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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 # 517

December 20, 2006

Tough All The Way Around - Nevil Speer, PhD, MBA, Western Kentucky University (reprinted with permission from 12/13/06 CattleNetwork.com)

Business principles are impartial and unconditionally merciless. That reality is evidenced by current operating conditions within the beef complex. It's been difficult to find much to celebrate in any sector during the past month. A sharp contrast to several years ago when financial gain abounded for all participants. Therein enters the bottom-line surrounding commodity businesses: over time the aggregate margin always regresses to zero. Long-term winners are those most capable at navigating through these tough periods.

Fed trade has been a battle of give-and-take in recent weeks. Election-week sales saw the market plummet to $86 since that time the market's chopped along in $1 increments. Sellers found a glimmer of hope in the heart of November as feedyards managed to spur the market higher despite declining wholesale prices - steer/heifer trade added another $1. And Thanksgiving-week saw upside follow-through: trade broke out early (Tuesday) with sales steady-to-$1-better versus the previous week putting the market back to $87-8. November finished, though, right back where it started with feedyards relinquishing their gains and weighing cattle at $86. But December's open gave the edge back to cattle feeders as sales moved back up to $87. As mentioned last month, weekly trade is currently largely focused on the short run the outcome being an absence of clear direction and market gyration from week to week.

The bigger picture, though, presents more of an unfavorable trend. Monthly averages for September, October and November are $90, $89 and $87, respectively. Granted, fed trade is about $6 better than July's market but, on the other hand, the 5-year average would have that premium closer to $7-8. Moreover, the market should be working higher as fall progresses. Conversely, this year's fall market saw spot prices peak in September and have steadily declined through November. The last time that occurred was in 2001 following September 11 in which beef demand markedly suffered due to decreased travel and restaurant expenditures.

Market defensiveness and inability to find traction is primarily the result of a stale wholesale market. Fed trade has paralleled wholesale prices which have failed to seasonally benefit from a fall rally: the Choice cutout has averaged between $144-6 from July through November. And currently stands below year-ago levels for the first time since summer. That's a complete turnaround from June, July and August - demand bailed the market out against prospects for large front-end fed supplies the Choice cutout ran $12-14 better than 2005 during those summer months. While flat wholesale prices are worrisome from a beef demand standpoint, one bright spot remains. Beef complex throughput has been excellent: during the period of May through November (30 consecutive weeks) commercial beef harvest has run well ahead of last year: cattle slaughter has averaged 661,000 head versus 628,000 head in 2005 while weekly production has been 514 million lb compared to 485 million lb a year ago.

The most important outcome of these conditions is that margins have turned negative all the way around. Packers have been unable to operate in the black for much of the past several months. Meanwhile, against the backdrop of ever-increasing feed costs, cattle feeders find themselves with negative closeouts. The weeks immediately following the holidays will prove critical to establishing general sentiment for trade early in 2007. Both sides need improved retail activity to help bolster cutout values and thus raising the floor for negotiations. However it plays out both packers and feeders need some upside to potentially improve their respective financial positions.

The most dramatic setback within the beef complex has come at the sale barn. Cow/calf producers are facing declining calf prices against the backdrop of a struggling fed market and higher grain prices. The 4-week moving average for 550-lb calves now stands at $110/cwt: that's $15-20/cwt off last year's fall market. Mark that difference up as $85-100/ head in gross revenue. Meanwhile, the 4-week moving average for yearlings has fallen below $100/cwt - the first time since May, 2004.

Given the calf market's direction and the rapid encroachment of next month's cattle inventory report, it's seemingly important to provide some discussion regarding status of expansion plans within the industry. During the summer of 2005 I committed several months to long-term feeder cattle supply per indicators of expansion. Several items of emphasis from that discussion are important to keep in mind as we analyze the current situation. Namely, at the outset the current expansion appeared guarded and restrained producers were careful to not over-commit operational resources to rebuild the nation's cowherd.

In other words, while expansion may be underway, the scope of expansion becomes increasingly flat. That restraint is the result of several factors including: 1) ongoing drought concerns, 2) increasing diversification of many operations which run cows - resources are committed elsewhere and, 3) shifting demographics. Clearly, the extent to which those aspects converge remains to be seen and will become clear only with the perspective of time. Meanwhile, some key indicators may provide some insight into current plans and perspectives of commercial producers. Several illustrations are provided below which aid in understanding the current attitude among producers and where the industry may be headed.

