A Publication of:

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 # 610

November 12, 2008

Patterned in the image of the Ohio Feed Management & Technology and also the Ohio Cow/Calf Schools, these will be fast moving and forward thinking "must attend" sessions for cattlemen planning to stay on the cutting edge of a rapidly changing industry. Registration cost will be $50 for the first person from an operation, and $25 for each additional person from that same operation. Reservations may be made by completing the form under this link and sending it along with the registration fee to the Ohio Cattleman's Association. Call OCA (614.873.6736), John Grimes, Highland County Ag Educator (937.393.1918) or Rory Lewandowski, Athens County Ag Educator (740.593.8555) for more detailed information.

Watch for more details in upcoming issues of the Ohio BEEF Cattle letter. Also, note that Nevil Speer, author of the following article, will be featured speaker during session 3 of this series.

Looking Down A Curved Working Alley - Nevil Speer, PhD, MBA, Western Kentucky University (reprinted with permission from CattleNetwork.com on 11/12/08)

Better take the long view because weekly fluctuations will make your head spin. The past month has been full of gyrations and reversals making it tough in terms of pricing and marketing strategies (more on that later). On a brighter note, despite some tough weeks and sharp downswings, the beef complex has exhibited resiliency; the market managed to recover just when it appeared significant support levels might be caving in.

Case in point: wholesale beef prices. Choice cutout values began a steady slide from mid-September's $160 (see graph below). However, the real damage came during the course of three weeks in October: boxed beef plunged from $156 (October 6) to $141 (October 27). But nearly as quickly, the market reversed itself on renewed retail demand and staged a significant rally. Early-November action facilitated a gain of $8 to establish cutout values back above $150.

As boxed beef goes, so also goes fed trade. Cash cattle traded mostly $97-8 during the month of September but declined to $95-6 at October's outset. From there, though, prices came under pressure due to sliding wholesale values. Negotiations ended $2-3 lower early in the month and slid yet further in mid-October establishing a near-term low of $89. Fed trade clawed back to $91-2 to end the month. And November opened on a solid note with cash trade following wholesale values higher and rallied back up to $94.

Perhaps most significant within the action of the past several weeks is a potential shift in bargaining leverage. In recent weeks the fed market has consistently run behind derived solutions. That trend is confirmed by Cattlenetwork's Monday Market Sentiment: actual negotiations have ended behind the aggregate estimate (see graph below). However, that's since moved the other way in favor of the cattle feeder. At the same time, packer margins have plunged sharply during the past several weeks. That's potentially good news for sellers who have endured a seemingly never-ending series of negative closeouts. (Cattle feeders are also pushing back on the replacement side in an effort to provide some buffer for closeouts going forward.)

Broader economic concerns will likely keep everyone on their toes. The financial crisis has weighed heavily on the minds of traders at the CME. Consumers are retrenching and altering their spending habits; many people have indicated likelihood of shifting purchases away from mid-level and upscale restaurants. That trend has weighed on the middle meats of late and pressured cutout values as a whole. Those worries have blanketed the December contract; negative pressure was out in front of the live market as the contract plunged to $87.55 on October 24. The market has since found itself oversold - coupled with some improvement in the cash market, the contract has worked back above $90.

Regardless, those types of fits and starts are likely here to stay - at least for the foreseeable future as the market finds its way. The entire economy is working with a new paradigm. Active consumer spending has underpinned the economy. In recent years much of that was spurred by rising real estate values with widespread opportunities to turn equity into cash. That's come to an end. And the question remains whether there'll be a long-term transformation (sea change, if you will) in terms of spending habits. The temptation, in the absence of solid information, is to base future price estimates based on previous performance and expectations within the market (referred to as "anchoring" in behavioral finance). However, if demand undergoes major transformation (both foreign and domestic), those previous expectations will miss the mark and contribute to further volatility as the market navigates through uncertainty.

On the note of volatility and change, September's Monthly Market Profile included some discussion relative to index funds and their respective influence upon the commodities markets. There exists significant debate surrounding the role of index funds and their influence on price; most of the concern has been focused on oil. That focus, though, is not exclusive to oil and certainly includes many of the agricultural commodities. Needless to say, much of the surge has been subject to a major reversal; in fact, talk of deflation has become commonplace. All the same, the influence of index funds remains a controversial issue and merits additional coverage.

The overriding controversy about index funds surrounds their subsequent ability to influence commodity prices. In other words, index funds, because of their persistent long position and sizeable investment portfolios have been artificially driving markets to unprecedented levels. That's where the debate begins: are funds driving the trend (i.e. speculators have become virtual hoarders of raw materials)? Moreover, the concern is equally present on the other side of the equation: index fund investment potentially accelerates price moves to the down side if funds begin to liquidate their respective positions.

