Response to Feed Price Changes
Heading into fall there has been talk of lower feed prices in the short-run and through harvest. As most feed prices have fallen nationally more feed use is expected. However, not all feed prices have fallen and not by similar levels across different states or regions. After providing a summary of both supply and demand changes for corn and hay, some implication are offered for those looking at the feed market.
The U.S. corn crop is expected to exceed 14.0 billion bushels in 2014, up slightly from a year ago. Feed use is expected to be up slightly too. Because production is expected to exceed all uses for the second year in a row, ending stocks are expected to increase again and result in lower corn prices nationally. At lower prices, more corn is likely to be fed to cattle and hogs as the cost of gain becomes lower. The preliminary August U.S. price for corn from National Agricultural Statistics Service was $3.70 per bushel compared to $6.21 per bushel in August of 2013.
In South Dakota the changes are different. Corn production is expected to decline to 765 million bushels in 2014 compared to 809 million bushels in 2013. Despite a lower expected supply level, the price of corn in South Dakota has fallen from $5.99 per bushel in August of 2013 to a preliminary price of $3.13 per bushel in 2014. Regionally, the pace of production has increased the pace of use. Higher transportation costs are also a factor. As a result, the basis widened out for much of 2014. The basis also looks very wide when compared to unusually narrow basis levels in 2013. From a feed perspective, the number of livestock has not changed much in South Dakota and neighboring states. What is expected, however, is for an increase in corn use on a per-head basis.
Another major feed, hay, has price changes that vary across locations. At the national level, 2014 hay production is up from a year ago to 141 million tons. With steady livestock inventory levels, there can be more hay use per head and higher ending stocks than after the 2013 harvest. Without a price decline, the stocks would become burdensome from a market standpoint. Thus, a lower national price would be expected compared to a year earlier. However, the national all-hay price in August was $185 per ton – up from $177 per ton in 2013. The reason is location; higher alfalfa production has occurred in central and eastern U.S. states while demand remains high in western U.S. states. At the local level, South Dakota hay production increased from 5.9 million tons in 2013 to 6.7 million tons in 2014. At the same time, the August South Dakota all-hay price has fallen from $159 per ton in 2013 to a preliminary $116 per ton in 2014.
The response to feed price changes will vary. For any feed with an absolute price decline, demand will lead to increased disappearance of that feed. As corn has become cheaper, more has been fed. With competing feeds, use of the cheaper feed is expected to increase. These effects will vary by location. Thus, nationally corn has fallen from $222 per ton in 2013 to $132 per ton in 2014, while competing hay has gone up in price. More corn and (ironically) less hay will likely be used nationally.
In contrast, the South Dakota corn price fell from $214 per ton in 2013 to $112 per ton in 2014, while hay has also fallen in price. Thus, more corn and more hay will likely be used regionally and the mix will depend on the specific end use. Many other feeds are priced relative to corn and hay. The costs of those products rose in recent years and have also fallen with corn and hay prices regionally.
The timing of feed purchases is also affected by price changes. For corn, the wider basis in the region has sellers looking for other outlets. The SDSU Extension basis charts just starting using December as the nearby contract. Thus, through harvest if basis is wider than the 5-year average, it is would suggest an incentive to store corn. In addition, there is carry in the futures prices for corn. Thus, feed users have a strong incentive at harvest to fill any storage space available and then purchase feed “hand-to-mouth” until conditions warrant a change. With continued very low volatility, any unpriced needs could be covered prudently with inexpensive corn call options. For hay, there is no futures market to use as a guide. Nationally, the peak in marketing hay tends to happen from July through September. In South Dakota, the peak in marketing hay tends to happen from October through December. This suggests more hay will still be marketed locally and local buyers will have to compete with demand from buyers in western states with an uncertain impact on price.