about to break loose on the grain markets.

China used to grow enough cotton and corn to supply its domestic needs, but now, word is that China is short 10-15 million tons of corn.  China also buys 60% of all the soybeans available on the world export markets. That’s right: for every 10 tons of soybeans exported, China buys 6 of them.  By 2015, it might be importing 25 million tons of corn, too.

Last Friday, corn was $6.65 a bushel, up from $5.40 only a month earlier.  This is lightning speed in the grain markets, or anywhere, really.

Which brings us to beef cows, of which there are 92.6 million head in the U.S., a 10% drop since 1996.  You have to go back to 1958 to find a year when the U.S. had fewer cows than it does now.   Higher grain prices usually mean a drop in steer prices, too, but this hasn’t happened.   The smaller feedlots fold, but the large corporations just keep buying cattle.  And yet, beef cow numbers are not expected to rise.  What’s going on?

Strong steer prices usually encourage ranchers to hold back heifers from the slaughterhouse, but replacement heifers actually declined 3.8% over the past year.  This means that the national beef cow herd will continue to decline, which in turn means high beef prices despite high corn prices.

In North Dakota, Pfitzenmaier says, he had a rancher tell him that what with most ranchers being “older folks”, they’re seeing “a great opportunity to liquidate the herd right now with these high kill cow prices, this high calf market.”  In other words, their children don’t want to be cowboys, and the parents have incentives to get out while the getting is good.

Over the past fifteen years, beef cow numbers in Lemhi County have dropped from just over 50,000 to 39,000, about a 20% decrease.   The larger operators consume the smaller, but the survivors don’t increase their herds, even with more land.  They spread the cows they have over more ground in an attempt to reduce costs.  It’s not a particularly good strategy, but it’s all they have left.

8 Responses to “Corn Prices and Falling Cattle Numbers”

  1. Daniel Berg Says:

    I’ve often wondered about what effect the appreciation of the yuan will have on the eating habits of the Chinese. With the yuan kept artificially low, the purchasing power for the Chinese is kept in check. I’ve seen estimates that it would increase in value by 30-50%.

    It seems like increased prosperity in a lot of countries equals increased demand for meat. If the global purchasing power for Chinese citizens increases by that much, how much will the incremental increase be in demand for meat? If demand for cattle increases, will that demand be met domestically or will there be higher demand for imports? There has been a ban on US beef imports in China since 2003. They are currently a net exporter in that category. They also have a lot of room to increase cattle production domestically.

    http://www.r-calfusa.com/news_releases/2010/100701-ceo.htm

    Also, some interesting stats on US beef exports:
    http://www.ers.usda.gov/news/BSECoverage.htm

    I guess I thought that if our export market for beef jumped dramatically, that prices would increase as well and there would be more of an incentive to increase beef production. It appears however that there isn’t much of a correlation between higher cattle prices and increased beef exports. It seems like US anti-cattle people might not have much to fear when it comes to a rising export market for beef.

    Here’s a supplimental article on rising demand for corn from the China Daily:

    http://www.chinadaily.com.cn/bizchina/2010-07/27/content_11053192.htm

  2. Ralph Maughan Says:

    There surely is increased demand from China because of prosperity. While most of the world struggles, their GDP grew 10% last year!

    Demand for corn is also up because of its wasteful use making ethanol for mixture with gasoline.

    There have also been more than average number of crop failures worldwide.

    The prices of unprocessed food are very responsive to changes in supply and demand. That means a small change in either will cause a more than proportional change in price.

    The heavy entry of such a huge demand coupled with weak food supply will drive up food prices. There will many political, economic and environmental impacts in the United States.

    • Daniel Berg Says:

      Ralph,

      Do you believe that increased demand for corn from China will actually hasten the move away from ethanol production? I wonder whether the higher prices will discourage ethanol production and have somewhat of a net/net effect?

      There has to be a breaking point where government subsidies no longer seem viable even to some of the supporters of ethanol.

      • Ralph Maughan Says:

        Daniel Berg,

        With all of the talk about cutting government, I’d think ethanol subsidies would be a big target, but the whole process of making or unmaking the budget has become irrational and unpredictable.

        If the Democrats were smart, they would hold all the subsidies that flow to primarily “red” states hostage.

        If these ideological decision-makers win with their draconian budget cuts, there will be a full out Depression and the planting of corn might actually drop but then too demand. We need a supercomputer to develop all the possibilities.

  3. SEAK Mossback Says:

    Our general agriculture policy is really hard to make sense of sometimes. I’ve seen the cotton in the Phoenix valley down toward Gila Bend and remember reading in Cadillac Desert that the driving purpose of the Central Arizona Project was for agriculture, mainly cotton in that area, as it was not needed to domestic water consumption. Making a river flow up through mountains has taken the equivalent of 2 nuclear power plants and then what’s left to drain back after agriculture in high salt soils is so salty it takes more energy to desalinate to deliver required quantity and quality across the border to Mexico. Meanwhile, they were paying farmers in the SE US not to raise cotton and, as mentioned here, massive wasteful subsidies of money and resources to raise it in new places has contributed to bankruptcy of third world farmers. It seems like things couldn’t be worse just letting supply and demand work.

    • Ralph Maughan Says:

      SEAK Mossback,

      I don’t necessarily disagree with you.

      To add, I think the interaction of supply and demand is a fact. It always works in some way or another.

      One question is whether some industry or occupation deserves a subsidy to increase supply over what it would be otherwise. Another is of those interests who want a subsidy to stimulate demand for their service or product.

      Then we have prohibitions, such as illegal drugs. Supply and demand works despite the prohibition. The strong demand calls forth the supply anyway, but the price is artificially high. A much better method might be legalization with taxes to offset the damage, but Republicans today don’t believe in any taxes even on harmful activities.

      • Daniel Berg Says:

        I think this is a tought question. I wish someone had the answer.

        I’ve thought about whether one industry or product deserves a subsidy over another. Some subsidies and projects are obviously ludicrous, like the one SEAK references, unless your hand is in the cookie jar. Ethanol is another project/subsidy that is obviously a complete waste. Others are not quite so clear.

        In Washington State and some other areas, I wonder whether it would be better if there were a seasonal tariff in place on certain imported fruits and vegetables so that the prices for these items would rise to a point where a grower could afford to pay wages that would attract a legal workforce. Obviously a crackdown on growers who would still seek to hire an illegal workforce would have to accompany that.

        This issue gets so ugly because who is to decide who or what deserves a subsidy/tariff/funding and what doesn’t, especially when the reprecussions are also environmental, not just social or economic (like public lands ranching).

  4. Ralph Maughan Says:

    SEAK,

    The curious system you describe I think is due to our system of geographic representation in Congress. Farmers from one part of the country wanted production restrictions to hold up the price of the product. Farmers in the SW wanted subsidies to bring new lands into production, thus furthering their myth that the desert would blossom as a rose.

    Politicians often worked for 50 years or more to create government subsidized irrigation projects.


Comments are closed.

%d bloggers like this: