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Previous issues of the BEEF Cattle letter

Issue # 519

January 3, 2007

More Cattle + Stalled Trade + Weak Demand = Higher Prices in 2007? - Brian Roe, Associate Professor AED Economics, Ohio State University, January 2007

Recent reports of winter storms in the Great Plains rallied cattle futures prices to some very impressive levels. Futures-based forecasts of local cash cattle prices yield a rosy picture for 2007, with prices in every month projected to be similar to or higher than last year. In particular, for the key spring months, futures-based forecasts are substantially higher (e.g., $5 to $10 higher) than last year. In short, my analysis is that these rallies have provided some great opportunities hedge prices for the first half of 2006. Particularly, I think that the April and June CME futures contracts are currently trading at levels that are highly optimistic given supply and demand conditions. I continue to think that recent February and August futures prices are also subject to some decline.

On December 29 every maturity of the CME cattle futures market was trading at a price above $88 which, when translated using historical basis, suggests an average price around $90 during the 2007 calendar year. This is particularly impressive compared to the $85 average price in these markets during 2006. Why are 2007 futures prices so bullish compared to 2006? Let's look at the possible causes for such optimism.

How about supply? Well, in December (well after the run up in corn prices was apparent) USDA projected 2007 beef production to be 2.5% higher than last year with the specter of nearly 5% higher production during the first quarter alone. Furthermore, pork production is also projected to increase by almost 4%. Granted, poultry production will only go up 1%, but it is still an increase. What about those winter storms that rallied the markets in late December? These could cause some short-run reduction in supply due to death loss and weight loss. However, even the most dire circumstances would only trim beef production by a couple percentage points, which still leaves at least a 3% increase in first quarter production and is unlikely to affect things for the rest of the year. High corn prices will also discourage heavier cattle weights, though back in 1996, when corn prices soared to over $4, average cattle weights dropped only 15 pounds. Furthermore, cattle are better able than hogs and poultry to soak up the increasing flood of distiller's grain being produced by the ethanol industry.

What about domestic demand? Well, retail demand was quite weak in 2006, with data from the first 3 quarters each revealing a fundamental downward shift of around 5% in retail demand for beef. This doesn't necessarily translate to weaker demand for cattle, however; indeed, for the first 3 quarters of 2006 the demand for live cattle was stronger than the previous year. However, this slowed during the final months of the year with initial estimates suggesting that December 2006 cattle demand will be weaker than the previous year's. Indeed, it is difficult for packers to bid aggressively for cattle when the beef they produce faces weak demand at the retail level, and it appears that this finally caught up with packers towards the end of the 2006.

What about foreign demand? For the first 10 months of 2006, we shipped 78% more beef to foreign consumers. Virtually all of that increase was not from Japan or Korea, but rather from Mexico and Canada. One would expect, at most, modest gains in trade during 2007 from our two neighbors. Japan is increasing demand at a painfully slow pace while South Korea is thinking of reinstating the trade ban despite facing some of the highest prices for beef in the world. In short, foreign demand may provide a modest boost in 2007 but cannot be the basis for the strong short-term prices we are observing on the CME.

So, given that the supply situation is bearish in general, that domestic demand is neutral at best and leaning toward bearish, and that trade is modestly bullish, why are the CME prices for cattle futures so high? I'm not sure, but let's put the strength of these recent prices in context.

Take April for example. The CME futures price traded above $93 on December 29. The Nebraska cash price in early April is historically about $1.60 above the futures price, though last year it was about even with the futures price. That puts the cash price forecasts for April cattle in Nebraska between $93 to $94.60, depending on basis. USDA projects that second quarter supplies will be 1.5% higher in 2007 than in 2006. Let's suppose that, for whatever reason, supplies in April are not that heavy and, instead, are merely equal to last year. Last year's average April price in Nebraska was only $81 - more than $10 below current projected cash prices. In other words, even if current supply projections are overstated, the futures market suggesting that cash prices will be 15% higher than last year.

Well, what about the year before - perhaps last year was just a bad year for demand. Well, in 2005, prices did average $92 in Nebraska, but the supply of beef was 4.4% lower in April 2005 than in April 2006. The $81 for all the beef produced in 2006 actually reflected stronger cattle demand than did the $92 price in 2005. In fact, the cattle demand observed last year was stronger than any other year since the Atkins-influenced demand of 2003.

In short, if April 2007 demand is exactly as strong as last year and supplies equal last year, it would imply that futures prices should be trading in the lower-$80's, not the lower $90's. In order to justify futures prices around $93, we would have to be expecting demand to be slightly stronger than the Atkins-era demand of 2003 or a massive beef shortage (i.e., 7% decline). A story with similar optimism can be told for the June futures price. Here the potential also exists for as much as an $8 decline unless demand exceeds last year's very strong performance. February and August futures prices are also optimistic when compared with the demand observed over the past three years, though in each case the degree of optimism in the futures market price is smaller. Neither of the distant contracts (October and December of 2007) is trading at levels out of kilter with current supply projections and recent demand strength.

All this points to an opportunity to lock in prices for spring and perhaps summer fed cattle deliveries. For example, a producer could lock in a late April fed cattle delivery using a Livestock Risk Protection policy from USDA, which is sold by local agricultural insurance agents. On December 28 one could lock in $87.53/cwt. floor price for just under $2.00 per cwt, which effectively creates a price floor of $85.53 for April cattle. Like any insurance product, the premium is paid up front and means that if cattle really do sell for $93 in April, you will effectively only receive $91 because the $2 premium has been paid. However, if prices revert to last year and fall to $81, you will receive the $85.53 price as the insurance policy will pay out the difference between the cash price and the $87.53 price listed in the policy. While these premium prices change with each day's market, it provides a nice tool to guard against downside price risk without having to venture into the futures or options markets, plus the policy is written for exactly the number of animals you are marketing.

Heifer Development Costs - Dr. Rick Rasby, Professor of Animal Science, Animal Science, University of Nebraska - Lincoln, Lincoln, NE

At the 2006 Cornbelt Cow-Calf Conference, Mike Kasten, a commercial producer from Missouri, who is a member of an alliance that sells bred heifers to other producers, outlined their costs of heifer development. Heifers are fed to gain 1.75 to 2.00 lbs per day from weaning to first breeding season in order to achieve optimal reproductive performance. Their costs could likely serve as a benchmark for other cow-calf producers in the Midwest. Following is a summary of their average costs.

Item Cost, Grains (2550 lbs) $163.20, Forage (pasture and hay) $66.66, Veterinary and vaccines $11.48, Breeding fees (semen and synchronizing) $32.87, Clean-up bull $6.27, Open heifer charge $18.27, Interest on heifer $38.81, Interest on feed $5.11, Labor $40.86, Sale expense $40.00, Total variable costs $423.98, Value of heifer at weaning $674.25, Total all costs $1098.23.

As shown above, feed costs accounted for 54% of variable costs, which is slightly lower than for most cow-calf operations (SOURCE: Proceedings, 35th Annual Cornbelt Cow-Calf Conf., Feb. 25, 2006, Pella, IA).

EDITOR's NOTE: Ohio's cattlemen are reminded that the Ohio Beef Heifer Development program is still accepting consignment of heifers to the program for 2007. Find more details under the Beef Improvement link at the Ohio Cattlemen's Association web site.

The Future - Proven Bulls - Kris Ringwall, Beef Specialist, NDSU Extension Service

There is nothing more relevant or futuristic in the beef business than a good discussion about buying bulls. This involves a process of selection that impacts the foundation of individual beef herds and the essence of the beef industry. As the discussion deepens, the concept of proven bulls has to evolve.

The result of purchasing semen from bulls that have proven themselves as being quality bulls is easily evident within producer herds. A bigger issue -- that the beef raised and made available to the consumer must be of the highest quality -- is absolutely critical.

Proven bulls, not just bulls, are the key ingredient. Proven bulls ensure that the right pieces are in the mix to allow management to fine-tune the ultimate product, beef. The industry's reputation and future depend on these bulls.

Although not always noted in cattle discussions, the fundamental principle producers must accept is that cattle belong to the producers and the beef belongs to the consumers. The magnitude of that statement really stands out and should stand out as producers look to the future.

The future is really now. Each year brings new and exciting thoughts and promises along with a reasonable dose of reality. Those thoughts, promises and projected reality were encapsulated very well in an electronic journal (Volume 21, No. 3, 2006) titled Choices (www.choicesmagazine.org) published by the American Agricultural Economics Association.

The discussion was pointed. In the future, promises will outweigh reality only if, as cattle producers, we grab "the bull by the horns" and sit up, listen and change. The series of articles identified issues that ultimately will shape our industry. The series included discussions on markets, structure and competition; the value of integrated markets and consumer demand; global competitiveness; environmental concerns and regulations; community concerns and labor; food safety and animal health; and the welfare and care of animals.

All of these issues sum up one reality: The beef business is simply no longer breed 'em, feed 'em and eat 'em. If there is a common thread to all the issues, it is individual producer responsibility.

The future will mandate aggressive producer engagement in business concepts and managerial analytical techniques that will ensure a position within a very competitive, worldwide consumer market. Much that happens on our individual operations must feed into a larger system. Even the large systems ultimately feed into even larger systems.

