Marsh, John M.

English

Research Papers in Economics

B R I E F I N G 
Briefing No. 72                     February 2005 
Feed Grain Volatility and Effects on  
Feeder Cattle Producers  
 
John M. Marsh 
Agricultural Marketing Policy Center 
Linfield Hall 
P.O. Box 172800 
Montana State University 
Bozeman, MT 59717-2920 
Tel: (406) 994-3511 
Fax: (406) 994-4838 
email: ampc@montana.edu 
website: www.ampc.montana.edu 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Objective  
 
Analysis 
 
for Informed 
 
Decision Making 
 
 
 
 
Contact: 
 
John M. Marsh 
(406) 994-5621 
jmarsh@montana.edu 
 
Prices received by cow-calf 
producers depend upon many factors 
including retail beef demand, red 
meat and poultry supplies, food 
safety, trade in live cattle and beef, 
and breeding cattle inventories.  In 
addition, feed grain supplies and 
prices are important since they 
impact the cost of gain in cattle 
finishing.  Cost of gain influences 
feedlot demand for feeder cattle and 
fed cattle supplies (particularly 
slaughter weights), and, consequently 
prices received by cow-calf producers 
and cattle finishers.  The United 
States Department of Agriculture 
(USDA) indicates that feed grains 
(particularly corn) can account for 
over 70 percent of variable cost of 
gain in cattle finishing (USDA 2003).  
  
Most commodity analysts view corn, 
the major feed grain used in livestock 
finishing , as a key link in 
determining prices of feeder calves.  
For example, producers in the 
summer months often decide whether 
to forward contract spring-born 
calves for the fall marketing period.  
They may have information about 
feeder cattle supplies, pasture 
conditions, etc., but expectations 
about fall corn prices are uncertain.  
If a larger fall corn harvest occurred 
than what the USDA projected in 
early summer, corn price will have 
declined, resulting in increased 
demand prices for feeder calves in the 
fall marketing period.  Thus, it would 
have been premature if producers had 
contracted calves at a fixed price in 
the summer.  Other feed grains used 
in livestock finishing rations are oats, 
barley, and sorghum.  
 
Commodity futures data on 2004 live 
cattle and feeder cattle demonstrates 
the corn price effect.  For example, 
fall contract price spreads between 
November feeder cattle and 
December live cattle increased from 
about $9/cwt to $24/cwt between 
April and September of 2004.  This 
was commensurate with the 
December 2004 corn futures 
declining by about $1.30/bu between 
April and September.  The corn price 
decline was consistent with USDA 
updated forecasts indicating expected 
increases in the fall corn harvest. 
The effects of changes in corn 
production and corn price on feeder 
calf price and calf crop production 
are examined in this briefing.  In 
particular, variables related to policy 
constituents of corn demand and 
supply are analyzed.  These include 
corn exports (trade policies), the 
marketing assistance loan rate for 
corn (USDA commodity programs), 
and fertilizer costs (energy prices).   
 
Livestock producers have a vested 
interest in these policy provisions 
because of their important role in 
determining feed grain prices and 
ultimately rancher profits. 
 reduce corn price, this would 
likely increase livestock revenue 
due to increases in feeder calf 
price and calf crop production.  
Revenues to cash corn growers 
would decrease if the percentage 
reduction in corn price exceeds the 
percentage increase in corn 
production.  The 1970-2003 trends 
in real corn price and corn 
production are shown (Figure 1). 
 
The real price, quantity, and real 
total revenue adjustments in the 
corn and feeder calf sectors given 
long-term (1970-2003) changes in 
the real corn loan rate, corn 
exports, real fertilizer costs, and 
real slaughter steer price are 
presented (Table 1).  Slaughter 
steer price represents a livestock 
demand factor which can affect 
both the corn and feeder cattle 
markets.  The changes in the 
variables over the 1970-2003 
period were: (1) a decline of 60.4 
percent in the corn loan rate; (2) 
corn exports increased by 207.7 
percent; (3) real fertilizer price 
declined by 27.6 percent; and (4) 
real slaughter steer price declined 
by 39.3 percent. 
 
 
quantity RV’s resulted in real feeder 
calf price changing by 10.55 percent 
of its average value of $67.70/cwt, 
or $7.14/cwt.  The resulting change 
in the calf crop was 7.71 percent of 
its average value of 42.24 million 
head, or 3.26 million head.  These 
corn market changes implied a gross 
revenue swing of $3.14 billion, or 
about 19 percent of average (cow-
calf) revenue for the 1970-2003 
period.  For a weaned 575 pound 
feeder calf, this amounted to about 
$74 per head. 
 
