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Issue # 492

June 21, 2006

Never Count The Market Out - Nevil C. Speer, PhD, MBA, Western Kentucky University (reprinted with permission from 6/12/06 CattleNetwork.com)

Call it what you like, dumb luck, chance, or perhaps you'd attribute it to keen strategy. Either way, cattle feeders will likely be indifferent. Their only concern is the outcome - higher prices. Against the odds they staged some solid staying power in recent weeks resulting in an important rally. Considering how things were shaping up the reversal is somewhat surprising. This time last month fed trade turned sour; May's second week of business (ending May 12) finished steady-to-$1-softer, albeit with active trade, at $77-78.50. And the fundamentals pointed to some tough weeks ahead. But if the past several years have taught us anything it's to never count the market out. Just when fed trade approaches the brink of despondency there's been an injection of renewed vigor. The most recent example: last fall's impressive September rally (see MMP: October, 2005).

Good things began to occur in late May. Sales during the weeks ending May 19 and 26 saw trade move $1 and $2 higher, respectively. Meanwhile, June's open extended the trend: northern feeders agreed to load trucks at $82 with some sales of $83; southern feeders weighed up at $83-83.50. All-in-all the turnaround equated to an additional $5-to-$7 in as little as three weeks - that's equivalent to approximately $60-90/head. While that doesn't completely heal up current closeouts it certainly makes a huge difference in terms of equity management.

A move of that magnitude was unforeseen given the backdrop of bearish signals. First, USDA's cattle-on-feed report indicated an inventory of nearly 11.6 million head: 9% ahead of last year's mark. Moreover, May's beginning 120-day+ inventory is record large exceeding 4.6 million head. While none of that was surprising to market analysts the report certainly didn't provide any friendly surprises. Meanwhile, USDA's cold storage report indicated mounting beef inventories - a whopping 30% larger versus last year. Third, the nation's economy continues to churn out mixed signals. In reference to beef spending expectations, rising interest rates and fuel prices are weighing on consumer attitudes. The University of Michigan's May Consumer Sentiment was pegged at 79.1 with Director Richard Curtin noting that, "Consumers viewed their financial prospects less favorably than any time during the past decade, with consumers expecting a much higher inflation rate as well as much smaller wage gains during the year ahead." Gallup results substantiate that finding as consumer attitudes about future economic conditions have consistently trended downward through the spring (June, though, did see a slight reversal).

Time and again, though, the market reveals its persistence. Despite potential negative indicators, consumers keep on buying beef. Boxed beef values soared amidst strong movement prior to Memorial Day. And subsequent reports indicate beef activity was swift during the weekend thus retailers were busy with fill-in activity in early-June. Simultaneously, the most recent run has been fueled by newly discovered optimism at the CME. Additionally, fed cattle value is also being supported by an enduring quest for Choice product among packers; the Choice-Select spread widening almost $5 during the past month.

That being said, the market appears to have established a near-term top. The week's action revealed an undercurrent of hard work ahead. Feeders began on a confident note with Monday's asking prices at $85 and largely bolstered throughout the week by stronger wholesale prices. Negotiations disappointingly settled $1-$1.50 softer in the north and $2 off in the south; live trade finished the week at $81-81.50. Why the shift? The factors described have come to fruition and begun to weigh on the market.

As a result, don't become comfortable within the laurels of the recent surge: make sales if the opportunity presents itself. As detailed last month, the beef complex possesses warning signs ahead: feedyards possess no shortage of market-ready cattle. Weekly harvest rates need to be swift and that need occurs in the midst of seasonally slow beef demand; recall that last year's cutout plunged following its spring top. Carryover could quickly become burdensome if transactions become sluggish. And as mentioned numerous times in the Monthly Market Profile - that situation is self-perpetuating downward spiral for the market.

May's snapshot shouldn't overshadow, though, the overall trend in 2006: spring presented a significant slump claiming extensive and well-merited media coverage (including the Monthly Market Profile). Even with improved prospects of late the overall picture is critical to feedyard operations; it's created extreme profitability challenges and consequently possesses potential long-term implications for the sector. It's important to remember that cattle feeders are margin operators: revenue derived from sales is only part of the profitability equation; the other portion derived from the buying side of the business. And despite a marked downturn on the fed side, the feeder market, in relative terms has exhibited amazing resiliency. That development serves to further pressure the current financial crunch and makes impending swaps challenging.

