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Previous issues of the BEEF Cattle letter

Issue # 537

May 16, 2007

Fasten Your Seatbelt! There's Ethanol Ahead - Nevil C. Speer, PhD, MBA, Western Kentucky University (reprinted with permission on 5/13/07 from CattleNetwork.com)

Steady money. That's been the overriding sentiment within the fed market over the past several weeks. Recall last month participants were buzzing about $100 sales. That appears to be the spring high: the following week business trended $1-3 lower with most sales at the $98 level. The market then knocked another couple of dollars off the top and fed trade plugged along at $96 for several weeks in a row. And May's first full week of business finished with cattle being valued at $96-7. At the surface the market is seemingly comfortable at current levels.

A look underneath the surface, though, reveals some churning and disruption as it pertains to margins. For example, fed trade's $98 in mid-April came as cattle feeders relinquished $2 while the Choice cutout gained nearly a whopping $13 versus the previous week. Needless to say, packer margins soared amidst that arrangement. Turnabout is fair play: the following three weeks witnessed the Choice cutout giving those gains back. However, cattle feeders hung on to steady money.

Alluded to above, wholesale values have been anything but tranquil: volatility has been the rule rather than the exception. Daily changes in the Choice cutout market have averaged nearly $2.00 during March and April. Therefore, it's difficult to get a meaningful handle on the direction of the market amidst that type of environment because of divergent strategies to manage margin. Overall, 2007 packer gross margins are running near a level which facilitates operating at a breakeven level (according to my estimates). However, week-to-week swings in spot margins have varied as much as $125-130 from high to low thus far this year (the low coming when fed cattle cross the $100 threshold; the high in mid-January with an $87 market). May and June are typically very important months relative to processor profitability; those two months have historically provided packers with the best margins of the year while also facilitating large throughput. That's witnessed by last week's marked improvement for packer margins with a $97 fed market (steady to $1 better) and $160 Choice cutout ($3-4 higher).

On the other side of the game, feedyard margins are also difficult to assess. Closeouts still possess the influence of winter and ongoing fluctuations within the corn market. As such, making an assessment of cattle feeding profitability in the aggregate is a tenuous proposition. Moreover, that'll likely continue for some time given the behavior of the feeder market of late. Seasonality in the feeder market has essentially been nonexistent. The recent dip in corn prices coupled with a good run of profitability has helped to support the market. Yearlings gained $8 during March and tacked on another $4 in April. Given that jump there'll be lots of variation in closeouts as fall approaches depending upon when cattle were purchased and whether or not risk management was utilized relative to procurement. Per that situation, July through September will be critical to monitor as we progress into summer considering the relative large number of yearlings placed on feed during February and March.

Last month's Monthly Market Profile initiated a series relative to ethanol and its influence on the beef industry. That discussion primarily derives from a previous Cattlenetwork online forum (http://66.203.152.160/forum/). The issue's complexity merit more detailed analysis than what I provided within the forum.

April's MMP (http://www.cattlenetwork.com/content.asp?contentid=120753) began the series by outlining magnitude and relative location of the nation's ethanol infrastructure while introducing some of the ensuing implications.

Undoubtedly, MMP readers understand the largest influence of an expanding ethanol industry on the beef complex stems from a surging corn market. However, some historical perspective coupled with review of basic economic fundamentals may help facilitate a clearer view of market behavior going forward.

The first illustration below represents annual carryover since 1990. Several themes are important. First, the horizontal marker asserts the approximate historic threshold level the market has tried to maintain. Projected carryover exceeding one billion bushels typically facilitated market participants to perceive sufficient cushion heading into the subsequent marketing year to offset minor production shortfalls. Within recent history that's largely been the case. The exception being the 95/96 marketing year but in the ten years since average carryover has exceeded 1.5 billion bushels.

The second illustration represents regression of average corn price on annual carryover for each respective marketing year. Note this is NOT meant to represent a demand curve - carryover is a function of both utilization and supply. The graph clearly denotes a strong relationship between carryover and corn price (R²=.76). And during the 17-year time frame outlined (89/90 - 05/06) increased carryover resulted in lower prices: roughly the established relationship equates to a 30-cent move for every 500 million bushels of carryover (b₁= -.63).