The first graph portrays federally inspected beef cow slaughter relative to annual beef cow inventory. Cow slaughter has received a large amount of attention this year because it has run nearly 18% ahead of last year's pace. From a broader vantage point, though, 2006 is running in line with the historical norm 2005 was the anomaly in terms of reduced cow dispersal rates. Stated another way, last year was an apparent juncture for operators to squeeze one more calf out of a cow that would otherwise be normally culled. And at that time the marginal benefit of that decision appeared advantageous. Those marginal cows held over last year are readily being marketed this year (last-in-first-out) for several reasons. One, drought continues to hamper operating conditions in many areas. Two, those cows have outlived their utility. And three, most operations make marketing decisions based on gross revenue requirements (not unit-cost-of-production) - declining markets equates to selling more animals to meet financial obligations.

The second illustration depicts annual heifer marketings relative to steer slaughter. 2005 and 2006 provide the lowest rates since the mid-1990s indicating producers have been aggressive about keeping back heifers as replacements. That occurrence relates back to the first graph and discussion above: two years of active heifer retention allows producers more freedom to cull older and/or poorer producing cows when the need arises. As such, 2006's increased cow slaughter may partially be an artifact of 2005 heifer retention (now bred heifers to calve in 2007).

What remains unknown is how long that trend will last. The third illustration outlines current feedyard heifer inventory versus 2005 and the 5-year average. What's interesting to note is that October's cattle-on-feed report indicated markedly higher feedyard heifer mix compared to last year's mark. Have producers reversed direction - marketing potential replacements as feeder cattle? Alternatively, is October's mark simply as an artifact of advanced placements? Only time will tell. It's important to note, though, that October's relative heifer mix remains well below the 5-year average. January's cattle-on-feed report will provide important insight into this trend.

So…what's it all mean? The snapshot is producers appear more aggressive about marketing both cows and heifer calves at the current time. Reasons for doing so, though, are as varied and numerous as number of operations: accurate analyses and interpretation of financial / management decisions within the cow/calf sector, in the aggregate, can prove elusive. Nonetheless, it appears the cow/calf sector remains guarded in terms of the long-term outlook and collective reticence for expansion has been underscored by events of late. Regardless, monitoring of these factors, in combination, will provide some insight as to the direction the sector opts to take in the coming months.

Stop Digging. . . - Kit Pharo, Pharo Cattle Co., Cheyenne Wells, CO (Reprinted with permission from Kit Pharo, a self proclaimed "no-nonsense" seedstock producer in eastern Colorado.)

If you find yourself getting deeper and deeper in a hole, the logical thing to do would be to stop digging. Unfortunately, human nature often causes us to dig faster. We are more afraid of change than we are of failure. Allan Nation, editor of The Stockman GrassFarmer, says, "Most people would rather fail conventionally than succeed unconventionally."

As cow/calf producers, we have experienced four very profitable years - but times are changing. As we head toward the downside of this cattle cycle, our income will decrease while our expenses will continue to increase. It will become more and more difficult for traditional (high-input) cow/calf producers to make a profit. Why? Because they will continue to dig themselves deeper and deeper into the same old hole. They're not afraid of hard work - but they are afraid of change.

There are several things in this business that are completely out of our control. The key to success is to concentrate on the things that are within our control. Producers who will continue to be profitable (every year) manage their forage resources in such a way that they feed very little, if any, harvested or purchased feed. They calve in sync with the forage resources on their farm or ranch, and they have efficient, moderate-sized cows that require no pampering or special care.

Forage Focus: 2006 Ohio Forage Performance Trials - Mark Sulc, OSU Extension Forage Specialist

The 2006 report of the Ohio Forage Performance Trials will be available soon at your local country Extension office. It has been printed in the December special insert of Ohio's Country Journal and is online at: http://www.ag.ohio-state.edu/~perf/

The report summarizes performance of 56 alfalfa varieties, 22 orchardgrass varieties, 11 tall fescue varieties, 6 perennial ryegrass varieties, and 24 annual ryegrass varieties. Trials were located at North Baltimore, Wooster, S.Charleston, and Jackson, OH.

