by Ann Barnhardt

Have you seen the Texas Hold’em Poker tournaments on TV? Well, I think someone should set up TV cameras at various auction barns around the country, and have a couple of commentators call the action. I can hear them now...

“Whoa! Did you see THAT Jimmy? Hereford Harry just bid $126 on that pen of eight fifty-weight black baldies! Let’s go to the super-slow motion replay from the Budweiser Bid-Cam. See how he wasn’t even looking at the pen when he scratched his thigh on that bid? What a pro. Wait, wait a minute... HOLY SMOKES! Dodge City Doug just bid $127 right behind him! I can’t believe it! Let’s go to the Verizon Wireless Breakeven Calculator on those cattle, Jimmy. OH, MAN! Those cattle are going to have a $98.50 breakeven! I can’t believe Dodge City Doug just made that move!”

Is there anything a cattle feeder can do to pin down risk in this environment? Yes. Eliminate the feed cost variable. Corn, as this article is being written, is trading in the $2.65 per bushel area, basis the December contract. Only a short while ago, in early April to be specific, the Dec corn was trading over $3.40 per bushel. Given the supply–demand balance sheet, weather conditions so far in this growing season, and the dizzying breakevens being bought today, can one really afford NOT to establish a price ceiling on one’s corn needs?

Let’s start with the supply-demand figures, which every cattle feeder should commit to memory.

•10.5 Billion Bushels = The corn crop the U.S. needs to produce in order to keep the carryout steady at 806 million bushels.

•10.1 Billion Bushels = The 2003 crop size – the largest crop the U.S. has ever produced.

•10.1 Billion Bushels = Also the crop size that would yield a 426 million bushel carryout – the same carryout we had in 1995-1996 when corn prices topped $5.00 per bushel. Additionally, remember that world corn stocks are MUCH tighter now than they were in 1995-1996.

•9.7 Billion Bushels = Crop size that would result in a zero carryout.

The bottom line is we need to produce approximately 104 percent of our previous record crop just to tread water supply-wise. Now, let’s consider the meteorological situation. The upper Cornbelt has been soggy since the late winter. Excess moisture, to the point of standing water in the fields, delayed the planting of some of the crop. It is those areas of delayed planting that will likely experience reduced yields.

Furthermore, the spring has been abnormally cool and wet over parts of the Cornbelt, and forecasts indicate that the cool, wet weather pattern may endure into the summer. It is possible that insufficient heat units may further cut into yields. Given that 104 percent of last year’s record production is needed to match usage, the U.S. can not afford anything less than a-maize-ing yields.

In previous years I would not have been as zealous about corn price risk management as I am this year. The difference-maker for me is the feeder market. If Dodge City Doug is going to risk buying feeders with a $98.50 breakeven, why shouldn’t he risk fifteen cents per bushel on a December corn call to establish a price ceiling? Besides, cattlemen have the God-given right to lay awake at night in a cold sweat worrying about the cattle market without distraction from the corn market. ©

Disclaimer: Information contained herein is believed to be reliable, but no independent verification has been made and there are no guarantees as to its accuracy or completeness. The risk of loss in trading futures and options can be substantial, and investors should very carefully consider the inherent risks. Visit Ann at www.Barnhardt.biz.