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OSU Extension BEEF Team
BEEF Cattle questions may be directed to the OSU Extension BEEF Team through Stephen Boyles or Stan Smith, Editor
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Previous issues of the BEEF Cattle letter
Issue # 900
August 27, 2014
A Time to Buy or Sell - John F. Grimes, OSU Extension Beef Coordinator
Conventional wisdom tells us that the proper strategy to investing in a business or commodity is to "Buy low and sell high!" I have heard that phrase for years and would agree that it is sound advice. However, the current outlook for the beef industry might put a different spin on the traditional investment advice.
There is little doubt that there is plenty to be excited about in the beef cattle industry. Nearly every class of beef animals is receiving historically high prices. The portion of the country experiencing drought has reduced significantly over the past 2-3 years. Feed costs are trending downward on the expectations of a second consecutive large corn crop and improved forage production across much of the country.
Nearly all the market signals are in place for cattle producers to expand their herds. Yet, the U.S. beef cow producer fully realizes that expanding the herd is a long-term investment and commitment. This fact has translated to a fairly conservative approach to expanding the nation's cow herd. There are many factors that have contributed to a slow rate of rebuilding which include strong feeder calf prices, volatile feed costs, drought, competition for land for crop production, and the advancing age of the average cow-calf producer to name a few.
If herd expansion is on your mind, there are some important factors to be considered. As always, there is debate as to whether one should raise or buy replacement females. Some may want to use their own genetics to build replacement female numbers while others may need to buy females from outside sources to increase numbers in their herd.
One must also consider the long-term nature of cow-calf production when making the decision of how to add females to the herd. Will you be able to capitalize on the strong prices received for feeder calves today and forecast for the near term? The purchase of bred replacement females may create a larger window of opportunity to sell calves in a favorable supply-demand situation. Financial considerations usually dictate the approach taken as ultimately, one must decide if it is more cost-effective to produce their own replacements or to purchase them.
I want to remind you that the Ohio Cattlemen's Association (OCA) is sponsoring an event of potential interest for both the buyers and sellers of beef breeding cattle. On Friday evening, November 28, the OCA will be hosting their second Replacement Female Sale. The sale will be held at the Muskingum Livestock facility in Zanesville and will begin at 7:00 p.m.
The 2014 Ohio Cattlemen's Association Replacement Female Sale will provide an opportunity for both buyers and sellers to meet the need for quality replacements in the state. Consignments may include cow-calf pairs, bred cows and bred heifers. Females must be under the age of five as of January 1, 2015 and may be of registered or commercial background. Bred females must be bred to a bull with known EPD's and calves at side of cows must be sired by a bull with known EPD's. Pregnancy status must be verified by an accredited veterinarian through traditional palpation or ultrasound or by blood testing through a professional laboratory. Analysis must be performed within 60 days of sale. Consignments will also be fulfilling specific health requirements.
Consignments for the sale are due to the Ohio Cattlemen's Association by October 1, 2014. Sale information can be obtained by contacting OCA at (614) 873-6736 or at their web site located at www.ohiocattle.org. If you have any questions about the sale you can call me at my office at (740) 289-2071, Extension #242 or contact me by e-mail at email@example.com.
I consider this sale a unique opportunity for Ohio's cow-calf producers. This sale is an opportunity for buyers to add quality females to their herds from a local source. Also, this sale is a marketing option for those producers looking to sell quality females in a strong market. You must decide which route is best for your operation.
Fall 2014 Beef Industry Outlook - John F. Grimes, OSU Extension Beef Coordinator
While we just discussed some of the economic considerations involved with buying or selling replacement females, the other segments of the beef industry have similar questions about the economic outlook for their enterprise. Producers can hopefully develop management and marketing plans for their specific enterprise if they are aware of the most up-to-date information economic information relating to the beef industry.
The OSU Extension Beef Team has posted a presentation titled "Fall 2014 Beef Industry Outlook" at their web site. This presentation addresses many of the supply and demand, production, weather, feed, and consumer issues that are currently shaping the economic future of the beef industry. This presentation is embedded below:
Selling vs Backgrounding 2014 Calves - Warren Rusche, South Dakota Sate University Extension
So far 2014 has been one for the record books when it comes to the cattle market. Increased cattle values combined with less expensive feed have dramatically changed the outlook for cow/calf profitability compared to the last few years.
These market place changes should trigger at least an examination of retained ownership plans. After all the net returns from selling calves at weaning will be some of the highest ever for most herds. The question then becomes whether there is an opportunity to capture additional profits by retaining ownership, or is the best strategy to sell at weaning and take the profits immediately?
Table 1 shows the returns for backgrounding calves from 550 to 750 pounds using a range of values at weaning (or purchase) and at selling. The costs for individual operations will vary depending on feed values and yardage costs, however for the purpose of this discussion the cost of gain is assumed to be $0.70 per pound.
