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OSU Extension - Fairfield County

831 College Ave., Suite D, Lancaster, OH 43130

and the

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 # 596

July 16, 2008

And The Winner Is . . . Beef! - Nevil Speer, PhD, MBA, Western Kentucky University (reprinted with permission from CattleNetwork.com on 7/14/08)

Where to begin? All the news and activity of late makes distilling down to a manageable level extremely challenging. (Perhaps MMP should transition to the Weekly Market Profile?)

Let's begin with June's most important action: wholesale beef prices. Beef eaters have seemingly been coming out in droves. The Choice cutout ended May at $156 and was mostly steady through the first half of June. But ever since is another story, cutout values have been on an extended winning streak: 18 consecutive business days in positive territory and tacking on an additional $18 to encroach $175. What's driving the contra-seasonal (see graph below) price surge? That's impossible to pinpoint. Much of the surge, though, is likely attributable to economic stimulus checks. Beef's good fortune is consistent with general consumer spending habits since the checks began arriving in the mail: retail sales were up in both May and June. Clearly, Americans have been on a fairly busy spending spree.

The foundational explanation doesn't really matter - what does matter is the outcome. And as beef prices go, so do live prices. Clearly, recent wholesale action has been supportive for the fed market. July opened business with sales occurring at $100-2. That level marks a $7 jump in 3 weeks; the equivalent of nearly $90/head. Meanwhile, December futures indicate potential for even more upside potential as the year progresses - the contract has tested $115 during the past several weeks and is currently trading $111+.

That said, current price levels mark a critical juncture for the beef complex going forward through the remainder of the year. Packer gross profit is currently very favorable - to the tune of $200+/head! However, the prospect of fed cattle being priced at $110-5 during the final quarter of the year denotes the potential for several significant outcomes. Most notably, CME live cattle futures are indirectly speculating on future cutout values: $112-cattle require average boxed beef values in the mid-$170's (Select product included) for processors to maintain breakeven margins.

Achieving higher cutout values, from already lofty levels, will likely prove an uphill battle. Many economists have voiced concerns of late about an impending "stimulus hangover" later in the year. Higher living costs coupled with continuing decline in housing values have left consumers in a difficult position (June mortgage foreclosures were up 50% over last year). June's Consumer Sentiment Index noted that 9-out-of-10 respondents believe the economy was in recession and voiced concerns about credit availability, employment prospects and high energy prices. So the primary question going forward centers upon consumer willingness and/or ability to continue the current beef spending spree after the stimulus runs out.

If wholesale levels can't achieve those levels then things begin to get ugly. There are several scenarios which could play out - none of which are favorable. One, packers can commit to beef operations and operate at a loss. That's certainly not a viable solution over the long-term and the packing sector is already suffering from that failed strategy during the past several years (see MMP: February '08, MMP: April '08). Or two, processors might opt to cut back operations until cattle are priced where margins become favorable. Slowing down throughput leads to extended feeding intervals; that's somewhat daunting for feedyard managers while also trying to manage elevated and volatile feed costs. Whatever occurs, it's important to recognize the cash market is left to face a potential tug-of-war between wholesale market trends and deferred prices indicated at the CME.

Several years ago I provided some coverage about the relative price of feeder calves; specifically, their relationship to feedyard profitability. The discussion was largely initiated by the changing capital and risk structure associated with business operations within feeding sector. It came at a time in which feeders had enjoyed a favorable three-year run of profits - a period of seemingly invincibility. Feedyards had been constantly rewarded by "betting on the come". In other words, replacements purchased ahead of breakevens were salvaged by an upward trend in the fed market. That 2006 discussion possessed an important precursor from October, 2005 in the Monthly Market Profile:

While the current chase has proven to be supportive for prices at all levels, it's likely not sustainable over the long-run. The sectors operate on margin: the principle of the winner's curse will render some players in an unfortunate position given a sudden shift or unforeseen turn of events. A word of caution for producers: cattle purchased at these levels possess inflated risk exposure due to the ever-growing amount of capital required to maintain ownership. Prudent risk management is well advised to prevent being caught up in potential business attrition.

