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Previous issues of the BEEF Cattle letter
Issue # 574
"The Same Old, Same Old Won't Work" - John Grimes, OSU Extension Educator, Highland County
Several years ago in Highland County, OSU Extension hosted an educational program for area beef producers that we advertised as "The Same Old, Same Old Won't Work". Progressive cattleman and beef industry leader Galen Fink was the featured speaker. At that meeting, Fink discussed several topics that would challenge beef producers to examine their operations and make the necessary changes to insure future profitability. This challenge to cattlemen seems more appropriate and timely than ever.
There is no question that it is human nature for many of us to resist change. This can be especially true for cattlemen. Today's producer is faced with the reality that changes must be made in the way that we do business in order to remain viable in our ever-changing economy. Every production practice must be examined to determine its contribution to the profitability of an operation.
Efficient forage production and utilization are key factors in any successful beef operation. Current land prices require producers to maximize forage production within reasonable cost constraints. Once we have produced the forage, we need to graze or mechanically harvest the forage at a peak nutritional status to help improve animal performance. An excessive amount of hay is wasted through poor storage techniques and inefficient feeding practices. Forage stocks are extremely tight and many pastures are in a depleted state due to significant environmental stresses over the past couple of years. We have to maximize forage production from an agronomic and an animal performance perspective in order to realize economic gains.
The impending expansion of the ethanol industry in Ohio will undoubtedly impact beef producers in the future. Will you change your feeding practices as a result of higher priced grain feedstuffs? Are you willing to make changes in your feed delivery and storage systems in order to take advantage of by-product feeds? Can you identify fellow producers to partner with to purchase larger lot sizes of by-products at potentially advantageous prices? There is no question that traditional feeding systems will have to be altered for producers to be cost-competitive in the future.
Are cattlemen aggressively implementing proven management techniques that enhance the bottom line or have high calf prices over the past several years fostered complacency? Have practices such as animal identification, castration of bull calves, dehorning, palpation, weighing cows and calves, body condition scoring, calf preconditioning, etc. been forgotten? We need to manage our calf crop in a manner to add as much value as possible to every animal. Producers expect to be rewarded for implementing value-added practices. If so, should we expect the buyer to discount our product if we don't add value to our calf crop?
Ruminant Livestock: Facing New Economic Realities is a series of meetings planned to address the new realities of the economic and management considerations related to ruminant livestock production in Ohio. Each program is two evenings and is planned in four different locations in Ohio. Running from 6:30 p.m. until 9:30 p.m. each evening, the schools will be hosted by Extension offices in Fairfield (February 25 and 27), Knox (March 10 and 17), Highland (March 19 and 26), and Athens (March 20 and 27) Counties. Presentations at each location will be resourced by OSU Extension Beef Team members Francis Fluharty, John Grimes, Rory Lewandowski, Jeff McCutcheon and Stan Smith. Bob Hendershot and Curt Stivison from NRCS/SWCD will also serve as presenters.
These programs will be thought provoking and far reaching, intended for progressive livestock producers who wish to remain competitive in a rapidly evolving economic climate. Come prepared to explore alternatives which are likely "not the way we've always done it."
Contact any of the Extension offices in the host counties for more information or to pre-register. Registration fee is $15 per person to cover cost of handouts and supporting materials.
The Wylie Coyote Effect - Allan Nation, The Stockman GrassFarmer
You know how Wylie Coyote continues to run straight ahead for awhile without falling after he leaves the edge of the cliff? Well, industries faced with a sudden change in circumstances do the same thing.
It takes awhile for the knowledge that the ground has given way beneath your feet to sink in.
This period typically lasts for 15 to 18 months, and then like Wylie Coyote, gravity grabs you and you plummet back into reality.
A good example of this has been the residential real estate market. It peaked in the summer of 2005. But, when did you become aware of it? About 15 to 18 months later.
