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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

Previous issues of the BEEF Cattle letter

Issue # 467

December 28, 2005

Plan for the inevitable - Steve Suther, Director, Industry Information, Certified Angus Beef (reprinted with permission from the CAB "Black Ink" publication, December, 2005)

"We decided not to sell those cows in December," a friend related. "Of course, we needed the money - but we couldn't afford the income." The cattle cycle had brought higher priced calves that justified the non-farm extravagance of building a new house. The next stage had to wait until January.

Tax strategy can get in the way of other goals, too, yet most producers juggle a few payments and receipts either side of the New Year's holiday. The idea is to defer some income or expense if you think it will be more welcome the next year.

Unless you have farmed the tax code for several years, you probably need professional advice. You may be able to use income averaging to roll part of a year's income back into a previous year at a lower rate, for example. Discover your options and investigate how best to plan for the inevitable filing date.

Just as the end of every year makes some folks think about income taxes, the low part of the cattle inventory cycle should make us think about culling. Cows are worth a lot as hamburger. It is time to roll the oldest ones out, along with any that have ever made you regret your ownership. They represent capital gains taxable income, but could be offset with capital equipment purchases. The cattle cycle tells us we are rebuilding herds, with fewer heifers placed in feedlots. Yet, economic analyses tell us this is not the best time to keep extra replacements because they are still worth a lot. Countercyclical strategists will let herd size dwindle over the next few years, waiting to rebuild when heifers are too cheap not to keep.

Most producers take expansion opportunities when they arise; certainly, our tax structure encourages expansion. But think about alternatives to buying or retaining heifers at this turn of the cattle cycle. Perhaps you could lease out some pastures or run stockers for a neighbor in the short term for similar net income.

When you do expand your cowherd, do it with higher quality cattle that will carry you into the next turn of the cycle. The market gets more discriminating as the gulf between commodity beef and premium brand quality widens.

The year's end is also a time to think about the legacy you will leave to your heirs. Seeing them all around your holiday dinner table can remind you of the march of time. Your eventual fate is more certain than taxes, but less predictable; estate planning tries to cover all imaginable bases. The time of gift giving could remind you that the "gift tax" doesn't kick in until it reaches $11,000 - it moves up to $12,000 in 2006 - and a couple can double that figure. There is no limit to the number of people on the receiving end. There may be tax implications for some of them, but they would have to see that as good news.

Federal estate taxes, which opponents like to call death taxes, have a questionable future. Repealed for 2005, House-passed legislation was pending in the Senate to make the repeal permanent. Estate settlement is always a tax issue in some ways, best handled with the aid of an attorney, but the exemption level was scheduled to rise to $1 million in 2006.

Any 1,000 cows could be valued at $1 million today, but there are big differences in quality and productivity. Some herds of that size can generate net incomes of more than $200,000 even after the cattle cycle causes calf prices to plunge. That's because they are efficient producers of calves that excel in the feedlot and at harvest as premium beef. Other herds feature unknown commodity cows that may be better off liquidated when prices are relatively high. It is also possible to trade such cows for a smaller number of higher quality, more valuable cows.

One day you won't be here to make these decisions. Some people think it a mark of vanity or materialism to exert their "will" after they die, but it is more of a gift to heirs to have everything planned - with their knowledge and cooperation as much as possible.

Backgrounding Calves - Assessing the Opportunity - Stephen Boyles and Steve Loerch, The Ohio State University Department of Animal Science

Backgrounding is the feeding/growing of steers and heifers from weaning until they enter the feedlot for finishing. Backgrounding may fit your operation if have time to feed a few calves and have some good quality roughage available. Since you will be starting newly weaned calves, skill in diagnosing and treating sick animals is also essential.

You can handle about 1.4 calves, grown from 425 to 750 lbs. on the feed needed for one beef cow. Buying and selling skill are very important for backgrounders. This is because 50 to 65 percent of the weight sold must first be purchased or produced. When the cost of gain is relatively cheap in finishing lots and prices for finished cattle look favorable then you may be competing against them for calves. However, there are finishing feedlots that prefer to feed yearlings (backgrounded calves and stockers) so that they can feed 2 turns of cattle in a year. Cheap calf prices (relative to yearlings) encourages some people to background cattle. You might look at Brain Roe's articles in the OSU Beef Team Newsletter on prices and market projections.

Producers may need to consider how feeding systems may affect the number of calves grading choice (http://beef.osu.edu/library/mgtdiet.html) and the use of implants to maintain carcass weight. (http://ohioline.osu.edu/sc162/sc162_12.html).

