CME: Crude Oil Prices Impact Livestock Production
US - CME's Daily Livestock Report for 18th November 2008.Notice: As you click on the link below, please find a special notice regarding the start
of trading of options on Feeder Cattle futures on the CME Globex
trading platform.
Crude oil prices continue to plummet and this remains
a bearish influence on grain prices. As the below
chart shows, crude oil and corn prices have moved almost in lockstep
for the past two years, in large part thanks to the increased linkages
between the corn feed and energy sectors.
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The ethanol industry
remains one of the largest users of US corn stock at this time
(estimated at about 32% of overall US corn usage in 2008-09) and
this will continue to make the corn markets especially vulnerable to
the extreme volatility in the energy market. If the relationship
between crude oil and corn is to hold in the short term, one could
see corn prices continue to drift further into December.
Reports
indicate that current new corn crop sales are very light, possibly
indicating that US corn producers are somewhat more bullish on
the price outlook for 2009 than the futures market. But, if ethanol
and world demand continue to slump, it will be difficult for corn
values to maintain any significant rally going forward. The
strength of the US currency clearly is a concern as is the weakness
in the US livestock industry. Indeed, with all the talk of possibly
slumping ethanol demand, it is also important to consider the expected
contraction in livestock and poultry production. The latest
USDA report indicated that egg sets are currently 11% lower than
year ago levels and have declined in double digits for the past two
weeks.
If large poultry producers are forced to declare bankruptcy,
and possibly liquidate, it could cause significant disruptions in the
feed grain markets and put further pressure on grain prices in
2009. As for beef, prices remain under pressure following the decline
in equity values and talk about weak beef demand. Feeder
cattle contracts were hit especially hard in today’s trading, with
futures declining by as much as 265 points (Feb ‘09 contract) and
most contracts establishing new life of contract lows. Feeders were
pulled lower by the weakness in live cattle futures and did not get
much support by lower corn futures. As for hogs, the market traded
mixed today but continues to be weighed down by speculation of
weakening export sales and uncertain outlook for US supplies in
2009.