A Publication of:
OSU Extension - Fairfield County
831 College Ave., Suite D, Lancaster, OH 43130
and the
BEEF Cattle questions may be directed to the OSU Extension BEEF Team through Stephen Boyles or Stan Smith, Editor
You may subscribe to this weekly BEEF Cattle letter by sending a blank e-mail to beef-cattle-on@ag.osu.edu
Previous issues of the BEEF Cattle letter
Issue # 592
Destination Unknown - Nevil Speer, PhD, MBA, Western Kentucky University (reprinted with permission from CattleNetwork.com on 6/11/08)
So much for normality. Memorial Day is typically thought of as the unofficial kickoff to summer. It usually signifies fed market spring highs are behind us and focus shifts to summer business dynamics: holiday barbecue orders have been filled meaning wholesale transactions are on the decline; meanwhile, feedlots are working through an ample supply of calf-feds. But 2008 is another story. The end of May, on the heels of Memorial Day, witnessed fed trade finishing at $95-6 - the best week of the year. That positive trend has since reversed in June with two weeks of softer sales and the market slipping back to $93. Nonetheless, might 2008 be upside down defined by spring lows (March's $86/cwt) and improve through the summer? That could be the case given 2008's May's action and persistently weak basis (see charts below).
Those anomalies indicate the market will be searching for direction. Absence of seasonality, macro-economic concerns, and significant premiums possessed by the back-end of the board create tension and ambiguity with respect to the near-term outlook. (As a side note, strength in the deferred contracts has boosted feeder cattle prices in recent weeks.) On one hand, August live cattle represent significant optimism to an otherwise normally tough period - hope stems from a supply perspective and progress towards renewed Korean trade.
The contract has traded $98+ during the bulk of May. On the other hand, the beef complex experiences a seasonal decline in cutout values which will weigh on the fed market in coming months. That's especially true given broader economic woes; consumers remain nervous and there's lots of doubt about the enduring impact of stimulus checks. Additionally, when it comes to export markets it never seems to be a done deal - traders can't rate potential over performance. As such, one of two things will need to happen: 1) the spot market will continue to rise through summer in response to bullish indicators, or 2) the August board will have to yield to bearish fundamentals.
Cattle feeders are definitely keeping their fingers crossed for the former - they need better prices to fend off a long string of losses. Certainly, closeouts are trending in the right direction, improving from the abysmal performance during February and March. However, that doesn't negate the reality that feeding cattle right now is proving to be a cash drain. If there's a decline at the CME, stalling the fed market, the summer of '08 could prove to be especially dismal for the feeding sector. Nonetheless, managers have proven to be willing sellers of late: harvest and total beef production during the past five weeks is running nearly 2% and 4% ahead of last year's pace, respectively. On the other side of the transaction, beef processors have turned the tide in terms of margins during the past 8-10 weeks.
"Demand destruction" is a term that denotes downward shift in aggregate demand induced by higher prices. It's the outcome of cumulative, long-term strategic choices to shift away from usage because of price. That's a very different phenomenon versus rationing usage - merely reducing quantity demanded as prices work higher. An important distinction! It appears the corn market is working towards creating demand destruction . . . because it has to; higher prices are no longer about buying acres or slowing utilization. The market possesses a high degree of anxiety which have been fueled by weather concerns during the planting season. That's sparked an important rally; prices have broken out to the upside with no established resistance levels thereby leaving upside potential somewhat unlimited, or at least difficult to anticipate.
As explained last month, " . . . unknowns still hover over the market including: 1) next year's supply - a function of this summer's production (weather will be key); 2) the level of inventory users choose to carry; and 3) export opportunities. Convergence of those factors makes 08/09 wide open. But what price will be necessary to facilitate a sufficient inventory buffer? That's a difficult question to answer especially considering increasing long-term and large-scale commitment to usage. Clearly, it's not possible to grow 14-15 million bushels year-after-year; simultaneously, the market won't allow zero carryover. But if neither of those factors are really in play, then who might reduce their corn utilization?" The answer remains elusive but will be determined by respective industry profitability and competitiveness. Collectively, to some degree, users will have to 'cry uncle'. But until that occurs the market will continue to incrementally find its way to new heights.
Wet weather of late now has the market very focused on overall acreage and yield. USDA adjusted their yield estimates downward in June's WASDE report from 153.9 to 148.9 bu/acre. Updated USDA acreage estimates won't be released until June 30 but clearly earlier calculations will need to be adjusted. The combination of reduced acreage and yield will dramatically affect total carryover estimates (see graph below). Meanwhile, USDA remains persistently optimistic about feed usage; June's report saw further reductions from an already-confident number - 08/'09 feed and disappearance was pegged at one-million bushels (16%) below last year's level. Regardless, carryover was reduced to 673 million bushels placing stocks/use at 5.3%. Lots of unknowns remain leaving the market to navigate its way through uncharted waters (a trip through white water rapids). Hang on!
