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Cattle Producers Must Plan for Higher Corn Prices

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In fall and winter 2006, many folks wondered what the price of corn was going to do. Would it keep increasing? What was and still is causing it to go so high?

The price has moved from the $2 to $2.50 range to the $3.50 to $4 range. The reason for the increase has typically been credited to the additional anticipated usage in 2007 by the 107 ethanol plants currently in production and the 46 expected to be in 2007. From the tax credit (Table 1) the ethanol plants receive, they can justify paying $4.74 for a bushel of corn if oil is at $70 per barrel. So, they have a significant incentive to continue expansion. Also, we have a large volume of fund trading in the corn market, causing a lot of volatility in corn futures. So, unless we have a 12 billion bushel corn crop in 2007, it doesn't appear things are going to get any better if you are a cattle producer.

What does all of this mean to the cow-calf producer? Because of higher corn prices, you can expect lower prices for your calves in 2007. You can see from Table 2 that for every $.25 per bushel increase in the price of corn, calves are worth about $6 per hundredweight less. That means a 500-pound calf would be worth $30 less for every $.25 increase in the price of corn. Based on the $1-plus increase in the price of corn just in fall 2006, this would mean that 500-pound calves should be worth $24 per cwt less or $120 per head less just based on the change in the price of corn. So, based on corn prices that could be in the $3 to $4 range, we could expect that the price of 500-pound calves with a mid $80s fed cattle market would range from $90 per cwt to $115 per cwt.

Remember that prior to the price of corn going up, 500-pound calves were worth $120 to $130. So, you will need to make plans to run your operation with less income than in previous years if you're a cowcalf producer, unless you have the opportunity to maintain ownership on small grain or some other highquality pasture.

If you are a stocker operator or backgrounder, be careful to make your projections realistic, as there is potential for some significant fluctuations in the market over the next few years.