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Previous issues of the BEEF Cattle letter
Issue # 707
October 20, 2010
Better Grab Some Mane! - Nevil Speer, Professor, Animal Science, Western Kentucky University
Remaining successful in any margin business is no easy task. The beef complex is no exception: profitability (or lack thereof) is overwhelmingly dictated by the differential between the cost of cattle, coupled with subsequent production expenses, versus sales revenue when they're shipped. That's straightforward and obvious to anyone who's participated in the business. But alas, that's also part of the allure of the business. A substantial number of people like to play markets (and fighting hard to keep it that way).
It's very gratifying to assume some business risk and then subsequently outwit the "market" - the collective wisdom of traders - and secure positive cash flow in the process. It's invigorating to gamble and win. But the stakes are escalating as markets move higher and increase in volatility. That scenario makes the "fun" disappears pretty quickly when you're on the wrong side of the wager. Evaluating the risk/reward equation has become much more significant: short-run consequences of a wrong decision - or failure to manage risk - possess larger long-term consequences. That is, negative cash flow can quickly eat up capital reserves.
Success over the long-haul, in this environment, means that business decisions increasingly require more due diligence and transition away from a routine or unwavering cash-to-cash operational model. Operators need to commit more time and attention to business finances and risk management to ensure asset preservation. Failure to do so becomes substantially costly and painful in this business environment.
With that lead in, from a revenue perspective, feedyards received a mini-vacation during the first couple of weeks in September. Sales required a little less work because the fed market was relatively tranquil during the month. That's especially true compared to the rash of activity that occurred leading up to Labor Day in the previous month. Fed trade, following the holiday, danced around $97-8 during most of the month.
October, though, opened on somewhat of a sour note with fed trade down $2 with cattle selling at $95. That weakness largely derived by slipping wholesale values. The Choice cutout has steadily eroded back down to the low-$150 territory - down from $163 around Labor Day. That's still about $15 ahead of last year's mark in early-October - but the trend needs to reverse before cattle feeders get some promise of higher prices in the weeks to come. Meanwhile, CME's October live cattle have relinquished nearly $5 over the past three weeks.
The business gets really tough on the buy side. Let's look at the two primary inputs: feeder cattle and corn. October and November feeder cattle were trading at $117 in late-August (and surpassed the previous highs established last spring). Since that time, though, those contracts have since slipped back to $107 (as of October 11). Part of that decline is normal seasonality - increased supply of cattle drives the market the other direction. But the real driver has been the corn market.
Therein lies the real story and therein enters the margin cramdown. The tail-end of September witnessed a bull-market correction in the corn pits with December corn treading back to $4.60. The first few days of October marched the contract back to $5.00. But October's WASDE report reignited long-term concerns about potential supply - the contract immediately moved limit up following release of the report. A historical perspective of the current WASDE report is provided in the illustration below. We're in uncharted territory. And the market is now looking at prospects for $6 corn. Or maybe higher; what price level will sufficiently ration usage and/or buy additional acreage in Spring, 2011?
The implications are huge for end-users. Consider that cattle placed in August with no protection on the feed side now face an additional couple of dollars tacked on to corn - that's the equivalent of roughly $70-80/head going forward over the next 12-to-14 weeks on feed and could creep even higher yet. I noted last month that, "Obviously, this is problematic for cattle feeders - especially for those working hand-to-mouth on the feed side. That occurs on several fronts: one, replacements purchased and/or contracted several months ago are effectively now overpriced . . . That's a tough squeeze going forward. Margins need to be managed very carefully especially given the uncertainties around the corn market right now."
Media has given lots of attention during the past several months to agriculture - namely, the phenomenon referred to as "agflation". That type of attention can be reassuring. For example, Investor's Business Daily (Oct. 8): "Stocks advanced moderately Friday, highlighted by strong action in the agriculture sector." And equities like CF, DE, and the Market Vectors Agribusiness ETF (ticker: MOO) were up 11, 5, and 4%, respectively. Margin businesses, though, are defined by winners and losers. Tyson and Smithfield, on the other side of the grain market, saw their value decline 8 and 7%, respectively in Friday's trade. Ongoing challenges in the sector are reinforced by a Wall Street Journal article (Oct. 7) entitled, "Food Awakening to Margin Squeeze."
Corn is part of the larger commodity story. Commodity indexes have established near-term highs during the past month. Historically speaking, commodity inflation has generally followed energy prices higher. The current rotation during 2010 has rewarded every sector BUT energy, with agriculture fully participating in those gains (see illustration below). That could all change quickly and brings us back to the opening concept. Margin operators have to be especially careful in the current operating environment of commodity financialization, global competition and increasing attention to relative currency values.
What's the appropriate thing to do? Dr. Michael Boehlje, Purdue University, explains it this way (Farming, Finance and the Global Marketplace: A Summary of the 2010 Agricultural Symposium - sponsored by the Federal Reserve Bank of Kansas City):
"The most relevant risk is margin risk, not price risk. At the same time, conventional tools to manage operation risk will be much less effective. In this scenario, financial management strategies are more critical than ever for successful risk managers."