Trend Effects of Corn Market 
Constituents 
  
With corn as an input in livestock 
production, revenue trade-offs 
between cash corn growers and 
livestock producers occur over time 
with changes in corn market 
constituents .  For example, 
increases in U.S. corn exports may 
increase corn price and corn 
production, but would decrease 
feeder calf price as feedlots adjust to 
tighter cattle feeding margins.  
Lower expected profits by cow-calf 
producers would then reduce calf 
crop production over time.  
Alternatively, if reduced fertilizer 
costs increase corn production and 
Model and Corn Market Volatility 
 
To analyze the corn market effects, a 
statistical model integrating demands 
and supplies of the corn and feeder 
cattle markets was developed.  Model 
coefficients were statistically estimated 
and equilibrium multipliers were 
derived to calculate economic impacts 
in these sectors.  For example, arbitrary 
changes in fertilizer prices, loan rates, 
or corn exports are expected to impact 
demands, supplies and prices in the 
corn and feeder calf sectors.  In turn, 
revenue adjustments in the corn and 
feeder calf markets can be calculated. 
 
The model multipliers can be applied 
to relative volatility in the corn market.  
For example, USDA crop data indicate 
that corn prices and production vary 
substantially, reflecting changing 
demand and supply conditions related 
to food and feed usage, exports, 
weather, etc.  Relative volatility (RV) 
is defined as the standard deviation of 
a variable divided by its average or 
mean value.  From 1970-2003, the RV 
of real corn price (1982-84 constant 
dollars) was 50.7 percent and the RV 
of corn production (acreage times 
yield) was 23.4 percent.  The 
multipliers of the statistical model 
indicate the corn price and corn 
0
2
4
6
8
1970 1975 1980 1985 1990 1995 2000
Corn Price 
($/bu)
0
2
4
6
8
10
12
Ti me
Corn Production
(bil. bu)
 Corn Production
Corn Price
Figure 1:  Real Corn Prices and Corn Production, 1970-2003 price variables (Table 1).  From 
1970 to 2003,  U.S. corn exports 
expanded by 207.7 percent, 
primarily into the markets of Asia, 
Mexico, and Canada.  This export 
increase resulted in increasing 
corn prices and production by 
$1.17/bu and 2.72 billion bushels, 
or a corn revenue increase of 
$19.25 billion.  The large revenue 
increase amounted to 96.2 percent 
of average 1970-2003 corn 
revenues.  But the effect of 
expanding corn exports on the 
feeder calf sector was to decrease 
feeder calf price and calf crop by 
$6.19/cwt and 2.81 million head, 
or a revenue decline of $2.49 
billion.  This decline amounted to 
15.2 percent of average 1970-2003 
feeder calf revenues.  Moreover 
the 60.4 percent reduction in the 
nonrecourse loan rate, which 
reduced corn production and 
increased corn price, reduced 
revenues of cow-calf producers by 
$0.35 billion, or 2.1 percent of 
average total revenue.   
      
        
calf crop, subsequently increasing 
the price and supply of feed corn. 
 
The USDA loan rate used in the 
statistical model is a nonrecourse 
marketing assistance loan rate.  
Nonrecourse marketing assistance 
loan rates have been a consistent 
price support feature of wheat and 
feed grain programs since the mid-
1930s, although other commodity 
program and loan provisions have 
varied.  Essentially, the loan rate 
serves as a floor price for program 
commodities such as corn as long as 
the corn is of loan quality.   Results 
of the statistical model indicate that a 
10 percent increase in the corn loan 
rate increases corn production by 3.2 
percent.  However, a 10 percent 
increase in national average market 
price for corn (usually higher than 
the corn loan rate) increases corn 
production by 8.2 percent. 
 
Results 
  
There are substantial differences in 
the market effects of the loan rate, 
corn export, fertilizer price, and steer 
The equilibrium multipliers of the 
statistical model were used to derive 
the impacts of the four variables 
above on prices, quantities, and 
revenues in the corn and feeder calf 
sectors.  The multipliers indicate, for 
example, that a change in corn exports 
within a time period of one year result 
in several years adjustment of feeder 
prices and calf imports until they 
reach an equilibrium.  The 
coefficients indicated several types of 
long-run economic relationships 
between the corn and feeder calf 
sectors.  First, an increase in the corn 
loan rate increases corn production 
and reduces corn market price.  The 
result is to increase feeder calf price 
and calf crop production.  Second, an 
increase in corn exports increases 
corn market price and corn 
production, but results in decreasing 
feeder calf price and calf crop 
production.  Third, an increase in 
fertilizer costs decreases corn 
production and increases corn price.  
The result is to decrease feeder calf 
price and calf crop production.  And 
fourth, an increase in slaughter steer 
price increases feeder calf price and 
 