Per that point, it seems that there's been a wide array of occurrences which directly or indirectly influence the beef complex. All of them are worthy of attention and outlined below with a few random observations on my part (for what it's worth).
First, there was an early-May story from Dow Jones newswire (Donna Kardos) outlining McDonald's April results. Especially interesting was the following observation within the story:
"Last month, McDonald's said it was being pressured by prices of some key commodities. For the full year the company had forecast domestic cheese costs to increase 13% to 14%, chicken 5% to 6% and beef be relatively flat." No surprise: the company's stores are being pressured by higher input costs. There seems, though, to be an ongoing mantra within the beef complex that at some point it will begin to pass along added costs to the customer. However, it's troubling that the poultry and dairy industries have already begun doing so; the beef complex hasn't been able to get that accomplished. Why not? The industry's inherently fragmented structure makes places it at a disadvantage with respect to pricing pressure.
Additionally, the failure to pass along higher costs doesn't bode well for the industry's demand picture amidst a challenging consumer environment. Separately, McDonald's has since reported a favorable 4.3% increase in same-store sales in the U.S. during May. However, the company attributed much of the surge to its " . . . new menu items, including the recently launched Southern Style Chicken biscuit and sandwich."
Along those lines, the Food Marketing Institute released results from its annual Grocery Shopper Trends survey during May. Key findings within the survey indicate that consumers are indeed being more careful with respect to food purchases and were as follows:
Those results correspond to trends identified last fall by Gallup. The organization cited in December that nearly three-quarters of Americans intend to reduce debt in 2008. Good intentions aside, it appears many Americans are having trouble keeping pace with rising costs as the Federal Reserve reported in late-May that credit purchases were $957.2 billion in March (up nearly 8% versus last year) while credit card delinquency rate is approaching 5% (the highest rate since 1990).
Third, even not-so-mainstream shoppers are trading down at the grocery store - or at least indicating the intention to do so. Mambo Sprouts Marketing released a survey of 1000 natural and organic customers in late-April. Skewed survey demographics clearly reflect a distinct consumer subpopulation:
The top-5 products identified as important to purchase in the organic classification were produce, children's food products, house-cleaning products, dairy products, meat and poultry. Nonetheless, 71% indicated that they have at least "somewhat" changed their shopping habits in response to higher prices. Meanwhile, only 54% of respondents indicated willingness to pay more for organic products while 46% were either not willing or unsure about their willingness.
Fourth, the 1st-quarter survey of the 10th District of the Federal Reserve (Federal Reserve Bank of Kansas City) relative to agricultural credit conditions revealed some interesting anecdotal observations among the Fed's membership.
"High input costs and unstable prices could make this a very unpredictable and potentially disastrous year." (Central Nebraska)
"Elevators in our area need a large quantity of bushels this harvest or some are in real trouble." (North Central Oklahoma)
"The fat cattle market continues to be a financial drain on some bank customers. This will eventually affect the cow-calf producers." (North Central Kansas)
"Fuel prices are killing these guys." (Northeast New Mexico)
Lastly, there's been a flurry of activity surrounding the commodities markets with recent Senate panel hearings to investigate the potential link between institutional investors and rising commodity prices; commodity index funds have grown dramatically in recent years with a corresponding rise in basic materials. Amid the rhetoric, politics and hype it's easy for this to get fairly complicated. Moreover, total return analysis becomes even more complex when we add in discussion about positive and negative roll yield, otherwise known as "backwardation" and "contango", respectively. So . . . are funds the responsible culprit for the run-up in prices? I'll leave that to Congress. In the meantime, amidst the rancor it's useful to remember some core market principles.
First, and most importantly, for every buyer there must be a seller. In other words, the funds can't purchase contracts if there isn't a willing seller on the other side.
Second, prosperity hasn't manifested itself across all commodity fronts. In fact, there are several funds designed specifically for livestock investment (e.g. the iPath® Livestock Total Return SubIndex ETN - ticker: COW: weighted 68% in live cattle futures). Seemingly, none of this investment has brought about notable prosperity for the beef complex.
Third, correlation doesn't imply cause and effect. The relationship between increased investment and higher prices doesn't answer the question about whether funds are driving the trend (i.e. speculators have become virtual hoarders of raw materials) versus simply chasing attractive investment options (an attempt to profit from higher prices stemming from increased global demand).