Commodity markets are inherently cyclical. Hang on tight! This may only be the beginning of a wild ride.
|Slaughter Steers ($/cwt)||94.83||95.95||97.48||97.58||96.91|
|Choice Cutout ($/cwt)||152.42||156.27||157.60||158.15||160.84|
|Select Cutout ($/cwt)||145.21||148.06||149.70||151.87||154.72|
|Hide and Offall ($/cwt)||11.17||11.16||11.12||11.05||10.92|
|USDA Slaughter Weights (lb)||1293||1290||1285||1280||1278|
|USDA Steer Carcass Weights (lb)||852||853||851||846||842|
|CME Feeder Cattle Index ($/cwt)||109.78||109.65||109.85||111.95||113.31|
|Cow Cutout ($/cwt)||120.16||121.10||123.33||126.16||130.20|
|Corn (basis Omaha: $/Bu)||4.90||4.10||4.67||4.59||4.24|
|Cattle Harvest (000 head)||664||656||663||675||583|
|Beef Production (million lb)||517.7||510.4||514.9||523.0||451.8|
The Corn Market - Dillon M. Feuz, Ph.D., Professor, Department of Applied Economics, Utah State University
The USDA released the October Crop Production Report last week and it has definitely impacted the market. The report reduced expected corn yield by almost 7 bushels per acre compared to the September report and that was about 4 bushels lower than what most of the trade had expected. USDA did "find" a few more acres and that coupled with "finding" some additional stocks last week was probably intended to temper the markets a little. However, it appears the trade put much more confidence in the lower yield numbers and not so much in the added acres or stocks from the previous week. December Corn futures were $.30 higher on Friday, $.27 cents higher on Monday and another $.23 higher on Tuesday this week. December Corn has essentially gone from $5.00 to $5.80 in three days. Many assume $6.00 corn is inevitable to ration what is now a very short expected ending stock for this crop of only 900 million bushels. That is an ending stocks to use ratio of less than 7%. Given that the ethanol industry is mandated to grow this year and next year, price will not be a rationing factor in that market. That means the feeding industry and exports will have to bear the brunt of rationing and given the relatively short supply of feed grains world wide, don't expect exports to suffer much.
What that all means is I believe we will see higher corn prices and the cattle, hog, poultry, and dairy industries will bear that higher cost. Projected feedlot cost of gain has risen from $75 per cwt. of gain to $85 per cwt. If corn prices continue to rise, and if we get in another battle this winter/spring for corn versus soybean acres, that rise could easily be well above $6 corn, then feedlot cost of gain will move into the $90 per cwt. plus range. Spring contracts for Live Cattle have also rallied in the last three days, under the assumption that there will be fewer cattle placed on feed. However, I doubt that the present economy will support prices much higher or even the current levels. That would mean if corn continues higher, then feeder cattle prices will likely decline further from the already discounted levels.
No ethanol apologist will convince me that that industry is not negatively impacting the livestock and dairy sectors and ultimately raising consumer food prices. You cannot inefficiently use a third of the corn crop to run cars and not ultimately raise food prices. I am not opposed to ethanol; just government mandated and subsidized ethanol.
Cattle Industry: Bright Long-Term Outlook - Chris Hurt, Extension Economist, Purdue University
The cattle industry is ready to set records for high prices this year and next. While this is positive news for finished cattle prices, calves and feeder cattle still face the price-depressing burden of high feed costs. In the longer-run, current high feed prices will keep the industry in a liquidation phase and smaller beef supplies in coming years will be positive for returns for years to come.
The cattle industry continues to adjust to high feed prices not only from the last three years, but also from the most recent increases in corn, distillers, and soybean meal costs. The longer-term adjustments continue to play out in the reduction of cow numbers. The most recent surge in feed prices will likely keep producers from expanding until feed prices moderate. That will not be until the 2011 U.S. crops are assured, which is still at least 10 months away. This means cow numbers will not likely expand until 2012 and that beef supplies will not start to grow until 2014.
In the past six months the cattle industry was also responding to feed price signals. Last spring the early planting of corn and optimism regarding yields dropped the U.S. average price of corn below $3.50 per bushel. Cattle feeders responded quickly by adding more cattle to feedlots. In May and June, placements were up 20 percent from the same months in 2009. For the more extended period from May through August, placements averaged nine percent higher. The recent sharp increases in corn and other feed ingredient prices are likely to send this fall's placements well below year-ago levels when U.S. corn prices averaged $3.62 per bushel for the final quarter of 2009.
Expanding trade opportunities are important to cattle markets this year. The USDA expects beef exports to expand by 18 percent this year, with imports falling by five percent. The impact of more exports and less imports represents nearly 500 million pounds of beef that will not be available in the U.S. compared to last year. That represents almost two percent of domestic production and enhances finished cattle prices by $2 to $3 per hundredweight.