Alfalfa yield topped the 10 tons of dry matter per acre mark for the first time in the history of the perform-ance trials (at North Baltimore). The reported yield in those trials represents what was growing in the field, with no harvesting and curing losses. It demonstrates the potential for very high forage yields in Ohio!

The Expo will once again include a three-day industry trade show. Last year's trade show which encompassed over 22,000 square feet of indoor space was a full house. If you are interested in promoting your cattle industry related product with a display in the 2007 event, contact Jamie King at (614) 873-6736 as soon as possible. The deadline to reserve space in the trade show is January 2.

Consignments are now being accepted for the Angus, Hereford, Limousin, Maine-Anjou, Piedmontese, Shorthorn and Simmental sales. For complete details about making a consignment or to request a catalog for one of these sales, log on to www.ohiobeefexpo.com and click on the sales link.

The ever-popular genetic pathway will once again be a feature of the main hallway and upper concourse of the Voinovich Livestock and Trade Center. To reserve display space for your bull prospects or donor cows contact the OCA office at (614) 873-6736. A limited number of spaces are available on a first-come, first-served basis. This is a premier opportunity to reach commercial, seedstock and club calf producers all in one location.

Over 25,000 visitors from 20 states and Canada routinely attend the Ohio Beef Expo. It is ranked as the fifth largest event hosted in central Ohio and is the premier location to meet Ohio's cattle producers. Don't miss it!

For complete details on the 2007 Ohio Beef Expo, visit www.ohiobeefexpo.com. The Ohio Beef Expo is a function of the Ohio Cattlemen's Association (OCA). The OCA is an affiliate of the National Cattlemen's Beef Association and is the state's spokesperson and issues manager for all segments of the beef cattle industry including cattle breeders, producers and feeders. It is the grass roots policy development organization for the beef business. Through the Ohio Cattlemen's Association, cattle producers work to create a positive business environment, while providing consumers with a safe and wholesome product.

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

LIVE CATTLE in Chicago (CME) closed up on Monday due to weakness in corn and soybeans and fund buying. The DEC'06LC closed at $86.825, up $0.425/cwt and $0.525/cwt higher than this time last week. The FEB'07LC closed up $0.975/cwt at $90.475/cwt, higher by $1.375/cwt over last Monday. The market found support in ideas that fewer cattle would be coming to market because of light placements in November and speculative fund's continued trend to buy live cattle. Fund buying also initiated buy stops extending gains late in the session. Forecasts for unforgiving weather in the Plains supported thinking by speculators that cattle marketings could be slowed. USDA will release its Cattle on Feed report on Friday and is expected to show placements lagging behind last year at this time. Cash beef prices on Monday were mixed with the choice cutout off $0.47/cwt at $144.19/cwt. The margin between choice and select cutout narrowed with the select cutout placed at $127.68, up $1.39/cwt. According to HedgersEdge.com, the average beef plant margin on Monday was placed at a negative $7.45/head, better by $4.85/head over last Friday's data at a negative $12.30/head. The five-area weekly cattle price showed cattle trading $1.00/cwt-$1.50/cwt lower from last week at $85.00/cwt - $86.50/cwt. This was $9.50/cwt lower than last year at this time. Cash sellers are encouraged to push marketings while avoiding weight and quality discounts. It may be wise to consider protecting a portion of 1st quarter '07 and 2nd quarter '07 marketings as spring prices are expected to plunge into the low 80's. Corn users should consider pricing more near-term corn inputs now.

FEEDER CATTLE at the CME closed higher along with live cattle on Monday. The JAN'07FC contract finished at $100.00/cwt, up $1.275/cwt and $0.375/cwt higher than last Monday. The MAR'07FC contract closed up $0.750/cwt at $97.600 but $1.025/cwt lower than last week at this time. Bearish corn and soybeans contributed to support for feeders. The CME Feeder Cattle Index provided support with the latest data placed at $100.71/cwt, off $0.10/cwt. Forecasts for low placements were expected to show up in Friday's USDA Cattle on Feed report. This too was supportive of feeder cattle prices because traders are thinking that supplies may be tighter than expected. Cash sellers are encouraged push feeder sales. Hedgers may be wise to consider protecting a portion of 1st quarter '07 and 2nd quarter '07 marketings. Corn users should consider pricing more near-term corn inputs now.

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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