Committed students of commodity businesses know that everything runs in cycles and, at some point, all good things must come to an end.

Indeed, a sudden shift or unforeseen turn of events did occur: rising corn prices. The fall of 2006 witnessed cattle feeders (and all users) dealing with an unexpected surge in corn prices. Prior to that 2006 surge (with the exception of '95/'96) feeding costs had been relatively consistent - typically about $260/head for a 750-lb yearling. Meanwhile, winter weather added insult to injury during the first half of 2007.

Getting a handle on profitability from an industry-wide perspective is extremely challenging. Costs vary widely across the sector. However, for the point of discussion the most important aspect is the overall trend. The illustration below provides some perspective of what feedyard managers have been facing during the past several years. The graph outlines gross profit (1250-lb fed steer less 750-lb yearling 150 days prior); simultaneously, the red line on the graph indicates a general, aggregate attempt at breakeven levels which represent feeding and administrative costs. Gross profit below the line is unfavorable. No doubt, there's likely to be differing opinions as to where the red line should fall over time but the overall theme remains the same: closeouts have largely been unfavorable during the past several years.

Cattle feeders are caught between a rock and a hard place. On one hand, they're operating in a volatile corn market with a definite upward bias - replacements have largely been, and continue to be, purchased into an adversarial feed-cost environment. Each month of ownership represents higher prices versus the point of purchase. On the other hand, they're also operating with business models predicated upon exercising economies of scale; that forces purchasing replacements at or above breakevens to keep feedyards full. Therefore, there's no room for any buffer to offset rising feed costs - that'd represent an inability to procure inventory.

This is an important time for the cattle feeding sector. A continued string of losses simply can't be maintained. That's especially true considering rising capital investment required to own (PPE - plant, property, equipment) and operate (cattle, feed) a feedyard. But those principles don't just hold true for large, commercial operations they also extend to smaller cattle feeders also. That was clearly articulated recently by Stan Smith, The Ohio State University, in his June 25 article entitled, "Cattle Feeding In Ohio: For Fun or Profit?" (http://www.cattlenetwork.com/Content.asp?ContentID=231921).

Long-term it's important to recognize that cow/calf producers are also being squeezed and given current beef cow slaughter trends, competitiveness for feeder cattle will likely continue to escalate in coming years. Per that item, Smith writes this: "While many keep telling me to "just wait, calves will get cheaper, and it'll work then" many more are suggesting they don't see feeders coming down anytime soon. In fact, a friend who works at Blue Grass in KY says he's moving 8 weights at $1+ and he's not sure it won't continue that way."

Meanwhile short-term, the impact upon closeouts may be compounded by concerns about the economy stated above.

Cattle feeders are encouraged to objectively discern every item of their respective business operations to remain successful. Failure to do so results in "bounded rationality" - decisions based upon incomplete information and/or influences which one happens to see at any particular moment.

Last Chance to Attend a field Day for Ohio Beef Heifer Development Program!!!

Wednesday, July 23 will be your last chance to attend one of the field days for the Ohio Beef Heifer Development Program. The field day will be held at JR Farms, owned by John and Mick Ritchie at 4904 Hamburg Road SW, Lancaster, Ohio, 43130. The activities will begin at 7:00 PM starting with dinner. A short educational program will be presented by representatives from The Ohio State University Extension Beef Team and the Ohio Cattlemen's Association. Heifers will be available for viewing before and after the program. This is a great opportunity for interested parties to learn more about the Ohio Beef Heifer Development Program and the plans for 2008-09 program. If you have any questions, please contact Bill Doig at 614-873-6736 or JR Farms at 740-969-2518.

On Tuesday, August 19, you are invited to the McKarns' Shamrock Vale Farms in Carroll County for the Ohio Grazing Expo. This field day will feature nationally recognized grazing experts including Jim Gerrish from Idaho, and Beth Burritt of Utah State University. Topics of discussion and observations will be extending the grazing season, water system development, new forage species, and understanding animal behavior as it relates to forage management techniques.