The ability to cash flow (income minus expenses) may be very local, but the ability to survive as a viable beef operation in the future really needs to be much broader. The opportunities for the future start this spring, following calving, when the cows are rebred.

The bull must fit the industry. The bull needs to have proven data that fits producer expectations and meets strong consumer demands. There really is no room for mistakes.

The product that ultimately is placed on a consumer's plate is the product of a bull. A bull that was evaluated, re-evaluated and ultimately selected as the sire. The beef is destined to arrive at a targeted palate that has, as an end result, a very personal experience of taste and flavor. In other words, the consumer has a great eating experience. Cattle producers are in the beef business, but we do need to remind ourselves of the significance of that statement.

The future is the responsibility of all. For beef producers, now is the time to visit with your local genetics company and key seed stock producers. This planning for bulls will bring assurance to the breeding program and production system, and ultimately place quality beef on a consumer's plate.

Forage Focus: Management 'keys' open door to pasture possibilities - Purdue University Extension

A livestock producer needs the right keys to unlock the secrets of establishing quality pastures, said Keith Johnson, Purdue University Extension forage specialist.

"There are six keys to successful pasture management," Johnson said. "The choice of a site is important, as is the soil on that site and the forage a producer chooses to plant. They also need to think about the seeding process, weed control and the first use of that forage."

Johnson will address each point during the Heart of America Grazing Conference. The conference takes place Jan. 24-25 at the Mount Vernon, Ill., Holiday Inn. The hotel is located at the intersection of interstates 57 and 64, in south-central Illinois.

Purdue is a conference sponsor, along with The Ohio State University Extension and three other Midwest land-grant universities and 13 agricultural and government organizations.

Johnson's presentation, "Keys to Successful Pasture Establishment," is scheduled for 1:45 p.m. and 3 p.m. CST Jan. 25.

When selecting a site, producers should consider its proximity to their homestead, water and electricity, and whether the site is prone to flooding, Johnson said. Soil composition and the types of forage it can grow also should factor into a producer's decision, he said.

"We have to think about the choice of the forage as it relates to establishing pastures," Johnson said. "First of all, what are the soils that we have selected for the pasture, in regard to the forage to be grown? As an example, alfalfa is not very well adapted to a poorly drained site. So alfalfa would not be a good choice to have on a soil that has poor drainage. Then we need to think about whether we make our own blend of grasses and
legumes or whether we buy pre-blended mixtures."

While pre-blended products might work well in some pastures, they aren't ideal for every field.

"I have several concerns about just picking a pre-blended mixture off the shelf," Johnson said. "First, are the right species in that bag? In other words, if I don't need the 5 percent lespedeza then why have the 5 percent lespedeza in the seed bag? Are the species in the right ratio? Some seed is very small and if you have a 5 percent contribution of that seed by weight, it could actually end up being 30 percent out in the field because the seed size is so small. And, lastly, you lose control because you are not making the choice of the varieties that are in that mixture."

Seeding too late or at the wrong depth can hamper stand establishment. Johnson urged producers not to sow small forage seed like orchardgrass or alfalfa deeper than one-fourth inch. If planted deeper the seed could experience emergence problems, he said.

Pasture establishment issues continue even after a first crop is ready for harvest, Johnson said.

"We need to allow these small plants to get established so that they can take the stress of grazing," he said. "We do not want to go out and graze an 8-inch stand down to 1 inch or 2 inches and not allow recovery. I would suggest that we graze only 50 percent of the forage that might be out there the first time, to further allow that plant to establish.
"Preferably, instead of grazing first use, we probably ought to consider making it as conserved forage, which means baling it as hay or making a silage crop when soil conditions permit that to happen. That way, we're not causing compaction by the harvest equipment."

In addition to Johnson's presentation, those attending the Heart of America Grazing Conference will hear forage and livestock specialists address such topics as grazing livestock on pasture with organic inputs, stocking rates, legume utilization, tall fescue management, grazing and crop rotation, and fencing.

Advance conference registration runs through Jan. 12. Early registration is $50 for both days or $30 for one day of the conference. Registration after Jan. 12 is $60 for both days and $40 for one day. Registration includes a dinner, lunch and program materials.

To register online, log onto http://web.extension.uiuc.edu/HOAGC. For more information about the conference, including a complete speaker schedule, visit http://www.livestocktrail.uiuc.edu/pasturenet and then click on the conference link; or contact Justin Sexten, University of Illinois Extension beef specialist, at (618) 242-9310 or by e-mail at sexten@uiuc.edu.

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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