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Previous issues of the BEEF Cattle letter
Issue # 505
September 20, 2006
More Revenue, More Placements, More Risk - Nevil Speer, PhD, MBA, Western Kentucky University (reprinted with permission from 9/11/06 CattleNetwork.com)
Deal or no deal? Hardened attitudes were readily apparent following Labor Day; packers and feeders dug in with each strongly focused upon various aspects favoring their respective position. Sellers relied upon improved currentness, renewed international prospects and a month-long run at the CME. Buyers were assessing fall demand, fighting for margin and leaning upon some long-anticipated profit-taking at the Merc. As such, trade failed to develop during the first full week of September. Such an occurrence is always a little unsettling for the market; it creates some uncertainty and increases the potential for volatility in the week(s) to come - favorable for neither side.
In the grand scheme of things, though, last week's stalemate should be perceived simply as more of a setback rather than some type of major development. That's especially true when considering the broader advancement during the past month. Recall that July finished business mostly at $78-80. August business commenced with a $4-6 surge with trade being mostly $85-6 during the first week of the month. Early-month prosperity resulted from active beef trade and strong wholesale prices forcing packers to aggressively procure inventory to fill Labor Day sales orders. Feedyards received carry-through on that momentum towards the middle of the month; cash sales settled steady to $.50 higher with the north at $86-to-$86.50 while the south was mostly $85.50. The bounty didn't end there: negotiations for the week ending August 25 saw live sales settling at $87-8. And then…the month closed with a bang! Fed prices were boosted $3-4: trucks were to be loaded with cattle valued $90-2 and some reports as high as $92.50.
Beef complex segmentation inherently establishes an antagonistic environment. One segment's good favor often equates to setback for another. Case in point: during the past several weeks cattle feeders have enjoyed fresh prosperity due to $90+ prices yet packers find themselves back in the red. The fed market's recent jump to a new plateau ends an extended streak, beginning in late-April, of positive margins for beef processors. Negative margins contributed to last week's standoff as packers tried to reassert some bargaining position and were bolstered by declines at the CME late in the week. That shift versus expectations of declining supply of market-ready cattle will likely mean some tough battles to gain leverage in the weeks to come.
The market is right on cue in terms of seasonal timing. However, reversal from summer lows typically comes more in the form of an extended grind versus a sudden shift into positive territory. This year's sprint to new levels is dramatic from a historical standpoint and somewhat unexpected given June's late surge (thus expectations were for a delayed fall recovery). Several factors have driven the sharp rotation. First, slaughter throughput has been brisk all summer; harvest rates have run nearly 685,000 head since Memorial Day (not including holiday-shortened weeks). Rapid throughput has allowed feedyards to avoid becoming front-end loaded. Resultantly, the market has shifted from an outlook of potential burdensome carryover to being relatively current. That helps on two fronts: 1) it improves seller bargaining position, and 2) it's helped to reverse persistent basis weakening since spring. Second, several factors have converged at the CME to drive Live Cattle contracts to lifetime highs. Bullishness in the pits has provided overall support to the cash market during the past several weeks.
Swift marketings at higher levels have created the need to fill pens. August's cattle-on-feed report revealed large July placements versus last year (though 2005's placements were small from a historical perspective). More significantly, though, cattle feeders are aggressively pulling cattle ahead. Light-weight placements established a new high-water mark for July - the second month for such an occurrence. Meanwhile, Cattle-Fax® reports that activity isn't just a blip on the radar screen: cattle feeders were busy again in August; estimate of placements for the month are 2.26 million head - 113% of 2005's pace.
Cattle feeders now find themselves in a much improved revenue situation versus just a month ago. That scenario has turned closeouts around - going from losers to breakeven during mid-to-late August. And the jump to $90+ has allowed for some significant profits over the past several weeks. Feedyards have rewarded themselves by purchasing replacements at higher levels and provided it with newfound support. Looking forward, however, breakeven prospects are a high-stakes game (a principal theme of the industry - more on that below). CME's Feeder Cattle Index crossed $120 on September 7. Alternatively, the 4-week moving average for 750-lb yearlings now exceeds $115 - $10 higher (or $75/head) than just three months ago. Meanwhile, CME contracts now stand at $118-9 for the fall delivery months. That action holds up the outlook for fall weaned calf sales with 550-lb steers now trading above $130.
Over the past several months I've been detailing various characteristics associated with the feeder cattle market. Most important amidst that discussion are the underlying implications of changes which have occurred in recent years.