 
Variable 
(1970-2003 changes) 
Loan Rate 
60.4% 
 
Corn Exports 
207.7% 
 
Fertilizer Price 
27.6% 
 
Steer Price 
39.3% 
Feeder Cattle Sector: 
 Price 
 Quantity 
 Revenue 
 Percent 
 
$0.86/cwt 
-0.38 mil hd 
-$0.35 bil 
2.13% 
 
-$6.19/cwt 
-2.81 mil hd 
-$2.49 bil 
15.15% 
 
$0.92/cwt 
0.42 mil hd 
$0.39 bil 
2.37% 
 
-19.23/cwt 
-8.73 mil hd 
-$7.1 bil 
43.19% 
Corn Sector: 
        Price 
        Quantity 
        Revenue 
        Percent 
 
$0.16/bu 
-1.09 bil bu 
-$1.85 bil 
9.25% 
 
$1.17/bu 
2.72 bil bu 
$19.25 bil 
96.20% 
 
-$0.17/bu 
1.17 bil bu 
$1.63 bil 
8.15% 
 
$0.21/bu 
-0.48 bil bu 
-$2.71 bil 
13.54% 
Table 1:  Effects of Changes in Corn Market Factors and Slaughter Steer Price on Revenues in the Feeder  
Calf and Corn Sectors 
Note:  "Price" and "Revenue" are in real dollar terms and "Percent" is Revenue divided by average total 
revenue (AR) for the sectors.  The Revenue is expressed as deviations from the average total 
revenues for 1970-2003.  For the feeder sector, the AR was $16.44 billion and for the corn    
sector, the AT was $20.01 billion. The programs of the MSU Extension Service are available to all people regardless of race, color, national origin, 
gender, religion, age, disability, political beliefs, sexual orientation, and marital or family status.  Issued in  
furtherance of cooperative extension work in agriculture and home economics, acts of May 8 and June 30, 1914, in  
cooperation with the U.S. Department of Agriculture, Dr. Douglas Steele, Vice Provost and Director, Extension  
Service, Montana State University, Bozeman, MT 59717. 
other feed grains.  More 
importantly, corn prices heavily 
influence costs of gain, thus, bid 
prices and production of feeder 
cattle, slaughter cattle weights, 
and beef production levels.  
Therefore, beef producers have a 
vested interest in government 
legislation that affect support 
prices, production costs, and 
exports of feed grains. 
 
References 
 
Marsh, J. M.  “Impacts of  
Declining U.S. Retail Beef 
Demand on Farm Level Beef 
Prices and Production.”  Amer. J. 
Agr. Econ. 85(November  
2003):902-913. 
 
U.S. Department of Agriculture,  
Economic Research Service.   
“Livestock, Dairy, and Poultry  
Situation and Outlook.”  USDA/ 
ERS, Washington, DC.   
November 2003. 
The beef cattle industry consumes 
nearly one-third of the corn used in 
livestock and poultry feeding.  Most 
livestock-feed grain demand and 
supply studies focus on the effects of 
feed grain prices on the livestock 
markets as opposed to the effects of 
the livestock markets on the feed 
grain industry.  But it should be 
recognized that if increases in 
consumer meat demand result in 
increasing livestock demand in the 
beef and pork sectors, then additional 
livestock units fed would increase 
the demand price of corn. 
  
There are two-way effects in the 
markets for feed inputs and livestock 
production.  The statistical model 
was used to estimate and compare 
the effects between the corn market 
affecting the beef market and the 
beef market affecting the corn 
market.  Statistical results indicate 
asymmetry occurs, i.e., changes in 
feeder calf price have about a 35 
percent larger impact on corn price 
and corn production than changes in 
corn price have on feeder calf price 
and calf crop production.  
 
Conclusion 
  
Public policies affecting corn prices 
and production are not trivial to cow-
calf producers.  Cattle producers 
continually monitor corn prices since 
corn dominates price movements of 
In the changes described, the more 
expensive corn reduced the demand 
price for feeder calves and led to a 
decrease in calf crop production.  
However, the real fertilizer price 
decline of 27.6 percent for the 1970-
2003 period boosted corn production 
by 1.17 billion bushels and decreased 
corn price by $0.17/bu.  The result 
was to increase feeder calf revenues 
by $0.39 billion, or 2.4 percent of 
average total revenue. 
  
Slaughter steer price is a critical 
factor that affects the expected 
profitability of cattle finishing.  Other 
factors constant, the 39.3 percent 
decline in slaughter steer price 
decreased feedlot operating margins, 
resulting in decreasing feedlot 
demand for both feeder calves and 
feed corn.  As might be expected, the 
distribution of the decline in revenues 
between the feeder calf and corn 
sectors is skewed towards feeder 
calves.  Specifically, the 39.3 percent 
decrease in slaughter steer price 
reduced feeder calf revenue by $7.1 
billion, or 43.2 percent of feeder 
revenue, but reduced corn producer 
revenue by $2.7 billion, or 13.5 
percent of corn revenue.  About 60 
percent of the decline in real beef 
cattle prices from the decade of the 
1970s was attributed to the long term 
(1975 to 1998) decline in consumer 
demand for beef (Marsh 2003). 
  

Feed Grain Volatility and Effects on Feeder Cattle Producers

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