To understand the issue fully, it's important to provide some quick review of index funds. Index funds come in many forms and depending upon individual priorities allow investment in equities, bonds and/or commodities. Index funds, with specific reference to commodities, disperse investments based upon a predetermined weighting of a basket of goods - i.e. specific commodity futures contracts. For example, the iPath^® DowJones-AIG Livestock Total Return SubIndex ETN - ticker "COW" - is weighted approximately 60% live cattle, 40% live hogs. In other words, for each dollar invested in COW 60 cents goes to purchasing live cattle contracts while 40 cents is committed to lean hog contracts. Index funds are distinct from other types of investment vehicles in that they are: 1) passively managed - they operate within a predefined strategy thus often allowing for lower management costs; 2) assume "long-only" positions in the market - the focus is on the buy side; 3) operate without financial leverage (in contrast to hedge funds which actively implement financial leverage).

One of the most vocal and highly touted opponents to index funds and their ability to participate in the commodity markets is Michael Masters (Masters Capital Management). Masters refers to the funds as "Index Speculators" and argues that, "While individually these investors are trying to do the right thing for their portfolios (and stakeholders), they are unaware that collectively they are having a massive impact on the futures markets that makes the Hunt Brothers pale in comparison." (See July 31 report entitled, The Accidental Hunt Brothers: How Institutional Investors Are Driving Up Food and Energy Prices.) Master's report explains that:

Index Speculators have bought more commodities futures contracts in the last five years than any other group of market participant. They are now the single most dominant force in the commodities futures markets. And most importantly, their buying and trading has nothing to do with the supply and demand fundamentals of any single commodity. They pour money into commodities futures to diversify their portfolios, hedge against inflation or bet against the dollar.

Master's second report (September 10) entitled, The Accidental Hunt Brothers - Act 2: Index Speculators Have Been a Major Cause of the Recent Drop in Oil Prices, argues the other side:

When Index Speculators pour large amounts of money into the commodities markets and buy large amounts of futures contracts, prices go up. When they pull large amounts of money out and sell large amounts of futures contracts, prices go down. These large financial players have become the primary source of the recent dramatic and damaging volatility seen in oil prices.

The September 10 report contends that institutional investors began a "mass stampede" out of commodities resulting in "dramatic and damaging volatility". That contention directly contradicts July's thesis claiming that "Index Speculators" were largely "ultra-long-term" and thus consumed liquidity within the markets thereby dampening volatility and hedging opportunities (more on this next month).

Per the controversy, the Commodity Futures Trading Commission (CFTC) recently published a report evaluating the influence of index funds. Bottom-line: "While there was an increase in the net notional value of commodity index business in crude oil futures, it appears to be due to an appreciation of the value of existing investments caused by the rise in crude oil prices and not the result of more money flowing into commodity index trading."

In the end, Masters and his proponents fail to address several key issues fundamental to futures trading. First, and foremost, futures contracts are a zero-sum game: for every contract purchased there must be a seller on the other side. And as such, there's no limit to the number of contracts which can be exchanged: there's potentially an infinite number of parties who are willing to bet opposite sides of an event (price) that might occur in the future. Volume doesn't imply price in the futures markets. That's a key distinction versus dealing with the actual commodity itself: price reflects relative scarcity at a given point in time (thus the term "spot market"). Second, correlation doesn't imply cause and effect. The relationship between increased investment and higher prices doesn't answer the question about whether funds are driving the trend (i.e. speculators have become virtual hoarders of raw materials) versus simply chasing attractive investment options (an attempt to profit from higher prices stemming from increased global demand). In summary, investment into the futures market doesn't equal demand for the actual commodity.

Next month we'll look at the issue of volatility and subsequent impact on hedging opportunities.

If you own and feed a beef animal, plan to enroll in the 2009 Ohio State University Beef Feed Management and Technology School. In fact, considering the remarkable changes in the industry over only the past year, even if you've attended this course previously, its time to attend again. This school provides cattlemen with an excellent educational opportunity to increase knowledge about all aspects of ruminant feed management including the latest on efficiently managing the by- and co-products cattlemen presently have access to for inclusion in rations.

Dr. Francis L. Fluharty, Department of Animal Sciences, The Ohio State University will be the instructor for the 8 week course. Classes will be held on 8 consecutive Tuesdays starting on January 13th and running through March 3rd, 2009. The classes will be 3 hours per night (6:30 p.m.-9:30 p.m.) for a total 24 hours of instruction. Those completing the course will earn the requirements for designation as an Ohio Professional Beef Producer.