With the negative production margin in the feedlot, today's feeder cattle prices cannot last. Eventually, like Wylie Coyote, gravity will take hold. The problem is that none of us know when.
It is not during periods of low prices that farmers and ranchers go broke. They go broke during those Wylie Coyote periods when things quickly change and they don't.
Forage Focus: To fertilize or not to fertilize? - Stan Smith, Fairfield County, OSU Extension PA
This winter locally, as we've cussed and discussed the cost of feed, fertilizer, land rent, machinery and anything else a farmer might purchase these days, one of the "cost saving" measures I've heard suggested is skipping fertilizer this year on hay and pasture land.
Are you skipping fertilizer on your corn ground this year too? I doubt it. If a recent soil test suggests you need fertilizer or lime on hay and pasture land, then don't think for a minute it's anything but voodoo economics if you don't apply it to your hay lands either. After all, an "average" Ohio annual hay yield of 3 tons per acre removes the same amount of potash from the soil as a SIX HUNDRED (yes, that's 600) bushel corn crop!
At a minimum, if fertilizer prices dictate that you simply can't fertilize all the hay and pasture land that a soil test indicates need be, take the resources available and use them strategically. Practicing efficient pasture grazing management over the years distributes and recycles manure nutrients very nicely. Your soil test may indicate that applying P & K is likely your lowest fertilizer priority on pasture land.
If limited resources dictate you only apply nitrogen fertilizer one time during the year, do it after the first growth flush is over in late May or June, or wait until August when you begin to stockpile. However at the same time, remember that research suggests that each of the first 40 pounds of nitrogen applied to a grass field returns up to an additional 54 pounds of dry matter. With forages valued at ~ 5 cents per pound right now, that indicates the breakeven price you could pay for up to 40 pounds of nitrogen per acre is $2.70 a pound! Or, looking at it the other way, an investment of 40 pounds of nitrogen at 60 cents per pound (total cost per acre= $24.00) on a grass hay field will return more than a ton of extra forage.
Fertilizing hay ground must be the highest priority, especially replacing P & K. Each ton of hay which is removed from a hay field takes with it 14 pounds of P2O5 and 50-55 pounds of K20. Replacing the nutrients removed by hay harvest must remain the highest priority to maintain long term stand health and productivity of perennial hay fields.
Prepare For The Unk Unks! - Nevil C. Speer, PhD, MBA, Western Kentucky University (reprinted with permission on 2/11/08 from CattleNetwork.com)
Iffy, choppy, indecisive: the specific descriptor doesn't matter - what does matter is the market's search for direction in recent weeks. Cash trade has lacked meaningful fundamental leadership and identifying solid trends has proven challenging for all participants. Unfortunately, that scenario generally possesses a defensive bias - risk assessment drifts to protecting downside risk leaving prices to slide lower. And indeed that's been the case during late-January / early-February. As a quick review, the market started out on a positive note in 2008 - fed trade occurred at $95 immediately following New Year's. However, since that time traders have slowly chipped away at the market's optimism.
During the past 4 weeks, fed trade has bounced around between $89 and $91. That's especially painful for cattle feeders: current closeouts are beginning to reflect replacements purchased during last fall's peak priced in an environment of corn in the low-$3 range and the back-end of the board was hovering around $100. Given the run-up in corn prices and the break at the CME, feedyard managers are now forced to make sales while losing equity to the tune of $150-200/head.
Much of the current uncertainty parallels trepidation within the equity market. As referenced last month, concern surrounding credit elasticity is playing out through the entire economy with many economists now forecasting recession in 2008. More tangible, though, are consumer attitudes and subsequent spending behavior. As an example, Discover Financial Services noted last week (Feb 8) that 49% of surveyed customers intend to reduce discretionary spending this month - up 5% from just last month. Meanwhile, credit card delinquencies are on the rise; the outcome being further tightening for those consumers seeking additional credit. Declining real estate values and subsequent credit crunch means less spending; that's confounded by pessimism surrounding the "wealth effect" as equity portfolios have declined sharply in the past few months.
