In spite of a tough year on US agriculture that saw historic drought conditions drive up grain prices and cull the cattle herd down to its lowest level since 1952, the US Department of Agriculture (USDA) is now predicting a crop surplus this fall. This could mean good news for the livestock industry.

This projection comes even as NOAA forecasts suggest the drought—which still affects over 57% of the United States— will persist to until at least the end of May. The winter storms last week did bring some relief for the Great Plains, with parched states like Kansas, Nebraska, and Oklahoma getting over ten inches of snow, but the precipitous precipitation won’t be lifting farmers and cattle ranchers out of the desert anytime soon. An inch of moisture requires a foot of snow, which means last week’s storms brought less than two inches of water.

Nevertheless USDA Chief Economist Joseph Glauber says the current high prices for crops will encourage farmers to plant more. Combined with improved conditions across the eastern Corn Belt, there should be record production levels for corn and soybeans this year and prices for most grains and oilseeds should be lower by autumn.

For the US livestock industry, this is welcome news.

As shown in the graph below, livestock prices are unshakably linked to the price of crops. Between 2009 and 2013, an increase in the price of crop futures by 250% was met with an increase of almost 50% in livestock futures, even while domestic meat demand has been lagging. This has largely been the result of higher feed costs, which have already forced livestock producers to downsize the US cattle herd by about 3.6%. Cattle herds in the Kansas, Oklahoma, and Texas region alone were reduced by 13.6%.

Figure 1: Price Comparison for US Crops and Livestock, graph created by ZEMA. Crop futures data averaged across prices for corn, wheat, oats, and soybeans; livestock futures data averaged across live cattle, feeder cattle, and lean hogs.

Higher prices for livestock have not translated to profits for the industry though. With a smaller herd and higher production costs, margins are still tight.

This is why the USDA’s autumn predictions could mean a step towards improved profitability for the livestock industry. According to Purdue agricultural economist Christopher Hurt, if corn prices drop by $1 per bushel and soybean meal prices drop by $100 per ton, hog production costs would decrease by about $12 per head.

With over 3000 pre-existing data interfaces and more than 300 data providers, ZEMA collects the latest agricultural data to run timely and accurate market analyses of what looks to be an uncertain future for the North American agricultural landscape.