The first question many people ask is, "Why is the industry changing?" A comprehensive answer requires more space than available here. However, a historical review provides some context to build upon. During the late-80s and early-90s the beef industry found itself simultaneously bogged down by efficiency and quality issues (quality being especially troubling as that had long been the industry's strong suit). Combined, those shortfalls contributed to diminishing consumer demand and left beef with a distinct price / value handicap in the marketplace. Weakened demand means less revenue. In response, individual businesses were forced to become more efficient, productive and competitive.
The ensuing question is, "What changed the most?" The answer is likely as varied as readership of the Monthly market Profile - much of it depends upon one's own bias or perspective. One of the most significant changes, though, has been the ongoing transition in business strategy within the feedyard sector over the past twenty years. That shift has been largely driven by sustained growth in capacity for the purpose of obtaining increased efficiencies of scale. That pursuit has dramatically altered the business environment and forces reevaluation of the various drivers which dictate how the sector operates. Many of our traditional assumptions about how the business works no longer prove correct or valid.
Business consultant Michael Hammer points out that, "Increasing productivity does enable a company to lower its costs while increasing its output and that ought to be good for any business. But what is good for any business, it turns out, isn't good for every business" (Fast Company, Nov, 2002). In other words, individual cattle feeders have been very successful in improving efficiency. The sector has achieved new heights of output and productivity (good for any business). However, to benefit from investments and new capabilities mandates individual feedyards to operate at higher levels of occupancy. Leveraging newly-implemented productivity forces buyers to bid the feeder market higher. It's a self-escalating conundrum in which higher prices mandate new economies of scale and vice-versa. Clearly, not every feedyard can stand that type of competitive environment in perpetuity (not good for every business).
As a result, and as I've referenced previously in the Monthly Market Profile, that escalation has created a fundamental surge in the amount of operating capital required to maintain a feedyard. Moreover, Cattle-Fax® estimates that the average return over the past 25 years is approximately $10-15/head. Considering increased capital investment over time, even consistent feeding margins represent diminishing return on investment (for more detail on this see MMP: June, 2006). And that doesn't account for capital investment into plant, property and equipment.
Despite last month's favorable market, 2006 could prove to be pivotal (see graph below). Given the previous discussion, it's clear that rivalry within the sector will likely increase in coming months and years. The sector has expanded and consolidated (thus increasing feeder cattle demand) while adopting new business strategies (such as supply management or new marketing venues). The net result is increased competitiveness. That's accentuated by several other factors which contribute to intra-sector rivalry:
This is an important period within the industry. Transition within any industry is difficult. And we may enter a period of new consolidation - not all feeding companies are equally situated to deal with what may emerge. How it will all shakeout remains to be seen, but those feedyards which more effectively cope with a hyper-competitive environment and rising capital requirements certainly have a head start - more on that next month.
Forage Focus: Fall Forage Fertility - Douglas Beegle, PSU Soil Fertility Specialist
As always, begin with a soil test. Even though it maybe getting late, the Ag Analytical Services Lab at Penn State normally has about 2 day turn--around with soil samples. So if you overnight your samples to the lab and have signed up for free web access to your results you would still have your results in plenty of time to make fertility management decisions for this fall. Other labs have similar service.
When you get your soil test reports back, look for fields that are low in P and especially K and, as always, look for low pH fields. These are the ones that you want to focus on for fall fertility management. Low fertility going into the winter can weaken the stand and often result in poor stands the following year. Make sure you get the recommended nutrients on these fields as soon as possible. Certainly get them on before the crop goes dormant because if the nutrients are not taken up by the plants they won't do much good for helping the plant get through the winter. Potassium is especially critical for winter survival.
If the soil tests are in the optimum range and the recommendations are for maintenance fertilization, timing is less critical. It certainly will not hurt to get them on early and it may give the stand a little extra protection over the winter. However, you could put maintenance P and K on after dormancy as long as there is not a serious threat of physically losing the nutrients in runoff. This would be a concern if you spread on frozen or snow covered sloping ground.
The other priority is to lime fields with low pH. Ideally for legumes the pH should be maintained between 6.5 and 7.0. If you have fields below this and especially if they are down around 6 or lower, these should be a priority for liming this fall. Fall liming will give the lime time to react before the next growing season. Also, freezing and thawing over the winter will help to incorporate the limestone. Watch the soil conditions before you have heavy lime trucks run over the field. If the soils are wet wait until they dry out or freeze. There is not problem with winter applications of limestone again as long as it is not susceptible to physically being washed off the field.
Fall fertility management in forages is critical if soil nutrient levels or pH are low. However, if you do a good job of maintaining soil nutrient levels and pH then fall may still be a good time to take care of this important task, but it is less critical thus giving you more management flexibility.
