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OSU Extension - Fairfield County

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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

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 # 618

January 7, 2009

Monthly Market Profile: The Beef Complex - Revenue, Volatility and Policy Keys to 2009 - Nevil Speer, Professor, Animal Science, Western Kentucky University

New Year's always marks an accounting of the previous year's events. Subsequently it also ushers in a look ahead for the next twelve months. Accordingly, last year I outlined three key factors for the beef complex in 2008: consumers, corn, and capacity. The coming year will likely prove to be largely the "same..but different" - 2009 will be marked by variations on those themes. Namely, it will be year defined by revenue, volatility and policy.

To begin, none of us need to be reminded about the current economic slowdown. It's THE story of 2008 and certainly present at the forefront of everyone's mind. What makes this recession different, though, is its convergence on the consumer. Interestingly enough, Gallup reported a year ago that nearly 75% of Americans intended to reduce debt in '08. And indeed they've made good on those intentions; the Federal Reserve reported (December) that aggregate household debt had declined as of September 30 - the first such decline ever recorded by the Fed. Most importantly, that response indicates a spending slowdown across the consumer front. And as noted last month, the spending trough may prove to be deep and enduring as consumers retrench while undergoing fundamental transformation relative to their purchasing habits.

Consumer behavior is especially important as it relates to food expenditures. The beef complex is not immune to that effect from both perspectives: volume (less beef being purchased) and value (trading down when purchasing). That's an important influence (both domestically and globally) because it means less overall revenue available to the industry. The first illustration below represents monthly revenue available to the feedyard sector; a function of total marketings and average fed price. Note that since the economic stimulus effect ran its course the beef complex has experienced a sharp decline in net sales. That's a troubling trend and portends an industry which will have to contract. At the very least, less revenue coupled with tightened cattle supply will further tighten the noose around the feeding and packing sectors already burdened by overcapacity.

Second, the corn market's influence isn't going away anytime soon. Granted the market has moved sharply lower from previous highs established earlier in the year. Simultaneously, though, the market has rebounded from early-December lows. Much of the market's ebb and flow is dictated by the ethanol industry: ethanol production has steadily climbed higher and now represents 38% of the nation's domestic corn use. Comparatively, livestock feed represents approximately 50% of the nation's total usage (down from 75% back in 2002).

Regardless of the market's overall level, end-users need to prepare themselves for continued volatility. In the period between 1997 and 2006 the maximum weekly fluctuation in the corn market (basis Omaha) was generally 20-to-25 cents during any given year. That ratcheted up to 50 cents in 2007 and broached $1.00 in 2008. And despite some recent proclamations of decoupling, corn no longer operates within its own market fundamentals (please see January's AgSight for additional perspective). Moreover, increased demand places the complex in an ever-more tenuous position in terms of annual carryover.

The end result is continued turbulence. Furthermore, economic recovery won't be a smooth transition. It will occur in fits and starts. That means oil prices will continue their ups and downs pulling corn and all other commodities along for the ride, not to mention changing capital structure and subsequent liquidity within the industry. All considered those have especially important ramifications for cattle feeders. Careful decision-making and risk management has never been more critical - a wrong decision on any given week could prove very costly!

Lastly, the beef complex now faces a myriad of issues going forward that will influence business operations. To begin, the JBS purchase of National Beef will become increasingly contentious and drawn out - it's a sentinel case reflecting sharply divergent views on the industry's shape and how business operations should operate in the United States. Meanwhile, formal complaints with the World Trade Organization from our two largest customers, Canada and Mexico, regarding mandatory COOL adds to the mix and represents another issue not likely to be resolved any time soon. Lastly, 2009 will witness phasing in of President-elect Obama's administration; there'll be lots of uncertainty about implementation of new policy priorities.

What's the bottom-line? 2008 ended on somewhat of a sour note; market trends were in a negative direction (see graph below) and 2009 will probably include some tough days ahead. But then again that's nothing new. Repeatedly over the years, somehow, someway the beef complex has risen to the occasion and proven itself to be remarkably durable and resilient!

Price Summary

Story Marketing - Dan Frobose, OSU Extension Beef Marketing Educator

Over the past several years I have been working with livestock producers in developing a "Story Market" or branding program to add value to their farm business. Story marketing works backward from consumer to conception instead of the traditional methods we are used to in production agriculture. What we try to identify are the characteristics in a product or service that the customer will pay a premium for, versus the norm of what the competition has to offer.