What's the take-home message of all this discussion? The cumulative effect of these and other challenges makes for complexity. Therefore, it's imperative to stay objective and well-informed. Mohamed El-Erian (When Markets Collide, c. 2008) explains it this way: "In this environment, the basic challenge is to understand the inevitable bumpiness of such hand-offs and to manage them appropriately without losing sight of the nature and implications of the new destinations." Inherently, that speaks to the point of industry competitiveness made earlier. All of these factors, either directly or indirectly, influence business profitability.
Forage Focus: Nutrient Value and Removal of Wheat Straw - Robert Mullen, Edwin Lentz, Keith Diedrick, OSU Extension
Due to the increasing fertilizer and straw prices across Ohio in recent times, some producers are curious about the economics of baling wheat straw versus leaving it in the field as residue. This leads to the question - what is the nutrient value of the straw being removed and should removal lead to increased fertilizer applications in subsequent years?
From a pure fertilizer value, wheat straw contains very little in the way of phosphorus (P2O5) but moderate amounts of nitrogen (N) and potassium (K2O). The actual amounts of N, P2O5, and K2O contained in a ton of wheat straw are 11, 3, and 15 pounds, respectively. A sixty bushel wheat crop might produce upwards of 2.7 tons of straw per acre, removing 30 pounds of N, 9 pounds of P2O5, and 41 pounds of K2O. Thus, straw does have some fertilizer value especially with regard to potassium and may require some additional fertilizer input in subsequent years, but, soil testing should be conducted to validate the need for additional nutrients.
Wheat straw residue also contains organic matter that when returned to the soil does have value, but it is difficult to put a dollar value on it. Continued removal of the above-ground biomass may have negative repercussions in the long-run in the form of decreased organic matter, especially if some organic residue is not returned to the soil.
EDITOR's NOTE: For information regarding the nutritional feed value of straw, revisit Steve Boyles' article on the subject in the June 27, 2007 (issue # 543) of the Ohio BEEF Cattle letter.
Nutrient Removal and Topdressing of Hayfields - Keith Diedrick, Robert Mullen, OSU Extension
For hay growers, nutrient removal is a little different, since most of the plant material is removed as the crop, not a choice as the wheat straw above. As it was described in the June 4 Ohio BEEF Cattle letter article on hay economics, grass hay will remove 40 lbs of nitrogen, 13 lbs of phosphate (P2O5) and 50 lbs of potash (K2O) per ton harvested. Alfalfa removes similar amounts of phosphate and potassium per ton, but supplies its own nitrogen by fixation in the roots. Forages cropped intensively respond to adequate fertility, and topdressing is recommended when soil tests show marginal levels of nutrients.
For legume and grass hay crops, phosphate and potash topdressing is not terribly time-dependent if soil test levels are near optimum. Most producers prefer to apply these products in a split fashion; one half of the fertilizer after the first cutting, and the other half in late summer to early fall. If soil test values are marginal or low, an early fall application of phosphate and potassium (before the plants go dormant) is very helpful for the crop to store nutrients in their roots and overwinter more successfully.
Nitrogen is still a necessary input for grass hayfields and mixed hay with less than 35% legumes (alfalfa, clover, etc), and should be applied after each cutting. The usual recommendation from the Ohio Agronomy Guide is 70-80 pounds in early spring for green-up, and 50 pounds of N per acre after the following cuttings. Those producers with pastures may modify these timings and rates to assure forage biomass at the right time for grazing.
Keep in mind that some N fertilizers are volatile and can be lost to the atmosphere. Hot summer temperatures as well as soil pH above 6.5 accelerate the N losses, especially when unstabilized urea is on the soil surface. Urea can enter the soil profile with a little rainfall (0.25 to 0.50" of rain will suffice in low residue situations). If you limed a field in the spring, or if lime is on the surface, urea will volatilize even more quickly. Ammonium nitrate and ammonium sulfate are alternatives with low volatility, but they may be hard to find.
N Applications to Second Cutting Grass - Dave Messersmith, PA County Extension Educator in consultation with Doug Beegle and Marvin Hall
If the weather remains cool and wet then nitrogen application to grass after first cutting will still pay for itself. While the price of N has gone up it is also important to remember that the cost for purchased hay has also gone up.
At $600/ton for urea and application rate of 35 lb N/acre then the cost would be $50/acre. With hay at $200/ton then you only need to increase yield by 0.25 ton to justify the N application. Unless the weather is really hot and dry then I think a 0.25 ton, or more, increase is easily obtainable.
Even though our economic optimum nitrogen recommendations for grass hay were developed based on $80/ton hay and $.25 /lb N, at today's prices of $200 /ton hay and $.65/lb N those recommendations are still valid because the critical thing in determining economic optimum N rates is the ratio of crop price to N price. The ratio today is very similar to what it was when we developed the recommendations. Thus the recommendations are still valid even though prices of fertilizer and hay have both increased dramatically.
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
Fairfield County Agriculture and Natural Resources
