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Corn+Soybean Digest

Cattle and Swine Feeders Still Good Customers

Like many Midwestern states, Nebraska is dotted with ethanol plants hungrily consuming more and more of its most famous commodity: corn. But entities that have set the table for corn markets much longer are still helping farmers bring home the bacon and beef.

Livestock markets, namely feedyards and hog operations large and small, remain the leading users of corn. And in an environment when corn marketing is sometimes crimped due to huge financial strains on grain handlers and others, those old-time markets can offer price premiums and help growers better manage their harvest program.

More than 60% of the nation's corn production goes for livestock feed. Much of that is purchased from grain elevators, and much is shipped from the Corn Belt to southwestern feedyards via unit trains. But a lot is still bought directly from farmers like Todd Watson and Derb Frey, two Nebraska growers who sell from 10% to 20% of their corn to feedyard neighbors.

Both farmers cash forward contract most of their corn with Ag Valley Co-op, Edison, NE, in southwest Nebraska. But area feedyards also tap their bins, especially at harvest. “I send up to 40,000 bu. of corn to a local feedyard,” says Frey, who farms with his son Greg out of Stapleton, NE.

“Feedyard sales can take up to 10% of our corn,” adds Watson, who farms in partnership with his brother Tedd outside Edison. “We sell high-moisture corn (HMC) at about 30% moisture. It helps us manage our harvest during a busy time of the year.”

Jim Hilker, Michigan State University agricultural economist, cites various reasons why growers could benefit from selling directly to beef cattle, dairy or swine operations.

“You don't see near as much of it as I would expect,” he says. “If nothing else, it may shorten the haul. And growers may not face the same kind of dock (discount) they see at the elevator. A livestock operation may want a little more ‘crack’ (in kernels) than an elevator may allow you.”

Even at age 76, Frey still works hard at marketing corn and soybeans besides being a Pioneer seed dealer. As a former B-29 gunner who flew 35 missions for the U.S. Air Force during the Korean War, he has faced much harder pressure than marketing grain. Nonetheless, when markets get squeezed, it's still a chore making sales.

HIS 2008 CORN marketing stood at about one-third sold in early May. Most was to the co-op at a price range of about $5/bu. overall. About 10% was contracted to a regional ethanol plant at similar prices. He was ready to also make sales to a local feedyard that in the past has purchased 20% or more of his corn.

“The yard is feeding more distillers' grains from the ethanol plant, but will likely require more corn,” says Frey. “I hope to make the sale. I can save on freight, since the yard is only 15 miles away. I don't face a moisture dockage or a drying charge.”

He has storage space for nearly half his crop, so he can spread out sales. “I stored some 2007 corn contracted for July 2008 delivery at $5.32,” he notes.

Frey sometimes uses call options to cover a price rise. “With forward contracting, I don't have to buy a put option to set a floor price,” he says.

Watson considers himself “a typical conservative Midwestern marketer.” Corn sales are all through forward contracts; no futures or options are used. “We don't want to face margin calls,” he stresses.

He likes to start marketing early in the year and get more aggressive in the summer. “Our basis can narrow to about 20¢ under in the summer so we look to sell more, since harvest basis is 30-40¢ under,” he says.

“Feedyard sales are made at any time, but the corn we sell is usually our initially harvested corn. We can start on it the first week in September when it's about 30% moisture. We get a three-week jump on harvest. The feedyard often gives us a little ‘basis bonus’ because it needs the corn for feed.”

Frey also often sees a 10¢/bu. premium from the feedyard. Hilker says such premiums are often worth it to livestock operations.

“It would be as much a benefit for the feedlot,” he says. “They may save in shipping costs by buying it directly from the growers. It could be beneficial to both buyers and growers as long as they know what they are getting into.”

THAT JOINT UNDERSTANDING likely would involve a legal contract, such as one with an elevator, to deliver certain amounts of grain at a specific price under specific conditions.

“You would want a good legal contract,” says Hilker. “For example, a cattle producer wants to lock in corn this fall. It's priced at $5.90 in May. If we have a regular crop or a really good crop, the price could be $4.50 in the fall.

“It's good for the corn grower, but a little harder on the buyer if he hasn't hedged the price. There needs to be something there to guarantee the price,” he says.

Hilker suggests that growers and livestock buyers agree “on an exact amount” to be delivered, but not be tied to a contract size.

Hilker adds that one reason why direct contracts among growers and livestock feeders and producers may have been lacking is a possible mistrust on both sides.

“There has probably been some distrust,” he says. “A marketing chain should start with some sort of trusting relationship.”

One problem faced by both the sellers and buyer is that growers “priced so much at low prices” that today's higher prices are troubling to livestock producers, Hilker notes. He adds that the state of both the cattle and hog industry will certainly impact the potential for direct grower sales.

Hilker says growers should improve all phases of their marketing capabilities. “Producers are going to have to look at a lot of different ways to market. They need to learn to hedge or possibly use options,” he says.

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