Table 1. Profit or Loss Backgrounding from 550 to 750 pounds
|Sale Price (750 Pounds), Dollars per Hundred|
|Calf Price (550 lbs) $/100 lbs||$205||$210||$215|
Based on this analysis the margin between the initial price and sales prices significantly affects the profit and loss. Risk management, either through price insurance products, futures and options, or cash contracts needs to be strongly considered when deciding whether or not to retain ownership. Price volatility has increased along with price levels this year. A geopolitical or economic issue halfway around the globe could lead to net losses.
Another often overlooked factor is how retaining ownership might affect feed supplies and carryover. This year hay and feed supplies are generally adequate going into fall. The same was true in the fall of 2011; but by 2012 feed inventories were critically short for many ranchers due to drought. It is important that producers make sure the potential rewards for retaining ownership justify the additional risk.
It is also important producers don't automatically assume the risk is too great and that calves shouldn't be retained. As shown in Table 1 substantial profits are possible, depending upon the buy-sell margin and the expected costs of gain.
Some situations where retaining ownership might pay off include:
* As a tool to add value to raised feedstuffs which are otherwise more difficult to market. Feeds such as high-moisture corn or silage are two examples. Feeding to cattle is a way to market those feedstuffs and save drying expense or harvest delays.
* Selling some of the calf crop while retaining the balance. This could be viewed as "not putting all the eggs in one basket" marketing. One example could be to sell the steers and hold on to the heifers as replacements either for sale or within the herd. Or the heaviest calves could be marketed at weaning with the lighter calves grown on forage.
* Sell premium priced calves and replace with less expensive, "opportunity" cattle. This isn't exactly a retained ownership strategy, but can be used as a way to add value to home grown feeds while capturing premiums for high-quality calves at weaning. Buying calves cheaper could help manage the buy-sell margin risk; however the risks of health or performance issues need to be considered.
This is a simulation of one scenario. All operations are different and this table may not apply to all situations.
The Cure to Record Prices - John Michael Riley, Extension Agricultural Economist, Department of Agricultural Economics, Mississippi State University
I think all marketing economist have, at some point, been told the saying that nothing cures high prices like high prices. I attempted a quick search for whom to attribute this line to with no answer (FYI: the search terms "cure", "high", "prices", and "quote" will fill your results with stock market quotes for the Direxion Daily Healthcare Bull 3X Exchange Traded Fund). Many might argue that live and feeder cattle futures, and more recently cash feds and feeders, have been "cured". The catalyst, of course, was the sanctions imposed by Russia late on Wednesday, August 6, 2014. Given that cattle markets remain at levels that are outside the norms of our data, it is no surprise that a news event such as this will be received in such a negative fashion. Prior to this, a sporadic three- to four-day sell-off in early July seemed to have provided a "cure" but that was short lived and most futures contracts recovered over the course of the next two weeks with very minimal damage to cash prices experienced. Will a resurgence like this occur again?
I will refrain from restating what has already been thoroughly covered (and with respect to many of the articles I read from both livestock and mass media outlets, for the most part, accurately covered!). However, I feel compelled to provide some perspective and commentary for In the Cattle Markets. In no disrespect to those who use it, but technical analysis is not my strong point since I tend to veer away from those beliefs. However, clear levels of support can bee seen from most all live and feeder cattle futures contracts (there are slight variations for the many different contract expiration months available). This is supported, pun intended, by the fundamental factors currently in place in the beef cattle production system - largely centered on reduced supplies and strong demand - all of which have been covered at length in previous In the Cattle Markets writings.
I will reinforce that of the United States' annual beef production approximately 10 percent is consumed in the export market. This is in contrast to pork and poultry exports, which are about 22 and 19 percent of annual domestic production in recent years, respectively. Granted, even for beef this is no small amount with 2.59 billion pounds exported in 2013, 2.62 billion projected for export in 2014, and 2.53 billion pounds forecasted for export in 2015 (according to the August World Agricultural Supply and Demand Estimates report). However, with respect to U.S. beef, pork, and broiler exports to Russia, the significance has fallen in recent years. For the five-year period from 2009 to 2013, 3.1 percent, 3.9 percent, and 11.4 percent of total U.S. beef, pork, and broiler exports landed in Russia.
So, will a second coming - or third, or fourth, or . . . I have lost count - of record cattle prices occur? Given the strength in the domestic market and since the importance of Russian meat imports has lost traction in recent years the clear "in the vacuum" fundamental answer is yes. In the short time since Thursday of last week (August 14), it appears that this is happening. Unfortunately, nothing operates in a vacuum in today's marketplace. So much influence from outside sources spills over into other sectors. Further, the high price levels continue to have cash market participants, futures traders, analyst, and so many random by-standers looking for the bears mingled in amongst the bulls. These two factors combined remove the forcefulness from the fundamental "yes".
