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OSU Extension BEEF Team
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Previous issues of the BEEF Cattle letter
Issue # 580
March 26, 2008
It's All In Play - Nevil Speer, PhD, MBA, Western Kentucky University (reprinted with permission on 3/10/08 from CattleNetwork.com)
Later rather than sooner, less rather than more - at this point at least, it appears that's how spring highs are shaping up. Normally, traders would be anticipating a significant seasonal bounce just around the corner. However, given uncertainty surrounding the market, '08 expectations need to be reined in. All indicators are that the typical surge will be somewhat delayed and upside potential will likely be muted in months to come.
Last month's Monthly Market Profile focused on fed trade's range-bound dynamics between $89 and $91. That scenario saw some incremental improvement as cattle weighed up during the first 3 weeks of February at mostly $91-2. And February ended further into positive territory with negotiations settling at $92-3. However, that quickly reversed with March's first week of business; negotiations settled at $91. At current levels cattle feeders are unable to dig out of a hole; closeouts are leaving $150-200 / head on the table.
Where spring highs end up remains to be seen but traders at the CME have taken on a decidedly bearish sentiment. Upon assuming nearby leadership, the April live cattle contract turned sharply lower as March opened for business and plunged nearly $4 during the week including Thursday's close below $90. At those levels, even with seasonally positive basis of $1-2 places cash trade in the vicinity of the current market.
Clearly, there's time for some turnaround but the bearish sentiment was influenced by several factors. The effect of higher fuel costs and escalating food prices is never positive. Overwhelmingly, though, the never-ending barrage of new developments surrounding the credit crisis is weighing heavily on the market. There's solid apprehension about the economy and consumer spending going forward. That translates into concerns about beef demand in the months to come.
The outlook is increasingly negative; the financial industry is facing prolonged and deepening troubles. However, none of that is really new; it's an event which has been developing for several years. Real-estate appreciation, which was seemingly endless, fueled a wave of second mortgages and served as an important catalyst for consumer spending. However, many families are now finding themselves upside down in their mortgages - owing more than current values. That's probably best summarized by something I included in the Monthly Market Profile exactly 5 years ago:
…expectation among economists is that consumers ordinarily spend what they earn. However, in the midst of refinancing frenzy during recent years, consumer spending has proven to be extraordinary. Alan Greenspan recently remarked that consumer spending will not experience a boost this year. That's because surging home values are projected to slow as mortgage rates stabilize. The two in combination have provided a sharp increase in refinancing which led to strong consumer spending. Furthermore, as a recent WSJ editorial pointed out, when rates begin to rise many over-leveraged borrowers will be caught in a crunch because they possess one-year floating rate mortgages; their cash flow will be diminished while home prices will subsequently be falling. The long-term, broader implications are serious: increased mortage defaults, setting off a chain of events, could undermine an economic recovery. Ultimately, the dependability of the consumer is increasingly being questioned. That equates to an increasing importance for the need to manage risk regardless of one's segment within the beef industry: "forewarned is forearmed."
During previous economic downturns the economy was bailed out as relatively low long-term interest rates spurred continued home sales. That's not occurring this time. In fact, the yield curve has steepened in recent months and lenders are increasingly careful about their mortgage portfolios.
That influence is spilling over to the consumer. The University of Michigan Consumer sentiment was 69.6 in February, the lowest level in over 15 years. Declining real estate values and shrinking equity portfolios coupled with higher costs at the fuel pump and grocery store equal financial stress. Four-in-ten households reported that their finances had worsened and just one-in-five expected their finances to improve during the year ahead. That pressure has manifested itself upon wholesale beef values. The Choice cutout has struggled to stay ahead of $150 and slid nearly $4 during the past week with the Choice/Select spread closing below $2.
The beef complex isn't the only industry having some trouble. In recent weeks there's been a flurry of coverage with respect to the ethanol industry and impending trouble on the profit front. For example, Fortune/CNN Money ran an article, entitled "The Ethanol Bust" (Birger, Feb 28), that focused on the issue of rising corn prices: "How can the ethanol industry be slumping only two months after Congress passed an energy bill most experts consider a biofuels boon? The answer is runaway corn prices."