The ramifications are unsettling. Most notably, January's Restaurant Performance Index declined for the 4th straight month and established its lowest mark since February, 2003. Meanwhile, 44% of restaurateurs indicate expectations of worsening economic conditions in the next 6 months. Those influences have spilled over into the wholesale market. Choice cutout values have struggled of late and posted 3 consecutive weeks to the downside during mid-to-late January. January's performance makes 8 months in succession for Choice boxed beef prices to average in the $140's (the last monthly average above $150 was May '07 at a level of $161).
That said, February's first full week could prove to be very significant to overall market trends in coming months. First, the Choice cutout managed to end the week by breaking through the $150 barrier - the first occasion since mid-December. However, within the event of higher trending cutout values, it's important to note that the Choice-Select spread broke below the $5 threshold during the week. That's potentially indicative of challenges to obtain value differentiation within the market and likely reflects the broader economic drivers discussed above. Secondly, and most importantly, packers managed to score some bargaining leverage and profit from higher cutout values; processors possessed positive margins for the week - by my estimates, the last occurrence above $130/head was back in June.
Per that item and in reference to discussion in January's Monthly Market Profile: Tyson announced closure of the Emporia, KS facility. Recall several months ago that John Tyson noted current overcapacity and declining margins as critical while explaining that another round of "rationalizing" would be required in the packing sector. Overcapacity is a fundamental problem in any industry but most severe in commodity businesses. Business strategist Michael Porter (Competition and Strategy, c. 1991) explains that commodity industries are especially susceptible because demand is generally cyclical: during economic upturns business tends to possess excessively optimistic expectations leading to disproportionate expansion and ensuing overcapacity upon shift in the cycle.
The grain markets are setting up for an important battle in the coming weeks. Discussion generally focuses on acreage allocation among corn and soybeans. However, developments of late indicate consideration also must include wheat, cotton, hay - they're all in the game. It's increasingly clear that global demand is accelerating and will likely continue to outpace available supply. As such, a single growing season is no longer sufficient to remedy production shortfalls. That means planting intentions possess longer-lasting ramifications; markets are looking further out in terms of pricing strategies to ensure adequate supply. Therefore, the next few months will be critical for each crop. Lots of volatility ahead!
Last month's Monthly Market Profile attempted to provide some broad overview of the current business environment within the beef complex. Several key issues were addressed - namely the outcome of current macro-economic concerns and subsequent impact on consumers, the influence of ethanol specifically as it relates to the corn market, and lastly, the enduring effect of relative overcapacity within the packing sector. However, I also alluded to the most significant market event of late: downward pressure for the feeder market. The results possess some important implications - both directly and indirectly.
In order to understand the feeder market's behavior it's important to get underneath the various layers which drive feeder prices. The second illustration below outlines the weekly trend of feeder cattle prices in recent years (basis CME Feeder Cattle Index). The market's recent run during the past 4-to-5 years initiated in earnest during the 2nd-half of 2003; closure of the Canadian border provided fundamental support to the market from the supply perspective.
That occurrence was especially significant given steady growth in feedbunk capacity. Cattle-Fax® indicates pen space expanded by nearly 1.9 million slots (~16%) during the previous decade. Meanwhile, interactive surveys at VetLife's Benchmark Forum in Phoenix (2005) revealed that 60% of feedyard respondents had increased capacity since 2000. The outcome has friendly to feeder cattle prices: capacity cannot remain idle. And since 2003 we've worked within a new trading range - the result of an underlying disparity stemming from excess bunk capacity chasing fewer cattle.
However, in recent months the market has taken its blows. Feeder cattle have been on the defensive because of higher grain prices. Cattle feeders have been forced to bid down replacements because of inflated gain costs. That's especially evident in the third illustration below: it outlines the price differential between fed and yearling steer prices since 2003. The price spread peaked as cattle feeders chased replacements and continually bet on the come (that risk was positively reinforced through multiple turns). However, in recent months, cattle feeders haven't been willing to chase as hard when purchasing feeders - that's largely due to uncertainty in fed prices going forward (as discussed last month) and volatile grain markets.