As commodity producers in agriculture, our history is such that we are price takers and not price makers. Why? Well, by definition commodity goods equal their cost of production. So if corn historically is $3.00 a bushel, that is what it takes on average to produce a bushel. So the least-cost producer typically reaps the profit. As eastern corn belt producers, it is difficult for us to achieve the economics of scale in production agriculture whether it be in crops or animal production. We are limited by geography and by human population.

So how do we get a bigger piece of the pie? Let's look at the market place and work backwards. What is our potential customer willing to pay for in a product that they cannot get now? Can you produce that product? And can you produce it at a sustainable profit?

What's your story? Crafting a marketing story is not as easy as it sounds, and you may need to let go of some outdated thinking in order to bring your story to life. Doing your homework ahead of time is the key. Obtaining a professionally conducted survey that explores the characteristics of your market will be your initial focus. Let the market you wish to serve create your story.

Do you know who you really are? A farm business that knows who they are and what they can do can go on to deliver their message, knowing well that some people are just not going to buy into what the business has to say. But those that do get it, really get it and are the potential customer.

How will your product or service change your customer? All stories or marketing messages have to do with change. A health-based product provides change from poor health to good health. A cosmetic company provides change from plain to beautiful, from self doubt to self confidence. The customer wants a change. People who are satisfied with the way things exist are not motivated to be customers. A story market targets people who are motivated; people who want to better themselves to be stronger, healthier, prettier, smarter and richer. If your potential customer isn't motivated to change, and if your product or service cannot deliver change, then you're wasting your time and money.

Is your message different? You must stand out. Your product or service must provide something different. Your message to the customer is that you are a leader and not a follower. Most likely your competition has focused on specific characteristics and features of the product and ignored the emotional marketing value that greatly influences why people choose one product over another.

Can you tell your story? You must have more than a story to tell or a message to deliver. You must know how to tell it. Your story needs to create a unique identity in the mind of your clientele. Try to position your product or service as a lifestyle choice.

Who is your customer? After conducting your market research, you should have a pretty good idea of who your customer is. Discover what motivates them and design your sales approach to trigger what stimulates them. Your approach must have direction. It must be focused and it must deliver a clear identity of your purpose.

Can you handle criticism? People engaged in production agriculture trend towards traditionalism. Can you take pressure from your peers who subscribe to "It can't work" thinking? Too often we lose good ideas because we worry too much about what other people think. Are you willing to roll up your sleeves and separate yourself from the crowd?

Now that you have read the previous lines regarding "Story Marketing", do you have an idea you'd like to pursue? If yes, give me a call and we can visit about your idea and your approach. I can be reached at the ABE Center, at 419-354-6916.

EDITOR's NOTE: Nevil Speer and Dan Frobose will both be presenters during the upcoming series Managing Dynamic Change in the Beef Cattle Industry. You'll find the registration information in the November 12, issue #610, of the Ohio BEEF Cattle letter. The complete agenda includes:

Session 1, February 4, 5: Dynamic Change: Beef Cattle Business Realities

Economic Forecast : Duane Lenz from Cattle Fax and Matt Roberts, Ohio State University Extension; What Can We Control and What Can't We Control

Session 2, February 11, 12: Optimizing Whole-Herd Profitability

Cow Herd Profitability: Tom Fields, National Cattleman's Beef Association; John Grimes, OSU Extension: Providing Seedstock that FIT the Industry Now and in the Future

Session 3, February 18, 19: Feeder Calves: Buying, Selling and Merchandising

Feeder Calf Marketing: Nevil Speer, Western Kentucky University; Working in Alliances: Ed Smolder, West Virginia University Extension and Steve Casto, Feeder Calf Grader and Beef Producer, Jackson County, West Virginia

Session 4, February 25, 26: Planning For the Future: Trends, Habits and Winds of Change; Panel Discussion and presentations including representatives from Wolf's Neck; Sam Roberts, UPI; Grass-Fed Regulations with Francis Fluharty, OSU Extension; Certifications and Value Added Marketing, Dan Frobose, OSU Extension

Find more details and registration information in the November 12, issue # 610, of the Ohio BEEF Cattle letter.