Cattle weighing 250 to 650 pounds or heavier can be backgrounded before they go to the feedlot with 400-550 pound calves being the most popular. Heifers will tend to weigh 30 to 50 pounds lighter at the same age. Typical backgrounding diets result in gains from 1.5 to 2.5 pounds a day. However, higher rates of gain are cheaper and more closely align with the genetic potential of today's U.S. beef cattle. Diet selection and target rates of gain should be based on several factors. Small frame cattle and heifers will reach market finish at a lighter weight if they are fed to gain more than 2.5 lbs/day during backgrounding. This can result in lightweight carcass discounts and reduces the pounds of beef sold at slaughter. Over conditioned yearlings will be discounted by feedlot buyers. Therefore, target rate of gain should be based in part on frame size. Cost of gain is a function of feed costs and rate of gain. Lot cost, lower energy feedstuffs can result in profitable cost of gains even when gains are slow. Limit feeding grain-based diets can also be used to put on cheap gain without excessive fattening. Higher energy feeds (grains) are more appropriate for larger framed calves with good lean growth potential.

Mismanaged cattle can be upgraded in quality (uniformity), or those from a poor environment that make compensatory gain, have advantages if healthy. Many "backgrounders" do not own the cattle that long (30-90 days). They may actually be pre-conditioning calves for feedlots and sorting them into uniform groups for further marketing.

With the use of newer software one can evaluate the various rates and costs of gain for various sources and prices of feedstuffs. Faster rates of gain, approaching finishing diets will typically reduce interest costs and the amount of feed it take for a unit gain. Some costs are based on cost per head (e.g. vaccinations, marketing charges) but can be decreased per pound of calf with faster rates of gain. You should work with local marketing experts to determine typical price margins between different weights of calves.

Ohio Cattlemen's Association to Host Regional Meetings Featuring Educational Sessions for Beef Producers

As a service to its membership, the Ohio Cattlemen's Association (OCA) in partnership with the OCA Allied Industry Council is holding a series of regional meetings located across Ohio during the months of January, February and March. Anyone with an interest in the cattle industry is invited and encouraged to attend. The meetings will begin at 7:00 p.m. with a complimentary dinner followed by educational speakers.

With the support of the Ohio Soybean Council, each meeting will feature an informative session about a current issue in the beef industry. There are several different topics so producers are encouraged to attend more than one meeting. Cattlemen will also learn how they can participate and make a grass roots impact in Columbus and Washington D.C. on the issues that can impact their everyday businesses; and learn more about what OCA can do for them.

According to OCA President, Bill Sexten of Fayette County, "OCA's regional meetings are designed to take OCA to the cattlemen, making it even easier for OCA members to have a voice in directing their organization and to encourage members to recruit other members and to give them some valuable management information in the process."

For complete details about each meeting, including detailed directions, visit www.ohiocattle.org or call the OCA office at (614) 873-6736.

Following is a list of the meetings and topics that are currently scheduled:

* January 12, 2006 - 7 p.m., Ohio Valley Career & Technical Center, Adding Value to Your Calves through Retained Ownership & Backgrounding

* January 18, 2006 - 7 p.m., Southern State Community College, Age & Source Verification Programs for Beef Cattle

* January 24, 2006 - 7 p.m., Newport Sportman's Club, Calving Clinic

* January 30, 2006 - 7 p.m., Barnesville Livestock Sales Co., Age & Source Verification Programs for Beef Cattle

* February 8, 2006 - 7 p.m., Washington Co. Extension Office, Increasing Conception Rates through Estrus Synchronization

* February 9, 2006 - 7 p.m., Muskingum Livestock Sales Co., Age & Source Verification Programs for Beef Cattle

* February 15, 2006 - 7 p.m., Columbiana-Mahoning-Trumbull County Annual Meeting, Beef Checkoff & OCA Issue Update

* February 16, 2006 - 7 p.m., Fayette County Extension Office, Developing a Grazing Management Plan for EQIP

* February 21, 2006 - 7 p.m., Williams County Extension Office, Age Verification & Animal ID Update

* February 22, 2006 - 7 p.m., Wyandot County Recycling Center, Protect Your Farm by Addressing Environmental Concerns

* March 2, 2006 - 7 p.m., United Producers Sale Barn Gallipolis, Understanding Indexes to Add Value to Your Cattle

The Ohio Cattlemen's Association is an affiliate of the National Cattlemen's Beef Association and is the state's spokesperson and issues manager for all segments of the beef cattle industry including cattle breeders, producers and feeders. It is the grass roots policy development organization for the beef business. Through the Ohio Cattlemen's Association, cattle producers work to create a positive business environment, while providing consumers with a safe and wholesome product.