Within that context, it's an especially important time to dedicate space to discussion and review of feeder market principles and fundamentals. As such, over the course of the next several months I plan on providing coverage of the market's framework. Much of the material will be drawn from a presentation I made on behalf of VetLife^Ž customers at the company's Benchmark^Ž Advantage Forum in Phoenix last November.

Let's first look at the market from a demand perspective. Underlying all discussion of the feeder market over the short-run has been a dramatic and incessant growth in feedbunk capacity during the past 15 years. The first illustration below depicts that occurrence: pen space availability expanded by nearly 1.9 mil head, approximately 16%, during the previous decade. Moreover, VetLife's^Žinteractive surveys in Phoenix revealed that 60% of feedyard respondents increased capacity during the past five years. Feedyard expansion requires vast capital investment that mandates full utilization. Capacity cannot remain idle when conditions appear to be unprofitable over the short-run; feedyards must employ that capacity on a full-time basis to offset fixed costs (more on that in future months). The development of increased capacity represents a classic demand shift and serves to be price supportive for feeder cattle.

emand is only part of the story; we must also look at the market from a supply standpoint. From an aggregate perspective, in order for feedyards to operate at a level which dilutes fixed costs and allows some opportunity for profitability dictates two basic options:

Pull cattle ahead from domestic sources and/or,

Develop a new source of replacements from foreign sources (Canada and Mexico).

During the past 15 years or so we've witnessed both those strategies in play. The second illustration below represents January 1 snapshot of cattle-on-feed inventory versus outside replacement supply. Clearly, the measure varies on a seasonal basis. The overall trend, though, is relentless. During the late-90s the ratio ranged from 38-44%. However, since 2001 cattle-on-feed has consistently been closer to 50% of available replacement supply. Why's that important? Assuming 2.25 turns per year in the feedyard the equilibrium for domestic supply is approximately 45%. From a domestic perspective, though, the implications are especially important because we've essentially pulled U.S. supply ahead of its long-running equilibrium. Feeder availability has become increasingly limited, especially in light of relatively constant cow numbers and ever-growing quantity demanded as described above. Therefore, the reasonable alternative to maintain operations at a profitable level, from an aggregate perspective, is to source cattle from Canada and/or Mexico.

What's it all mean? Simply, higher prices. The feeder market jumped to a new plateau in 2000: yearlings averaged $80+ versus the $70 mark established between 1995 through 1999 (reference the third illustration below). More importantly, though, was the upswing following Canada's May 20, 2003 BSE announcement - that development representing a classic supply shift. The yearling market averaged nearly $89 in 2003. However, that statistic doesn't tell the true story. During the first six months of 2003 the market was consistent with the previous three years being established at $80; the last six months, though, the market surged to $98 following the Canadian embargo. And since that time we've worked within a new trading range - the result of an underlying disparity stemming from excess bunk capacity chasing fewer cattle.

Distilling this down to manageable terms: the feeder market possesses very different fundamentals compared to as little as five years ago. Unequivocally, that's established great prosperity for the cow/calf sector. Segmented businesses, though, operate in a synergistic vacuum - what's good for one is detrimental for another. Incremental changes have manifested a hyper-competitive feeder market which has ratcheted up capital requirements and subsequent risk for feedyards to maintain normal operations. That makes this squeeze different from previous rounds of red ink. Against that backdrop, the fed market's recent reversal coupled with relatively steady feeder prices may usher in another wave of consolidation for the feeding sector. Only time will tell.

Forage Focus: Should I Clip My Pastures? - Jeff McCutcheon, Knox County Extension Educator, Ag & NR

It is mid June and you are standing in a pasture field with the owner. The cows were rotated out of this field the day before. The ripening grass seed heads come up to your waist. The green leaves of the grass and clovers have, for the most part, been grazed to about 2 inches or 1200 lbs. of dry matter per acre. It does not look too bad. Yes, the spring flush got ahead of the owner, but with this year's growth pattern, it was hard to keep up. The owner asks "Do you think I should clip this pasture?" In the following discussion you run through the reasons to clip pasture to see if they apply.

First, clipping will help keep it vegetative. Yes, but not at this point. It would have been beneficial to clip during the stem elongation or before flowering after the seed head emerges. That would have forced the plant to grow more vegetative tillers. This year that would have been in May. Now with the seed ripening on the stem those specific tillers are pretty much done. You will still have re-growth, just not from those tillers. Every cool season grass tiller in a pasture field does not produce a seed head every year. Two of my colleagues have said that clipping after flowering is either cosmetic or for revenge, not vegetative growth.