Ethanol industry revenue is derived from the sales of fuel and distillers grain. On the flip side, production costs are overwhelmingly dictated by the price of corn. Therefore, calculation of gross profit is relatively simple and typically denoted in the following example from mid-February.
|2.8 gal ethanol / bu corn @ $2.08 / gal||$5.82|
|17.5 lb DDG / bu corn @ $166.25 / T||1.45|
|Operating Costs and Expenses ($/bu)|
|Cost of goods sold: corn @ $4.80 / bu||$4.80|
|GROSS PROFIT ($/bu)||$2.48|
That $2.48/bu must cover fixed costs, variable production costs, return to management, return to investment and profit. The first illustration below highlights the weekly trend of ethanol values and corn prices during the past 13 months. The most significant interpretation is the growing, unfavorable spread between corn prices and ethanol values in recent months. Year-to-date, ethanol processing gross profit is estimated to be $2.84/bu (basis Iowa); the preceding 10-month period (Mar-Dec) averaged $2.95/bu. Eleven cents may not seem substantial; however, consider that a plant with capacity of 55-million gallons per year (mgy) utilizes nearly 20 mil bu of corn - that 11cents translates to a difference of nearly $2.2 million annually!
Let's take that one step further. There are currently 140 ethanol plants in production with capacity potential of 8-billion gallons per year (bgy): equivalent to an average of 57 mgy / plant. Meanwhile, approximately 60 new plants are under construction: equivalent to a cumulative capacity of 5 bgy and average 83 mgy / plant. As such, the new processing plants are nearly 46% larger than the industry's first-generation plants. It's safe to assume the newer plants will possess improved purchasing leverage over their smaller competitors. If that additional leverage yields just a ½ -cent per bushel advantage the savings is equivalent to $150,000 over the course of 12 months on the purchase of 30 mil bushels. Simultaneously, larger plants will likely possess lower fixed costs per unit of production and thus require less gross income to remain competitive.
Regardless of one's assumptions, the outcome is what's important. It's likely that ethanol production is setting up for a new round of intra-industry rivalry. That has some important implications. Namely, competition for corn will be fierce as the individual plants battle for survival. That influence has been, and will continue, to spill over into the grain markets driving the price higher and indirectly influencing markets to purchase additional corn acres. Meanwhile, users of other crops are also vying for more product including wheat, cotton, hay - they're all in the game. USDA's most recent projections are as follows (including '07/'08 for comparison purposes):
|Planted Acres (mil)||93.6||90.0||63.6||71.0|
|Harvested Acres (mil)||86.5||82.7||62.8||70.1|
|Total Production (mil bu)||13,074||12810||2585||2950|
|Carry Over (mil bu)||1,304||1438||574||160|
|Imports (mil bu)||15||15||6||6|
|Total Supply (mil bu)||14,393||14263||3165||3116|
|Domestic Use (mil bu)||10,505||10870||2000||2037|
|Exports (mil bu)||2,450||2150||1005||910|
|Disappearance (mil bu)||12,955||13020||3005||2947|
|Carryover (mil bu)||1,438||1243||160||169|
|Avg. Price ($/bu)||4.00||4.60||10.40||11.50|
So what's the point of all this discussion as it relates to the cattle industry? Competition for grain is becoming increasingly competitive - that's not news for anyone. What is significant, though, is the overarching influences within the grain markets that we've never witnessed previously. The second graph highlights the relationship between ethanol and corn prices (basis Iowa) during the previous 13 months. At first blush the graph indicates that the relationship among the two is spotty at best; statistically speaking, variation in ethanol prices explains little more than 25% of the variation in corn prices. However, stop and think about that from a historical perspective. That influence has never before been seen: ethanol has never directly influenced grain prices but now accounts for over 25% of differences on a weekly basis.
Commodity prices are surging and the dynamics are shifting! Is this a sustainable bull market or are we in a bubble? That remains to be seen. But what is clear, all markets (commodities, equities, financial) are becoming increasingly linked, interrelated and playing off each other. That's added a new dimension of complexity to decision-making and risk management. And it keeps all of us on our toes…interesting times!
Forage Focus: Oats, Teff and Other Stuff - Stan Smith, PA, Fairfield County OSU Extension
As Vince Gill explained in the lyrics of one of his hits a few years ago, "Everybody's ready for the next big thing!" Unfortunately, in the world of agriculture and Mother Nature, the next big thing is seldom what it seems at first glance. Depending on how quickly, how blindly, and how completely early adopters jump into that "next big thing" we've all been seeking, with regard to forage production this year, it'll likely be either feast or famine. That being said, it brings me to the subject of oats, teff and other stuff!
