Corn, China Determine Cattle Profits

Analyst explains their linked and bullish outlook.

Published on: Dec 1, 2010

By Miranda Reiman

The price of corn is the primary determinant of profit or loss in cattle feeding today.

"U.S. cattlemen, I can't say it strong enough," said Dan Basse, president of AgResource Company of Chicago.  "You've got to be focused on grain prices and your ingredient prices because it's going to determine who stays in business, who makes money, who expands and who goes."

Basse made his remarks at the Feeding Quality Forums in Grand Island, Nebraska, and in Amarillo, Texas. The market analyst examined the interactions between corn and beef markets, starting with global factors that affect both.

"It used to be when I woke up in the morning, I would look at the weather forecast as one of the first drivers for grain markets," Basse said. "Now I get up and the first thing I think about is, what are the Chinese markets doing?"

Why China?

In general, that economy is bullish, with gross domestic product (GDP) expanding at 8% to 12% per year. As such countries emerge, demand rises for all raw materials, Basse said.

The average income for a Chinese worker is $4,300, significant because studies indicate people start including more meat in their diets as annual incomes reach $5,000.

"Feeding those people in that new, higher economic status is going to be important for us all," he said. "China is now consuming record amounts of rice, corn and cotton. We've seen these commodity markets just explode upwards as China finds its dominance in terms of world economic power."

The Chinese government has historically placed a great emphasis on being food secure and holds high volumes of commodity reserves, but that's changing in an effort to curtail food inflation.

"If Chinese food inflation is rising above 5.5% or 6%, that's a warning sign to their government," Basse said. "If you're making $4,000 per year and you're already spending 60% of that amount on food to begin with, and food inflation is taking control of another 6%, that's a worry."

Since March, China has sold corn reserves on weekly auctions trying to regain control, but even after a record crop in that country, food prices are still rising.

"You're selling a million tons a week and prices are still rising—what are you going to do next?" Basse asked. "You better go and get some of that U.S. corn, and I don't care what price it is because we need food security. I don't know how the Chinese avoid buying U.S. corn sometime after the first of the year."

U.S. grain ending stocks are relatively tight, too.

Chinese corn buys

 "U.S. cattlemen, why I'm so focused on China is that not only do we have to fight the ethanol monster each and every day, but we have to fight the Chinese for what's left," Basse said.

There is increasing global competition for by-products as well.

"China can import distillers grain without a tax. Corn comes in with a 13% tax, but distillers grain comes in tax free and they like the product," he said.

Even Brazilian sugar price affects the industry. It has been trading at $.31 per pound (lb.) this fall, but breakeven for using sugar in ethanol production is near $.18/lb.

"If you are the biggest ethanol producers in Brazil, what do you do?" Basse asked. "You sell sugar on the world market and you bring in ethanol from somewhere else." 

So foreign markets are helping prop up U.S. corn-based ethanol production, he said—and with current price relationships, it would take at least $6.50-per-bushel corn before those margins turn negative.

No improvements in sight

"You are going to be fighting the corn market for multiple years," he said.

Domestic and export demand for U.S. corn requires 13.8 billion bushels. If there are 87 million planted acres next year, the yields need to be at least 174 bushels/acre to break even with demand. This year, yields were the third-highest in history at 154.3 bushels/acre.

"The corn market is what drives everything, and unfortunately I don't see a way we can get corn prices relaxing unless we have multiple years of good weather," Basse said.  A drought, or any other major yield detractor, would push prices even higher.

The silver lining

There is good news for cattle producers however: global meat demand is higher.

"We're now back to exporting one in 10 head of the cattle we slaughter," he said. "We're getting back to pre-BSE [bovine spongiform encephalopathy] days."

The pork industry derives twice as much business from overseas, exporting one in five head, he added. If the beef industry reached that point, fed cattle prices could reach $118-120 per hundredweight.

"That would create real competition between the U.S. consumer and the world," Basse said. "Quality is something we always want to be cognizant of, because it's our key marketing grounds that we'll have for working our beef into those Asian markets."

He's predicting cattle prices to reach record highs in 2011.

The bottom line

"Being bullish on cattle is one thing, but what I really want you to be focused on is the margin on grains," he said. "Only the producers who have vision on feed prices will make money and hold on to equity long-term."

Reiman is assistant director of industry information for Certified Angus Beef.