Resonable Thoughts

I've been trying to get a handle on what is going to happen to cattle prices with the Ethanol boom driving corn prices so high. Part of <a href="http://www.billingsgazette.net/articles/2006/12/14/news/local/30-stockgrowers.txt">this story</a> finally clued me in to the best explanation I've seen.<br />n<br />n<blockquote>What might be really ridiculous is corn going to $4 a bushel.<br />n<br />nMichael Swanson spent the noon hour trying to explain how that was going to affect the feeder calf and slaughter steer market.<br />n<br />nSwanson, who is an agricultural economist for Wells Fargo, indicated he was bullish on cattle prices but was not so sure about profits. The difference is that input costs for production could easily outstrip the higher cash return per pound of beef.<br />n<br />nBut, in what sounded like a contradiction, Swanson said higher corn prices would mean lower slaughter weights, which means less beef in the supply chain while actual demand for beef will continue to rise – or a need for more cattle to supply the beef, meaning higher cattle prices.<br />n<br />n"The key (to this scenario) is, will ethanol production keep corn where it is at ($3.50 a bushel) or even higher?" he said.<br />n<br />nHe said 20 percent of the U.S. corn crop of almost 11 billion bushels a year is now used for ethanol production, primarily in the Midwest. The success of the ethanol industry depends on the price of oil staying somewhere between $40 and $100 a barrel. Predictions of 30 percent of the corn crop going to ethanol could make corn way too expensive to feed to cattle and would force those lower slaughter weights he spoke about. Corn substitutes such as barley and sorghum will benefit farmers who raise those crops, he said.<br />n</blockquote><br />n<br />nLet's see, feeders will feed to lower weights causing a contraction in the meat supply which will cause prices to go up. The higher price will offset the higher price for feed so hopefully their profit/loss scenario won't change. If that's the case, the price they are willing to pay for calves will either stay the same or go down slightly.<br />n<br />nCow-calf producer's profit will depend on how much grain they feed their critters before they sell them. People like me who feed barely any grain products, just some cake in the winter, should be in pretty good shape in this scenario. Our costs won't go up very much with the rising grain prices.<br />n<br />nThis is all assuming what this guy says is true. It feels right to me and I have learned to trust my instincts a long time ago on this kind of stuff, they have yet to steer me wrong.<br />n<br />n<strong>Trust your instinct to the end, though you can render no reason. Ralph Waldo Emerson</strong>