The program will begin at 10 a.m. and continue until 3 p.m. Reservations and a $10 registration fee to cover lunch and handout materials are due by August 12, and may be submitted to: OSU Extension, 32 West Main Street, Carrollton OH 44615.

For those wishing to attend, yet beat the high cost of gasoline, the Ohio Forage and Grassland council is sponsoring a bus to the Grazing Expo with pickup points near Circleville, Logan, the Park and Ride at SR 13 & I70, and Cambridge. The cost to ride the bus will be less than the cost of 2.5 gallons of gasoline for OFGC members ($10) and less than the cost of 3.75 gallons for non-members ($15). Times and exact locations of the pick-up points are still being worked out, and the 47 bus seats are available first come first served. Bus reservations may be made by contacting the OSU Extension office in Fairfield County or through Bob Hendershot.

Forage Focus: Manage your pasture's N cycle - Jim Gerrish, Grazing Management Consultant, Americangrazinglands.com

In the past I've discussed how effectively pastures can run on legume nitrogen (N) alone. While legumes can put quite a bit of N into the pasture, the next question is how effectively are you recycling N in your pasture system?

Whether it comes from legumes or fertilizer, N in pasture can be recycled for new pasture growth. The more effective job you do of managing the natural N cycle, the less money you will spend on N fertilizer.

While cattle consume a lot of N as protein in the forage, less than 5% of the N is retained in their bodies. The rest is excreted as either dung or urine.

When the diet protein level is close to what the animal needs, the excreted N is split equally between dung and urine, with the fecal N being slowly released as manure decomposes. Almost all urinary N is readily available in the soil.

As the protein content of the pasture increases, most of the extra N passes through the urine, making urine a potent N fertilizer. If you've noticed dark green patches of green in your pasture, it's because urine has the N-fertilizer equivalent of 200-1,000 lbs. N/acre in that little patch.

Because most of the N in urine is in a urea form, N can be lost to the atmosphere as ammonia gas, just as with urea fertilizer. Hot, dry soils lose a lot more ammonia than cooler moist soils.

As the urine remains in contact with the soil, the ammonia is converted to ammonium, a positively charged ion, and it becomes bound to the soil. However, as ammonium in the soil is converted to nitrate, it can also leach out of the soil, especially on sandy soils. So even though most of the N consumed passes through the animal, more than half of it easily can be lost from any further potential as a fertilizer. These loss pathways are why we have to continually add N to soils.

Capturing more N: Grazing management that leaves more of the soil covered with green plant residual or dead litter keeps the soil cooler and enhances urine infiltration rate. Good grazing management traps a lot more N in the soil and reduces the ammonia loss, leaving more N in the soil to support the next plant growth cycle. Short grazing periods that leave taller residuals after grazing result in a much more effective nutrient cycle, compared to grazing shorter through a longer period.

Changes in grazing management can make big changes in the effectiveness of the N-cycle. On continuously stocked pastures you may have noticed the urine spots seem to be scattered and don't really affect large areas of the pasture. Nutrient cycling research has shown that as little as 2-5% of the pasture area may be affected by cattle urine in a single grazing season. No wonder urine spots just serve as a reminder of how desperately the pasture needs N.

Graziers using high-intensity, short-duration grazing notice much more uniform pasture growth following a grazing period of just a few days. Research shows that in a short-duration grazing system, as much as 50% of the pasture surface area may be affected by urine in a single year. This produces a much more uniform pasture; and when cattle pass through a pasture the next time, they tend to graze more uniformly.

In a continuously grazed pasture with typical stocking rates for the Midwest, the effective N application rate from cattle urine is less than 1 lb./acre/day. This level does little more than feed the soil microbes.