It is increasingly encouraging that Asian markets are leading the export volume increases so far this year. Purchases from South Korea are up 130 percent from last year with Japanese purchases up 21 percent. China is back in the market as well with an increase of 50 percent in beef purchases. Gaining back export markets after the first U.S. BSE cow was announced in late 2003 has been a long process. Even after this year's large gain in export volume, annual exports will still be only 91 percent of 2003 export tonnage.
Smaller beef supplies will continue to support high finished cattle prices for the rest of 2010 and all of 2011. Per capita beef supplies in the U.S. will be down about three percent this year and an additional one to two percent in 2011. Prices will be supported not only by reduced beef supplies but by strength in the world economy and some recovery in the U.S. economy which will enhance demand. Recent high feed prices are expected to keep the hog industry from expanding and cut into the previously expected three percent expansion in chicken production. Smaller supplies of competitive meats support beef prices.
Nebraska finished steer prices averaged $93.75 in the first three quarters this year. That compares with an annual price of only $83.25 in 2009 when recession deflated demand. Assuming the prices in the final quarter of 2010 are about $98, 2010 will have reached a new record price of $94.80 exceeding the previous record high of $92.27 in 2008.
That record price is expected to be broken next year with Nebraska finished steers averaging in the low $100's. Prices are expected to be in the low $100 during the first quarter and then reach yearly highs in the second quarter when they may average about $105. Expect prices to drop two to four dollars per hundred in the summer quarter and then finish the final quarter of 2011 in the very low $100s. Price forecasts tend to have large errors so consider a range of at least $3 higher or lower from these forecasts.
Some analysts miss the fact that higher feed prices eventually are reflected in higher meat prices. In the beef industry, feed prices which began to move higher late in 2006 are now reaching consumers as record high beef prices. Consumers are in for many years of much higher retail beef costs. The retail price so far this year has averaged $4.37 per pound, exceeding the previous record of $4.29 for the same period in 2008. Early forecasts of retail prices in 2011 are $4.60 to $4.65 per pound, an increase of about six percent over the 2010 record price. The lofty level for next year compares with an average retail beef price of $3.84 per pound for the five years from 2002 to 2006, before the period of much higher feed prices. To be fair the added retail costs of beef is a combination of both higher farm level values mostly due to high feed costs and higher costs involved in marketing margins.
Record finished cattle prices for 2011 and higher feed costs are tugging feeder cattle and calf prices in opposite directions. Stronger finished cattle prices push calf prices up while higher feed prices push them down. The winner of that battle will depend on the relative changes in finished cattle and feed prices.
While cow-calf producers would have received much higher prices for calves without the recent increase in feed prices, they should hold on to their cow herds as record finished cattle prices and (hopefully) cheaper feed in the fall of 2011 should result in much higher calf prices, perhaps for multiple years to come.
Forage Focus: Fall Oatlage Harvest - Paul H. Craig, Dauphin County PA Extension
Reports and observations across south central PA indicate that significant acreages of oats were planted following corn silage harvest this year as an emergency forage crop. Many of these stands are knee high or taller and some fields planted into small grain stubble have already reached heading and even the milky stage of production. As our fall weather progresses it will soon be time for producers to prepare to harvest this crop as oatlage.
Highest quality of oatlage as a forage crop results from harvesting at the boot stage. Highest yields will be found at the dough stage. Like other small grain and grass forages digestibility of oatlage will decrease after heads emerge. Producers will need to consider what will be the intended livestock for feeding this crop. Will it be high producing dairy cows, heifers or dry cows? What ever the intended animals to feed it will be important to have this crop forage tested to maximize feeding value. Some earlier work from Ohio has found that the "average" feed value of oatlage harvested between boot and dough stage was: 15.9 CP; 57.0 NDF; 54.6 NDFd and 66.4 IVTD with an average yield of 2.5 T DM/Acre.
To ensure optimum forage quality at feedout harvest management factors must be considered. Dry matter content at chopping should be 32 to 35%. Whole plant moistures can be hard to estimate with this crop due to hollow stems and the proportion of leaves to stems in the crop. Run a pre-chopping moisture with a Koster tester to gain an accurate measurement.
Because of the hollow stems the theoretical length of cut should be reduced to 3/8 inch for better packing in a bunker, bag or upright silo. The use of an inoculant for small grain silages on this crop is recommended since the number of naturally occurring fermenting bacteria on the crop will be significantly lower as a result of cold temperatures and frosts. In addition colder air temperatures at this time and in the silage mass will result in a slower and longer fermentation period following chopping. Do not plan to feed this harvest soon after harvest. In addition because of the slower fermentation this crop will not store well and should be feed out before warm temperatures arrive.
Oats are very tolerant of cold temperatures and frosts and crop maturity will not increase as rapidly as spring time. As a result the urgency of harvest is not as great and producers can wait for optimum weather and soil conditions.
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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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