2005 Cattle Market Review and 2006 Preview (December 16, 2005) - Dillon M Feuz, University of Nebraska-Lincoln

This has been an interesting year in the cattle business. The long awaited, oft discussed, finally arrived market reopening to Japan occurred this past week. While there will be a couple of token beef shipments in 2005, no real trade will occur until next year. More discussion of the impact of that market opening will be presented later in this article. The long dreaded, oft cussed, judicially reviewed border reopening with Canada occurred this past summer. The market took note, yawned, and moved forward with very little disruption or price impact. Much of the Great Plains and Intermountain cow-calf production regions received some very welcomed precipitation this past year. While the effects of the drought are not likely over, greener pastures coupled with record high calf prices fueled the expansion plans of many cow-calf producers. And finally, beef demand seems to have remained strong in spite of natural disasters, record high fuel prices, and the "sky is falling down and we are to blame" nightly network news reports. It appears that consumers still like beef and are still willing to pay for it.

In spite of all of this news - good, bad, or ugly based on your perspective - the cattle market was sensational in 2005. USDA Choice box beef prices averaged over $1.44 per pound for the year. That compares to an average price of $1.41 last year and $1.28 for the past five years. The spread between Choice and Select prices was in line with the five year average. That increase in average price occurred even though beef production was about a half of a percent larger. Fed cattle prices in Nebraska averaged $87 per cwt. in 2005, compared to $85 in 2004 and just over $75 per cwt for the previous five years. Yearling and calf prices in Nebraska were also at record high levels for the year. The price for 750 pound steers averaged $117 per cwt. and 550 pound steer calves averaged over $138 per cwt. for the year. Prices last year were about $110 and $127 and the five year average was $94 and $109 for yearlings and calves, respectively.

It doesn't take much of a "clair voyant" to tell you what prices were this past year. However, I looked into my crystal ball and I have made a few projections for next year. Short summary: cattle prices will remain relatively high but will be lower in 2006 than they were in 2005, perhaps returning to 2004 levels. Here are my reasons for that outlook:

Domestic demand - US consumers spend less than 10% of their income on food and meat purchases and more specifically beef purchases are only a small portion of that 10%. Therefore, changes in fuel prices, car prices, electronic gadgetry prices, Husker season football tickets, etc. influences the purchases of fuel, cars, electronic gadgets, season tickets, etc. far more than it influences the purchase of beef. It appears that the growth in the popularity of low carb diets has dwindled, which helped to increase beef demand, but consumers have found the great taste of beef and are likely keeping it on their menu. Hence, beef demand may not grow in 2006, but it should remain fairly stable.

Export demand -- Exports will increase in 2006. I don't expect to see us get back to exporting beef to Japan at pre BSE levels any time soon (minimum 3 years) but we will be regaining our market share there over time. If South Korea, Taiwan, Hong Kong, and other Pacific Rim countries will follow the Japanese lead and reopen their borders as well, we could gain back perhaps 50% of our pre BSE export levels. That could represent an increase in quantity markets of about 3% of our domestic production. That would be price positive at all levels of the cattle market.

Domestic supply - Our national cattle herd is growing. There was some growth in 2004 and I am sure that when the USDA releases it annual cattle inventory numbers for the start of 2006, we will have seen more than a one percent increase in the size of the cow herd. Fed cattle weights also continue to trend higher and this adds additional beef to the system. Estimates are that our total beef production in 2006 will likely be as much as 3.5% higher than in 2005. That would be price negative at all levels of the cattle market.

If I am optimistic on how fast we regain export markets, than I could also make the argument that cattle and beef prices will remain close to 2005 levels. However, being a little more cautious on trade, I expect prices will decline from 2005 levels. Furthermore, given that the supply increase is being driven at the cow-calf level and that demand is being pulled at the retail level, I would expect calf prices to decline relatively more than beef prices. Fed cattle price changes will be between those for calves and those for beef. Cow-calf producers have enjoyed several years of relatively strong calf prices. If expansion continues, as I expect it to, be prepared for sharply lower calf prices in a couple of years.

Happy Hanukah, Merry Christmas, Happy New Year and any other Holiday I may have missed.

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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