Beef Field Day Planned for September 30 - Steve Ruhl, ANR Educator, OSU Extension
The North Central Ohio Beef Field Day is planned for Saturday, September 30. It will be held at the Mansfield Correctional Institution. Registration will start at 9:30am and the event will begin at 10am. The Correctional Institution is located approximately one mile north of U.S Route 30 on State Route 13 (north edge of Mansfield, Ohio). The event is being sponsored by the Ohio State University Extension, Mansfield Correctional Institution, and area county cattleman's associations.
The Correctional Institution Farm has a herd of 300 commercial cows. They breed their females to A. I. bulls. The best females are used for replacements while the rest of the females and males are fed at the farm to produce beef for the prison system. The males are fed as bulls. This topic will be discussed at one of the sessions during the field day.
There will be six main areas that will be highlighted at the field day. The participants will be divided in three groups and the groups will be lead by the farm manager, beef herdsman, or veterinarian for the farm (Tom Cowell, Gary Eichorn and Dr. Fernando Silveira, respectively). The practices of the farm will be highlighted by the farm personnel and beef/health specialists will further discuss the topics, provide demonstrations, and answer questions.
After the tour the participants will be served lunch and have time to ask further questions and network with other beef producers. The event including lunch should conclude at 2pm.
The cost for the field day is $5.00 per person. The deadline for reservations is September 25th. Reservations should be sent to OSU Extension - Morrow County, 871 W. Marion Road, Suite 102, Mt. Gilead, OH 43338. Walk-ins will be charged $8.00 per person. Participants must be at least 4 years old and photo ID will be required at the field day if greater than 15 years of age.
For further questions contact Steve Ruhl at 419-947-1070 or email ruhl.1@osu.edu
Weekly Roberts Agricultural Commodity Market Report - Mike Roberts, Commodity Marketing Agent, Virginia Tech
LIVE CATTLE in Chicago (CME) closed higher on Monday with the OCT'06LC at $90.900/cwt, up $0.775/cwt and the DEC'06LC up $0.750/cwt at $91.10/cwt. After trading both sides of unchanged futures moved higher in short covering by locals selling early and placing bull spreads, floor sources are quoted. Buy stops added to the gains in the OCT'06LC contract. Additional support was seen from late-week trading of cash cattle in the high end of expectations. Cash cattle last week traded at $88.50 - $89.00 range. Cash cattle were steady to slightly off on Monday in the 5-area market average. The market was seen as drifting after a mixed start waiting on the next wave of cash cattle sales this week. Below is a slide from the Livestock Marketing Information Center showing choice slaughter steer prices for 2005, 2006, and the 2000-2004 average as of September 11, 2006.
Slipping box beef prices and negative packer margins are seen as limiting any rallies in the near-term even though the market is somewhat oversold and feedlots are not moving cattle at offered prices. USDA on Monday put the choice beef cutout at $144.16/cwt, down $0.68/cwt, the lowest since August 7. According to HedgersEdge.com, the average beef plant margin for Monday was estimated at a negative $33.15/head, down $3.20/head from Friday and $23.50/head lower than a week ago. Beef exports are expected to rise over the next few months but will take some time to reflect their impact on the market. USDA on Friday placed the Cattle on Feed report for feedlots of 1,000 head or more at 105.5%-111% more than last year at this time. August placements range from 102%-115% of one year ago while August marketings are expected to come in at 99.6%-105% of a year ago. The market was supported by October/December spreading by one large fund and October/February spreading by another large fund. Cash sellers should still consider protecting a portion of 4th quarter '06 and 1st quarter '07 marketings at this point. Corn users may still think about pricing a significant portion of corn supplies at this time as input prices may have established their lows. Try to catch the low bounce in this choppy corn market to price your corn if you haven't already.
FEEDER CATTLE at the CME ended slightly higher with both the SEPT'06FC and the OCT'06FC contracts closing up $0.150/cwt at $117.700/cwt and $116.175/cwt respectively. Trade in feeder cattle mostly followed live cattle in light trading, floor sources said. The discount to the CME Feeder Cattle index was supportive of feeder futures even though the latest CME Feeder Cattle index was lower. The expectation among traders is that the index will rise following strong demand for feeders at Texas direct markets last Friday. The CME Feeder Cattle Index for Sept, 14 was placed at $118.92/cwt, off $0.54/cwt. Feeder supplies outside feedlots remain tight to very tight amid improving pastures, lowering feed costs, and lowering energy costs. Interest for feeders is expected to remain good to very good. Cattle feeders may want to watch these markets still looking to catch those "up" days to sell. Corn users may still think about pricing a significant portion of corn supplies at this time as input prices may have established their lows. Try to catch the low bounce in this choppy corn market to price your corn if you haven't already.
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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