Now let's analyze those illustrations within the framework of economic fundamentals. First, a quick review of demand: increased demand means at any price quantity demanded is higher than previously expected (a very different principle from increased quantity consumption resulting from lower prices). Ethanol production has created a fundamental shift in corn demand meaning at any price quantity demanded is greater than before. Second, price: it represents the value of the marginal unit. Stated another way, it signifies relative scarcity of the next unit utilized. Increased usage (or expectation of usage) leads to heightened scarcity of the next available unit thereby driving up prices. Third, shortages (and for that matter surpluses) are a matter of price - not quantity. Shortages result from quantity demanded being greater than the quantity supplied indicating price is, for whatever reason, too low.

So…what's it all mean? Markets eliminate shortages by raising the price to ration utilization. A phenomenon we've clearly witnessed in the corn market during the past six months. Note in the first illustration that carryover projection for the current marketing year (06/07) is estimated at 937 million bushels. That level is comparable to the 03/04 carryover (958 million bushels).

However, also note in the second illustration the forecasted carryover/price relationship for 06/07 and 07/08 is well off the previously established regression line.

Why the difference? Primarily, the market possesses increased demand. Fundamentally the stocks-to-use ratio has changed: same carryover but more relative scarcity given forecasted utilization. This year's carryover represents a much smaller percentage of total usage. Thus the market has raised the price (value of the marginal unit) to prevent shortages: corn prices (basis Omaha) have averaged nearly $3.60 during the past six months - more than a buck higher than 03/04. Also note that that despite similar carryover between 06/07 and 07/08 the market is expected to rise by nearly 30 cents - a direct reflection of further decline in stocks-to-use.

Lots of uncertainty surrounds the current marketing year. USDA's May balance sheet estimate was critical (and bullish) for the market; it helped remove ambiguity and provided analysts some solid footing going into summer.

However, lots of unknowns still abound including: 1) next year's supply - a function of this summer's production (weather will be key); 2) the level of inventory users choose to carry; and 3) export opportunities. Convergence of those factors makes 08/09 wide open; carryover projections range anywhere from zero to 1.2 billion bushels. Clearly, the market won't allow zero carryover. But what price will be necessarily to facilitate a sufficient inventory buffer? That's a difficult question to answer especially considering increasing long-term and large-scale commitment to usage. USDA's 07/08 price average is pegged at $3.40/bushel but that includes a forecast swing between $3.10 and $3.70.

The market will undoubtedly continue its pursuit to higher levels. Getting there, though, will also entail lots of uncertainty and rivalry along the way. There's turbulence ahead. Buckle your seatbelt -it's going to be a bumpy ride.

Last year we reported on a Fixed Time AI system (CO-Synch+CIDR) that has become widely recommended in the industry for AI breeding of postpartum cows on a single day. (See October 2006 Cow Calf Manager). Our work in Virginia indicates this program results in pregnancy rates of 55 % to 65% to fixed-time AI (FTAI). In field studies in Missouri, the CO-Synch+CIDR system averaged 65% pregnancy rate in over 3000 cows in 35 herds. The range in their studies was 57% to 72% AI pregnancy rate. It should be noted that all herds were well managed with cows in good body condition.

Recently, we have been investigating another system in cooperation with Dr. Mike Day at The Ohio State University and Dr. Ramanathan Kasimanickam from the VA-MD College of Veterinary Medicine. The new system (Figure 1) only keeps the CIDR in place for 5 days and delays AI until 72 hours after CIDR removal. This allows for a long phase of follicular development that may increase oocyte (egg) quality and AI success.

GnRH = Cystorelin®, Factrel®, Fertagyl®, OvaCyst®
PG = Lutalyse®, Prostamate®, In-Synch®, estroPLAN®, Estrumate®

Results with CO-Synch+ 5 day CIDR in Virginia: The results with this system are extremely promising. Before we go any further, it should be noted that this is still considered an experimental system. We are planning large scale field studies with this program to gather more data over a large range of environments and management conditions. Producers interested in this system should be aware that it is considered a promising experimental system and is not currently recommended by the Beef Reproduction Task Force.

