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Cattle Prices Have Outrun Grain Prices

Chart In Focus
May 03, 2024

Most of the time, corn prices move in step with the futures prices for live cattle.  This makes some sense from a meteorological standpoint, as better growing conditions for corn also mean better conditions for grasses (hay), and so cattle ranchers can produce cattle more economically.  There is a bit of a lag sometimes, since cattle ranchers cannot immediately ramp up production of more cattle when grain prices and other inputs fall.  Biology dictates that it requires a certain amount of time to produce an incremental additional cow to affect prices in that market.

What is really interesting right now is that we are seeing a big inversion of the normal positive correlation between corn prices and live cattle prices.  The price of corn has fallen out of the big spike in all grain prices in 2021-22, which followed the Russian invasion of Ukraine. 

We have seen inversions like this before, most notably in 2014-15, when cattle prices spiked higher.  Much of that was a response to cattle producers selling off large portions of their herds a few years earlier, in response to the big spike in corn and wheat prices in 2012.  That meant they had fewer mommy cows (a technical term) to produce new cattle in response to high prices. 

Inversions like this beg for a reversion, just to reestablish the normal positive correlation, and so we should reasonably expect a reversion to the current inverse correlation these two are showing.  Presumably that means cattle prices coming down, but it could also take the form of grain prices going up to meet cattle prices, which would be bad for food inflation if it works out that way. 

One of the other normal relationships in the farming markets is that wheat and corn prices are usually very strongly correlated. 

wheat and corn prices monthly

Here again, it is a case of good or bad growing conditions affecting both grains, and there is also some ability to substitute one for the other, especially in feed for cattle or hogs. 

What many farmers may not be expecting is that there should be a rise in grain prices over the next year. 

gold versus corn prices

The price of gold gives us about a 12-month leading indication for what corn prices are going to do, and thus also for wheat prices.  Gold prices have been rallying for the past year, a rally which is only now getting started in corn prices.  It does not always work out perfectly all the time, and I have noted a couple of anomalies in that relationship in the chart above.  But even when there is an anomaly like that the relationship pretty quickly returns to normal in the months that follow. 

So get ready for grain prices to start to rise.  But given that cattle prices are already up and need to revert back down to get back into positive correlation, cattle producers are likely headed for a difficult time again with higher input costs and lower prices they can sell their cattle for.

Tom McClellan
Editor, The McClellan Market Report

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