The following is a list of some of the major topics that will be taught in the school: Overview of Factors Affecting Profitability; Industry Challenges; Anatomy and Function of the Ruminant Digestive System; USDA Quality and Yield Grades and Beef Carcass Characteristics; Feeder Calf Grades, Weaning Management Strategies, and Factors Affecting Price; Feedlot Receiving Period Strategies for Keeping Newly Arrived Calves Healthy; Growing and Finishing Systems for Calves versus Yearlings; Grain Processing Methods; Utilizing Distiller's Grains and Other By-Product Feeds; Feed Bunk Management and Feed Intake Control Strategies to Optimize Feed Efficiency and Minimize Metabolic Disorders; Factors Affecting Price Received for Finished Cattle; Understanding Grid Pricing, and Feeding for Grids ; Economic Analyses and Breakeven Calculations; Using Prediction Equations for Gain and Intake to Assist in Marketing Decisions.

The school will be held at the New Lexington High School Vo Ag Room. The cost of registration for the school is $50.00 for the first person from an operation plus $10 for each additional person from that operation. Registration includes a resource notebook and refreshments.

To enroll in the school contact Ted Wiseman at the Perry County Extension Office (740-743-1602) or wiseman.15@osu.edu. In this time of extraordinary feed costs, and significant premiums for the highest quality cattle, don't miss this opportunity to improve your feed management skills.

Bred Heifer Sale Canceled, Heifers Posted to Web

Last week we mentioned that OCA had canceled the Bred Heifer Sale originally scheduled for next month. Despite cancellation of the sale, the 30+ heifers which were consigned remain for sale, and have been posted on the OCA website. Find that posting at http://ohiocattle.org

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

LIVE CATTLE futures on the Chicago Mercantile Exchange (CME) were up Monday except for the December contract. The DEC'08LC contract closed at $92.650/cwt off $0.150/cwt and $0.675/cwt lower than last Monday. FEB'09LC futures closed up $0.60/cwt at $94.150/cwt; even with a week ago. Heavy spreading in the February/December contracts by the funds pressured December futures and is expected to do so through the end of the week. Floor sources said that higher corn gave way to thoughts of lower beef placements. Right or wrong that is how the pit thought today. USDA on Monday put the Choice Boxed Beef at $150.79/cwt, up $0.54/cwt. USDA put the 5-area price at $90.09/cwt, off $0.37/cwt from last Monday. According to HedgersEdge.com, the average packer margin was raised $51.35/head from this time last week to a positive $5.30/head based on the average buy of $91.01/cwt vs. the average breakeven of $91.40/cwt. Corn is still expected to have found a bottom except for volatile range swings.

FEEDER CATTLE at the CME were mixed on Monday. The NOV'08FC contract finished at $99.000/cwt, up $0.050/cwt but $0.700/cwt lower than this time last week. JAN'09FC futures finished at $98.875/cwt, off $0.35/cwt and $0.30/cwt lower than a week ago. Higher corn prices pressured feeders. Cash feeders in Oklahoma City were up as much as $3.00/cwt on good demand. The CME Feeder Cattle Index was placed at $96.45/cwt, off $0.14/cwt from the last quote but $0.39/cwt higher than a week ago.

The November 10, 2008 USDA World Agriculture Supply Demand Estimate (WASDE) report held no surprises. The news was mostly neutral for corn and soybeans and bearish for wheat.

CORN futures on the Chicago Board of Trade (CBOT) were up on Monday. The DEC'08 contract closed at $3.834/bu; up 8.0^¢/bu from Friday but 19.75^¢/bu lower than this time last week. MAR'09 corn futures closed at $4.014/bu; also up 8.0^¢/bu but 19.25^¢/bu lower than last Monday. Corn generally was neutral to USDA's WASDE report. U.S. corn production was lowered 13 mi bu to 12.020 bi bu based on a 153.8 bu/ac yield, 0.10 bu/ac lower than the last report. Exports were lowered another 50 mi bu from USDA's revised report to 1.9 bi bu. As a result ending stocks were increased 36 mi bu to 1.124 bi bu. Lower-than-expected exports were reported by USDA placing corn-inspected-for-export at 24.748 mi bu vs. estimates for 26-32 mi bu. The CFTC Commitment of Traders report had large speculators increasing net bear positions by 3,000 lots to 22,539 contracts. Cash corn bids in the U.S. Mid-Atlantic States were weaker by 2.0^¢/bu - 5.0^¢/bu. Hopefully up to 60% of the '08 crop was priced. It is still likely pay to store what's not priced.

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

Fairfield County Agriculture and Natural Resources