OK, what about weed control? Cutting weeds does more damage when the weeds are in bud or bloom stage. Walking in that pasture field, I did not see any perennial weeds in this stage. Clipping to control weeds could be a valid reason, but it needs to be timed right.

What about pinkeye prevention? One aspect of preventing pinkeye is to reduce eye irritation. A main eye irritant in pastures is seed heads and grass stems. Cattle will graze down through the seed heads and stems to get the more desirable forage. Seed heads and stems can cause physical abrasions to the eye. These abrasions provide an opportunity for bacterial infection. If you struggle with pinkeye, then clipping to remove the seed heads and get the stems below eye height is a valid reason.

Pinkeye - A disease of plenty - Bethany Lovaas, DVM, University of Minnesota Beef Team

As is typical for the northern climes of the United States, we often see a "spring flush" in the pastures. When warm weather hits, provided there is adequate moisture in the soil, the grasses start to grow like they're afraid they'll freeze tomorrow. Rarely will you hear a cattleman complain that he has too much grass, but like all things, too much of a good thing is still too much.

In years when weather is very conducive for excellent pasture growth, there is also a higher incidence of pinkeye seen in cow herds. This can be explained, for the most part, by two things: high rate of pasture growth means grasses are likely unusually tall (depending on species) and are likely to be rubbing near the cows'/calves' eyes, and with high moisture springs comes a plague of flies. Face flies are usually the culprit. These are the flies that are seen around the cows' eyes, feeding on the cows' tears.

The typical organism that causes pinkeye is Moraxella bovis, which is normally found in the bovine eye. In the case of health, the bacterium lives and grows on the cow's eye, without causing any signs of disease. However, in the case of injury to the cow's eye, her normal defense mechanisms are compromised, and the bacteria will set up an "opportunistic" infection. Injury can occur by simply a blade of grass touching the cornea, and damaging the first layer of cells on the cornea, or by the cows' own attempts to rid herself of the flies on her face.

Pinkeye affects the cornea of the eye, and usually nothing else. It also starts as a small point in the center of the cornea, and as the disease progresses, it affects more and more of the corneal surface, until the entire cornea is enlarged, white to yellow in color, and the cow is completely blind in the affected eye. It is important to note that during a moderate to severe infection of pinkeye, there may be blood vessels visible where there were none before. This is part of the body's attempt to heal by bringing circulating white blood cells to the sight of infection.

Typical signs of pinkeye depend on the severity of the disease. Some cattle may simply have some mild to moderate tearing (mild infection). Some cattle will have severe tearing, be photosensitive (sensitive to light) and are squinting, and there may be swelling noted around the affected eye. In severe cases, the cornea will be so enlarged and swollen, that the cow may actually have difficulty closing her eyelids over the affected eye.

When deciding to treat pinkeye, remember that cows are incredible healers. Even if you think that there is no hope for healing, unless the eye is actually ruptured, don't give up. Treatment of cattle affected by pinkeye is determined by the severity of the infection. If you note simply tearing from the affected eye, with little to no signs of clouding of the cornea, you will likely have good success treating with a subcutaneous injection of oxytetracylcine or an intraocular injection of penicillin (+/- dexamethasone). However, if there is a large degree of corneal opacity noted, treatment should include an antibiotic and the eye should be sutured closed or the eye should be covered with a patch.

Vaccination against pinkeye may be recommended if you typically have problems year after year. These are moist areas (often swampy areas) where there is a lot of tall, course grasses, where the cattle congregate to keep cool and keep the biting flies off of their bellies. An annual vaccination strategy may be prescribed for that cow herd. However, in areas where pinkeye is typically not a problem, and there is an outbreak in the odd year, vaccination may not be very cost effective. In a lot of cases, by the time the outbreak is recognized as such, and a vaccine is implemented, the worst of the outbreak is over. It typically takes cattle two weeks to mount an effective immune response to a vaccine, and by the time their immune system is effectively stimulated, the outbreak is over, and any healing noted is due to the fact that the worst of the problem is already past, and most cattle are already convalescing. The ideal time to get the vaccine into the cattle is a minimum of two weeks prior to the outbreak, which can be done if you are good at predicting weather patterns and how they will affect the fly population.