Unquestionably, the primary benefactors of the run-up in feeder prices during the past 5 years has been the cow/calf sector and allowed producers unprecedented revenue opportunities. Historically, that would've meant expansion but not this time. U.S. beef producers have proven been especially cautious about expansion during the past twenty years - and particularly so in this decade. Why the reluctance? The answer is difficult to pinpoint amidst nearly 800,000 different operations. Regardless, the most important part is the outcome. Nonetheless, stable cow numbers in the midst of expanding feeding capacity and lack of feeder cattle imports was very price supportive; I've described previously in this way: "More slots chasing a comparatively stable supply has created a "feedtruck premium" and driven prices to historic levels."
What's next? Within an environment of rising real estate prices, higher production costs and ever-increasing uncertainty, consolidation and cowherd liquidation will likely accelerate. How it plays out remains to be seen but could prove very significant for the beef complex further pressuring sectors already burdened by relative overcapacity - not to mention all supportive industries. Prepare for the "unk unks" (unknown unknowns)!
Weekly Roberts Agricultural Commodity Market Report - Mike Roberts, Commodity Marketing Agent, Virginia Tech
LIVE CATTLE futures on the Chicago Mercantile Exchange (CME) were mixed on Monday. FEB'07LC futures finished off $0.025/cwt at $92.170/cwt but $1.645/cwt higher than last Monday. The APR'08LC contract closed even with last Friday at $95.100cwt, but $1.175/cwt over a week ago. JUNE'08LC futures were up $0.250/cwt at $94.450/cwt. The market is hopeful for spring and summer grilling. Lower CBOT corn, soybeans, and wheat were helpful. Cash cattle were $1 - $1.25/cwt higher last Friday as USDA's 5-area-average price was placed at $91.73/cwt. Packers were willing to bid more because of better margins last week. According to HedgersEdge.com, the average beef plant margin for Monday was estimated at $26.80/head, $2.90/head better than last Friday and $47.35/head better than a week ago. Higher retail beef prices also helped. USDA increased the choice beef cutout by $0.52/cwt to $150.73/cwt. Cash sellers should hold cattle and sell only when cattle are ready while trying to hit these rallies. It might be a good idea to price corn inputs at this time. This volatility will continue until the U.S. crops are planted as corn wars with soybeans for acres.
FEEDER CATTLE at the CME were up on Monday. MAR'08FC futures closed at $105.900/cwt, up $0.875/cwt and $1.150/cwt higher than a week ago. MAY'08FC were up $0.850/cwt $113.050/cwt. The AUG'08FC contract topped all contracts with $113.950/cwt. Falling grain markets and tight supplies were supportive. Cash feeders were up sharply by $2-$4/cwt at the much watched Oklahoma City feeder auction. The latest CME Feeder Cattle Index for February 7 was placed at $101.61/cwt, up $0.67/cwt. Feeder sellers should consider selling cattle on these rallies. It might be a good idea to price corn inputs at this time. This volatility will continue until the U.S. crops are planted as corn wars with soybeans for acres.
Visit the OSU Beef Team calendar of meetings and upcoming events
BEEF Cattle is a weekly publication of Ohio State University Extension in Fairfield County and the OSU Beef Team. Contributors include members of the Beef Team and other beef cattle specialists and economists from across the U.S.
All educational programs conducted by Ohio State University Extension are available to clientele on a nondiscriminatory basis without regard to race, color, creed, religion, sexual orientation, national origin, gender, age, disability or Vietnam-era veteran status. Keith L. Smith, Associate Vice President for Ag. Admin. and Director, OSU Extension. TDD No. 800-589-8292 (Ohio only) or 614-292-1868
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