Cash corn prices in the Texas Panhandle have decreased $2.00/bushel since July. While there is still some uncertainty about how big the new corn crop will be and just how low corn prices might go, there is no doubt that significantly lower corn prices will have a big impact on feeder price levels and feeder price relationships. Overall feeder cattle price levels have risen sharply with prices for most weights of feeder cattle up about $25/cwt., a bit more for the lightweight calves.
From a stocker perspective, the potential value of gain depends on the overall feeder price level as well as the price spread or rollback between the purchase price of the stockers and the selling price of the feeders. The impact of feeder price level is well illustrated by comparing value of gain now with the feeder lows in May. Using combined auction data for the week of May 24, 2013, the price of 524 pound steers was $150.97/cwt. and the price of 823 pounds steers was $127.21/cwt. This represents a $23.76/cwt rollback between the beginning and ending price and results in a value of gain of $0.85/pound for 299 pounds of gain. Last week, the Oklahoma combined auction price for a 522 pound steer was $173.52/cwt. and the price of an 818 pound steer was $151.76/cwt. This is a $21.76/cwt. price rollback and results in a value of gain of $1.14/pound for 296 pounds of gain. Thus, roughly the same price rollback results in a significantly higher value of gain because of the higher selling price.
Anticipation of significantly cheaper corn, and the lower feedlot cost of gain that it implies, is well reflected in the current prices of heavy feeder cattle. While feedlot competition for tight feeder supplies may drive feeder prices higher, it will be to the detriment of feedlot margins unless fed cattle prices move higher than currently reflected in Live Cattle futures. However, the adjustments for lighter weight feeder cattle may not yet be fully reflected in feeder markets. Lower feedlot cost of gain is reflected in feeder markets in two ways: higher overall feeder prices and larger premiums on light weight feeders over heavy feeder prices.
Current corn price expectations suggest a market average price in the range of $4.50-$5.00/bushel for the next crop year. This translates into a feedlot cost of gain of $0.80 -$0.90/pound as feedlots are able to use more and more new crop corn in the coming weeks. The value of stocker gain at current markets prices is in the range of $1.10-$1.15/pound. The stocker value of gain is a reflection of the feedlot cost of gain which means that the value of gain will likely decrease some in the coming weeks. This will be accomplished in the market with higher prices for light weight stockers relative to heavy weight feeders. Of course, it depends on exactly what the corn price is and also on winter grazing conditions and the ability of stocker producers to respond to these market signals. There is, for example, potential for 550-600 pound steer prices to increase roughly another $5/cwt., relative to the current price level for 800 pound steers, before the expected corn price is fully reflected in stocker prices.