Some practices that can be implemented to decrease the incidence and/or severity of pinkeye are related to controlling the inciting factors. If the problem is predominantly due to tall grass, a potential solution would be to clip the pastures to a more manageable height for the cows. If an overabundance of flies is the main culprit, fly control can be accomplished by putting insecticide impregnated ear tags in the cows/calves, pouring the cows with an oil based permethrin or pyrethroid insecticide, or providing the cows with oilers and rubs (for self application of insecticide). When using fly tags, it is important to remove the tags after their labeled effective life has expired. If they are left in the cows' ears for longer, the amount of insecticide continues to decrease over time, and can select for insecticide resistant strains of flies. This may ultimately make them ineffective on your farm, and you may be forced to implement other fly control measures.

For additional information about this or other cattle production practices, visit the University of Minnesota Beef Team website.

Sweep for Potato Leafhopper in Alfalfa - Ron Hammond and Bruce Eisley, OSU Entomologists

Potato leafhopper (PLH) adults have been in the state for the past several weeks having migrated from the south and since a lot of first cutting alfalfa has been made, it is time to start sweeping alfalfa for PLH adults & nymphs on this second cutting. We have had reports that some second cutting fields have required treatment for PLH. Also, new seedings should be checked for leafhoppers since new seedings cannot take as much damage as older seedings. Checks should be made with a standard sweep net by taking several 10 sweep samples randomly across the field and counting the number of PLH adults and nymphs found in each 10 sweep sample. Treatment for PLH is based on the number of adults and nymphs found when sweeping versus the height of the alfalfa. For example, treatment is warranted if the number of adults and nymphs in 10 sweeps equals or exceeds the height of the alfalfa in inches (8 adults & nymphs in 10 sweeps in 6 inch alfalfa would justify treatment for PLH). Information about PLH can be found in a fact sheet on the web at: http://ohioline.osu.edu/ent-fact/0033.html and insecticides for PLH control in alfalfa can be found at: http://entomology.osu.edu/ag/545/aiplh.pdf

Multiflora Rose Management in Pastures - Dwight Lingenfelter, Agronomy Sept. PSU and Dave Messersmith, Extension Educator, PSU

Multiflora rose is in full bloom across much of Pennsylvania, marking one of the best seasons for control. Several herbicides can provide good control of multiflora rose, especially when applied during flowering. Three foliar applied herbicides suggested for late-spring/summer are Cimarron or Ally, Crossbow, and glyphosate.

Cimarron (Ally) can be used as a broadcast or spot treatment. Apply Cimarron at a rate of 0.5 to 1 oz/A plus a surfactant for broadcast treatments or 1.0 oz/100 gallons water plus surfactant for spot treatments. (Ally can only be applied at a rate of 0.3 oz/A) There is no application to grazing interval for Cimarron or Ally.

Foliar applications of Crossbow can be effective on multiflora rose. For spot treatments, use 4 to 6 oz/3 gallons water and spray until foliage is uniformly wet. For broadcast applications, use 1.5 to 4 gallons of Crossbow in enough water to deliver 10 to 30 gallons of spray per acre. Mid June, when multiflora rose is flowering, is an excellent time to make these applications. Follow-up treatments may be necessary. An interval of 14 days is required for lactating dairy if using 2 gallons/A or less.

Glyphosate can be used as spot treatments on isolated patches of multiflora rose. Apply a 1 percent solution (about 1 qt/25 gallons water) of glyphosate with a hand-held sprayer. Uniformly wet leaves and green stems, but avoid runoff. In PSU research, Glyphosate has been more effective at controlling multiflora rose at fall application time. So application should be made in late summer or early fall when plants are actively growing (after fruit formation). A 14 day interval is required for grazing animals.

To achieve the best control of multiflora rose, a combination of several tactics should be used. For example, mowing established plants now (during flowering) followed by an application of glyphosate to the regrowth in early fall would provide better control than either mowing or herbicide alone.

No matter which control tactic is used, follow-up maintenance practices are a must for long-term control. Removal of dead brush, annual mowing and adequate soil fertility are examples of practices that should be used to encourage pasture growth and maintain control of multiflora rose.

For more information on multiflora rose and its management refer to the publication Agronomy Facts 46: Multiflora Rose Management in Grass Pastures.

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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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