At the opposite end of the spectrum is a grazing system where cattle are moved to a new paddock every day. In this scenario, the effective N-fertilizer equivalent from urine is around 50 lbs./acre/day - a fertilizer rate that will really make grass grow! Other stocking scenarios fall between these two extremes.

A twice-weekly rotation puts about 20 lbs./acre of readily available urinary N on the pasture. If the pasture has 30-40% legume in the pasture, the combined effectiveness of legume-fixed N and recycled urine can support a relatively high level of productivity. Several university studies around the U.S. indicate a well-managed legume pasture with effective nutrient cycling produces yields comparable to applying 100-200 units of N/acre.

With cost management an ongoing concern for most beef producers, taking nutrient-cycle management seriously is a key step to reducing or eliminating fertilizer costs.

FSA stops CRP "critical feed use" - NCBA release, July 10, 2008

Yesterday morning, July 9th, the USDA Farm Service Agency issued a stop order to all state offices prohibiting the consideration of any changes to current Conservation Reserve Program (CRP) contracts and the ceasing any current haying or grazing on CRP ground that was released due to a May 27^th order from USDA. This stop order is the result of a "temporary restraining order" filed and won by the National Wildlife Federation (NWF) as a part of their ongoing legal actions against USDA.

On June 27th, the NWF, in association with several of their affiliates, filed a "Complaint for Declaratory and Injunctive Relief" against USDA. This complaint was followed by the filing of a "Temporary Restraining Order," on July 8th, against the filing of CRP contract changes. NWF filed their complaint after the Secretary of Agriculture, Ed Schafer announced the release of 24 million acres of CRP ground for "critical feed use." NWF is citing the lack compliance with regulations under both the National Environmental Policy Act (NEPA) and USDA, particularly a lack of environmental assessment and public comment before the land was released as the reasoning for their lawsuit.

Should the court grant their complaint, an injunction would be issued against USDA. This would make the Order CRP-598, releasing the ground for usage, null and void until USDA complied with the regulations within NEPA and USDA.

Many producers have already made changes to their CRP contracts and were preparing their land for either haying or grazing. NCBA, while not completely satisfied with the original order due to a lack of payment reductions, will continue to monitor this litigation.

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

LIVE CATTLE futures on the Chicago Mercantile Exchange (CME) closed down Monday. The AUG'08LC contract closed at $99.125/cwt, off $2.075cwt from Friday and $3.125/cwt lower than last Monday's close. OCT'08LC futures were down $2.175/cwt at $106.400/cwt and $3.275/cwt lower than a week ago. Even though packer profits remain steady, cash markets were weaker on Monday. USDA put the 5-area price at $99.50/cwt vs. $101-$101.50/cwt a week ago. According to HedgersEdge.com, the average packer margin was $65.00/head based on the average buy of $101.200/cwt vs. a breakeven of $106.300/cwt. This was $15.45/cwt lower than this time last week. Sliding input prices and large export data were not supportive enough to keep prices from skidding as longs liquidated positions and worked bear spreads on chart signals amid trader expectations for the usual summer weakness in prices. It was reported on Monday that May beef exports were up 27.23% over last year. Early Monday choice cutout data were reported $0.42/cwt higher at $173.38/cwt. Cash sellers should have opportunities for higher cash prices over the next couple of weeks. It might be a good idea to price short-term corn inputs at this time.

FEEDER CATTLE at the CME closed lower on Monday. AUG'08FC futures were off $1.550/cwt at $110.175/cwt and $0.0850/cwt lower than last Monday. The SEPT'08 contract finished the day at $112.700/cwt, off $1.000/cwt but only $0.025/cwt lower than a week ago. Spillover pressure from live cattle, chart-based selling, and a bearish CME Feeder Cattle Index pressured prices. Bear spreading in the September/August was noted. The CME Feeder Cattle Index was placed $0.13/cwt lower at $111.76/cwt. Cash feeders were steady to firm closing up as much as $1/cwt. It may be a good idea to hold feeders to heavier weights if grass is available. Pricing near term corn inputs might not be a bad idea.

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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