With forage inventories in the Midwest depleted, and acres being attracted into more profitable row crops this spring, I'm hearing the next big thing in forages is oats, teff or even potentially a variety of other alternatives. This is where common sense, some basic practical management, and a logical look at our most immediate needs may result in a more profitable solution than simply accepting some of the sales pitches I'm hearing.
First, if you need forage ASAP, find a way to get some nitrogen on a few of your pasture acres. And, for the most total annual production of your pastures, DON'T start grazing them before their time!
If you need baled forages, simply make the first cutting in a timely fashion . . . that likely means beginning around early to mid May.
I'm hearing some producers talking about planting oats as soon as soil conditions permit in an effort to bale them for "early hay." First keep in mind this likely means mid June before they are in late boot stage and harvest ready. More importantly, considering today's grain prices, there's no way we can harvest enough forage from spring planted oats to cover the lost profit opportunity when taking a field out of a full season corn crop worth $5 +/- per bushel just to grow some oats to bale in early summer. Spring planted oats do not yield nearly the tonnage, or quality of the oats you've heard us talk about being planted into wheat stubble.
The next "big thing" I've heard is that teff will solve all our forage issues. Indeed it has it's place, but don't be fooled . . . find it's place on your farm before you buy your teff seed. Teff should not be planted before warm weather arrives once and for all, and any threat of frost has passed. This means it's not planted in Ohio until ~June 1 (how many times have you worn long sleeves at your Memorial Day picnic?) and it's production will curtail quickly as cooler weather arrives in Fall.
To begin with, if you take a field away from corn or soybean production and leave it idle until it's fit to plant teff on June 1, you've lost 6 weeks of production on that ground. Perhaps the best fit for teff in Ohio - and perhaps the only fit - is in a situation where a hay stand is failing, and needs to be rotated out of hay for a season. Harvest the first cutting of hay in late May using glyphosate prior to mowing it, and then plant the field into teff immediately.
I've heard it suggested teff will work nicely as a double crop after wheat. Considering that first harvest of teff will likely not be until 45 days after planting, and the plant shuts down as cooler weather approaches, I can't imagine teff can compete in total dry matter production, or cost of production with oats in this double crop after wheat scenario. In fact, oats have been so forgiving from a planting date standpoint that we have seen our best yields and highest quality when they're planted the first of August. This allows time to bale a valuable straw crop, haul manure over the wheat stubble and then plant oats. Cost of seeding will likely be a little less than planting teff, and the fertility demands are lower. Find more information on teff under this link: http://fairfield.osu.edu/ag/beef/beefJune6.html#linkdd.
Perhaps turnips or annual ryegrass find their niche on your operation as a quick forage fix on areas where bale ring waste and trampling have destroyed portions of a pasture.
The bottom line is that most of the forages we are hearing about this winter have their place in the forage management mix. But, used out of place, they may quickly become a liability during these times of high land and feed values.
If you want to discuss these thoughts further, attend one of the last two sessions of Ruminant Livestock: Facing New Economic Realities tonight in Hillsboro, or tomorrow evening in Athens.
Make Pasture Fertilizing Pay - Bruce Anderson, Extension Forage Specialist , Nebraska Ag Extension
Spring is approaching and cool-season grass pastures soon will green-up. As with other crops, grass growth is stimulated by fertilizer. With nitrogen fertilizer costing over 60 cents per pound this spring, though, producers may be asking whether it pays to fertilize pasture.
Our Nebraska research shows that you get one pound of additional calf or yearling gain for every pound of nitrogen fertilizer applied. However, this fertilization rule-of-thumb assumes that the amount applied is within our general recommendations, which are based on the potential amount of extra grass growth expected. This is affected mostly by moisture. It also assumes that your grazing management will efficiently harvest this extra growth.
If you fertilize pasture in spring and then let animals graze continuously on one pasture throughout the season, much of the extra growth is wasted. They trample, manure and foul, bed down on, and simply refuse to eat much of the grass. Eventually, less than one-third of the extra grass ends up inside your livestock.
To make fertilizer pay, manage grazing so more of what you grow actually gets eaten. Subdivide pastures with some cross-fences and control when and where your animals graze. Give animals access to no more than one-fourth of your pasture at a time, and preferably less. Then graze off about one-half of the growth before moving to another subdivision. If your pastures aren't already subdivided into at least four paddocks, your fertilizer dollar might be better spent on developing more cross-fences and watering sites.
Follow these suggestions and more of your pasture growth will be eaten and you're likely to get more profits from your efforts.
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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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