Feed Supply and Demand - Matthew A. Diersen, Professor, Department of Economics, South Dakota State University
In recent weeks people in different livestock sectors have been wondering about the relative price impacts of corn and other feeds. Other people have asked about the longer-run price outlook for feed and for cattle. Having expectations for corn and hay in this setting is necessary as they ultimately feed into the prices for different classes of cattle. For crops using a balance sheet allows for both supply and demand adjustments.
Starting with the current marketing year and balance sheet for corn, the large supply has dominated the news. Livestock herds cannot be expanded nor can ethanol or other industrial uses (expect exports) increase as fast as corn will be added this year. All of this is factored into the current WASDE price projection of $3.55-$4.25 per bushel for corn. However, if one is looking at retaining heifers or valuing future calf crops, then the 2015/16 marketing year is of interest. One way to determine a 2015/16 corn price is to extend the balance sheet forward. Levels from the USDA baseline are kept constant except for the different beginning stocks. Doing so implies further growth in the ending stocks level for 2015/16, which in turn gives a lower price. The baseline price was $3.30 per bushel on corn for 2015/16. Modeling the corn price against the ending stocks to use ratio gives an even lower projected price ($3.21 per bushel) than the USDA baseline would suggest. Looking at the futures market one sees different story - carry or higher prices out to December of 2017.
The situation for hay is a little more immediate. The August Crop Production report suggests a sharply higher hay production level than expected based on trend yields. The price impacts have been mixed since then. Alfalfa prices are being supported in drought-affected areas and are declining in other areas (e.g., South Dakota). At the national level hay supplies have effectively been rationed in recent years. Disappearance or use based on the number of livestock has been quite low by historical standards. Now, during the hay production year, the supply of hay has effectively increased while livestock numbers have continued to decline. The net result is that use can increase and the price can also fall. An expanded cattle inventory would need additional hay acres in future years if normal yields and prices are to follow.
Lower corn and hay prices both factor into higher feeder cattle and calf prices for both 2014 and 2015. Fundamental forecasts for cattle prices typically have fed cattle in the $155 per cwt area for 2015. In contrast, futures prices for much of 2015 have been $10 per cwt less. Feeder cattle follow a similar pattern. The bottom line is that with corn futures trading above the fundamental price level for next year, cattle futures prices remain below the fundamental price levels. Cattle feeders cannot lock in corn cheap enough to bid higher for feeders or calves. If this logic holds, the implication for prices in 2015 would be a set of surprises of lower corn and higher feeder cattle that is difficult to exploit. It would also imply higher calf prices in 2015 than the futures market will allow to be exploited also.
Last Call for the Roundup!
If you call the office of the Ohio Cattlemen's Association today or tomorrow, there's still time to reserve your spot at this year's Ohio Cattlemen's Roundup. This year's event will be hosted in Clark County on September 5 and 6. Find all the details as well as on-line registration linked here at the OCA website.
Pasture For Profit Grazing School Next Week!
The Clinton Soil and Water Conservation District, NRCS, Wilmington College, Ohio Forage and Grassland Council, and OSU Extension will be hosting a Pasture for Profit Grazing School Program at Wilmington College. The College is located on at 1870 Quaker Way, Wilmington Ohio 45177. The Grazing School will be on campus at the Pyle Center, Thursday September 4, 2014 9:00 AM - 4:00 PM and at the College Farm on Friday September 5th, 9:00 AM to noon.
The sessions will cover setting your goals and objectives, evaluating your resources, understanding plant growth, grazing economics, forage species selection, developing contingency plans for drought, mud and deep snow, soil pasture fertility, and fencing and livestock watering systems.
Producers need to register by August 28th by contacting the Clinton SWCD office at 937-382-2461, or at their office; 111 South Nelson Ave, Suite 5 Wilmington, OH 45177. A registration fee of $40 per farm will include materials, Pasture for Profit notebook, Pasture Stick, refreshments, and lunch on Thursday. Additional registrants from the same farm are only $10.
Please contact the SWCD or NRCS office for an agenda and registration form.
The program will provide valuable information in a fun atmosphere that can be used to ensure that the grazing operation on your farm is environmentally responsible as well as economically viable. If you are a farmer or a person with an interest in grazing management-pasture ecosystems plan to attend. The benefits from attending include additional points in the USDA-Natural Resources Conservation Service EQIP (Environmental Quality Incentives Program) ranking process, increased knowledge about forage plant growth, improvement of the environmental quality; cleaner air and water; healthier soil, plants and animals. Learn ways to increase net profit for your farming operation.
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.
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Keith L. Smith, Associate Vice President for Agricultural Administration; Associate Dean, College of Food, Agricultural, and Environmental Sciences; Director, Ohio State University Extension and Gist Chair in Extension Education and Leadership. TDD No. 800-589-8292 (Ohio only) or 614-292-6181.
Fairfield County Agriculture and Natural Resources