For complete details on the 2009 Ohio Beef Expo, visit www.ohiobeefexpo.com. The Ohio Beef Expo is a function of the Ohio Cattlemen's Association (OCA).

Weekly Roberts Agricultural Commodity Market Report - Mike Roberts, Commodity Marketing Agent, Virginia Tech

Happy New Year . . . Here we go! The headline . . . A three-week high by the U.S. dollar, boosted by expectations for interest rate cuts by big banks, and what U.S. President-Elect Obama's stimulus package will do for the financial mess supported commodities. In light of this news there was talk in the markets that large speculators and funds would be rebalancing soon. Translation: More money in the big pockets - more money in the market. Have we seen this before? ? We'll wait and see how the stimulus works on prices and volatility. Whatever it means, one thing for sure, we'll probably have another interesting year.

CORN futures on the Chicago Board of Trade (CBOT) closed down on Monday. MAR'09 corn futures closed at $4.112/bu; off 1.0¢/bu but 36.0¢/bu higher than last report. This contract has gained all but 4.1% back from three weeks ago. The JULY'09 contract closed at $4.214/bu; up 1.25¢/bu. Strength in the soybean market on higher crude oil prices and parching corn-growing weather in Argentina was somewhat supportive. However, sluggish export selling on strength in the U.S. dollar weighed on prices. One floor source said that the market was beginning to watch the South American weather more closely. USDA put corn-inspected-for-export at 23.360 mi bu (down 3% from last week) vs. expectations between 20-25 mi bu. USDA's last report notched less bullish fundamentals for corn due to lower exports from a souring world economy, higher input prices, and less ethanol demand. However, ethanol futures did post modest gains. The next USDA report is due out on January 12^th. Ending stocks were raised accordingly as USDA lowered planting intentions. This will remain to be seen as fertilizer prices cool off and if world markets stabilize. However, that being said, corn still faces fundamental challenges in 2009. Funds sold 2,000 lots with large speculators buying that same amount near the close to rally prices. Cash corn in the U.S. Midwest was mostly steady amid slower farmer selling while freight prices dropped to reflect lower shipping costs. Corn cash bids in the U.S. Mid-Atlantic states were steady ranging from $3.60/bu - $4.11/bu. Farmers that are selling now are doing so to cash flow the 2009 crop and to take advantage of better basis. The carry from July '09 futures to December '09 futures is 3.9¢/bu/mo vs. a 2.0¢/bu/mo storing charge. If you have un-priced corn in storage it might be a good idea to price up to 35% of it. It also might be a good idea to price up to 10% of the 2009 crop.

LIVE CATTLE futures on the Chicago Mercantile Exchange (CME) were mixed on Monday with the front month and the 4^th-out-deferreds up and the 3 nearby-behind-the-front-month down. FEB'09LC futures closed up $0.450/cwt at $87.550/cwt; $3.75/cwt higher than last report. The APR'09LC contract closed at $90.400/cwt; off $0.350/cwt. Technical trading in February/April spreading supported the nearby February contract. This was an adjustment to the spread offset profit taking on overbought conditions on Friday. Technical signals will take over for the rest of the week as the Goldman roll begins on January 8th. The Goldman Roll will consist of rolling some February long positions into the nearby April contract. This move is tied to the Standard & Poor's Goldman Sachs Commodity Index. Mexico resumed imports last week from most of the 30 U.S. packers it placed on a ban the week before.

FEEDER CATTLE at the CME followed live cattle up on Monday. JAN'09FC futures finished at $97.000/cwt, up $1.40/cwt and $8.875/cwt higher than last report. The MAR'09FC contract settled at $96.725/cwt; up $1.200/cwt and $8.800/cwt higher than last report. Carryover-buying, lower corn prices, and buy stops helped feeders. The surge in Friday's Feeder Cattle Index and January/March bull spreading were supportive. The CME Feeder Cattle Index for January 1 was placed at $92.92/cwt, up $0.96/cwt. There were some reports from vendors that cash cattle in the much viewed Oklahoma City market spurred fundamental feelings of the market.

This sparked fund buying on the cash prices advance. Most cash markets were closed for the holidays and the four floor sources said that this strong start to the new year felt bullish. We'll see if it holds out on any financial market news. It might be a good idea to hold off on pricing more feed until after the January 12^th USDA report.

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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