The experiment led by Drs. Day and Kasimanickam investigated the need for two doses of prostaglandin F2a (PG). The study was conducted in 830 cows from 6 VA Dept. of Corrections herds. The key results were:

* Two doses of PG (one at CIDR removal and another one 8 to 12 hours later) were needed for highest pregnancy rates.

* CO-Synch+ 5 day CIDR with 2 doses of PG resulted in an average FTAI pregnancy rate of 69.5 %

* The range in FTAI pregnancy rates across locations was 63.8% to 75.2%.

Clean-up bulls need to be monitored carefully: The study also reinforced the need to monitor clean-up bulls during the breeding season. At all locations, bulls had passed a full pre-breeding exam. However, the percentage of cows open after AI that became pregnant to the clean-up bull varied from 35.1 % to 88.5 % (Table 1).

Table 1. Effect of location on percentage of cows not pregnant to AI that became pregnant to natural service

Adapted from Kasimanickam et al., 2007

The causes of decreased pregnancy rates at two locations appear to be related to libido, penile deviations, or failure to find cows in estrus. The bull's libido and ability to seek and breed cows cannot be determined in a standard breeding soundness exam. Bulls need to be observed carefully especially during the first 5 days after introduction to the herd. Producers need to observe bulls mounting and successfully breeding cows in order to insure success with natural mating.

Another key management strategy is to observe cows for estrus during the mid-point of the breeding season. If too many cows appear to be in heat, then producers need to identify the possible cause and correct the problem. Causes include bull failure, cow body condition, cow age, and heat stress.

Forage Focus: Grazing Livestock Affects Pasture Fertility - Rory Lewandowski, Extension Educator, Athens County

At the February Ohio Forage and Grasslands Council annual conference, Dr. Dave Barker, an Ohio State University forage specialist, presented some of the research he is doing regarding the effects of livestock grazing upon pasture fertility. Probably the main message that came across in his presentation was that animals move nutrients. Grazing animals move nutrients within a pasture paddock, between pasture paddocks and move nutrients off the farm as animal product. One of the main effects of grazing from a pasture fertility standpoint is to concentrate nutrients into patches through urine and manure deposition.

The main nutrient contained in urine is nitrogen. Urine accounts for about 70% of the nitrogen returned to a pasture by grazing livestock. According to Dr. Barker, one urine patch can have a nitrogen application rate equivalent to about 1000 pounds/acre. This is too much nitrogen to be effectively used by grass growing in the area, so there are high nitrogen losses. Leaching losses, where nitrogen moves down through the soil and out of the rooting zone, account for nearly 50% of the nitrogen in a urine patch according to a German study cited by Dr. Barker. Another 22% of the nitrogen is lost to the air by volatilization as ammonia.

The manure or dung patch also concentrates nutrients where it is deposited by the animal. Research indicates that the phosphorus in a manure patch can be equivalent to 220 pounds/acre. In areas where livestock "camp" or hang out, the soil potassium levels can be 4 to 10 times higher than the pasture average. While nitrogen application rates can be similar to that applied to an area through urination, losses are much lower because the nitrogen is bound up in an organic form that is more stable. Nitrogen leaching losses under a dung patch were found to be only about 4% of the total nitrogen applied. Losses of nitrogen through volatilization measured about 5%.

Nutrients are moved within a pasture paddock and between pasture paddocks by livestock and their patterns of urine and manure deposition. Water tanks, shelter/shade areas, salt/mineral feeders and areas where hay is fed are all places where manure and urine are deposited more heavily. There are strategies that can be used to increase the uniformity of urine and manure deposition throughout a pasture field.

One of the most effective strategies is to increase the stocking rate so that livestock cover more surface area within a paddock. Another way to achieve this effect is to provide the same number of animals with a smaller paddock size. Salt and mineral feeders should be located away from the water source and from any trees/shade so that manure distribution is increased across the paddock. If there are high and low nutrient areas, use a grazing rotation and paddock structure that will move nutrients from the high nutrient areas to low nutrient areas.

Finally, recognize that nutrients are moved off the farm as animal products are sold. Those nutrients can be replaced as purchased feeds are brought on to the farm, fed to livestock and recycled through the manure and urine. Nutrients may also be replaced through fertilizer application. With the cost of nitrogen fertilizer continuing to move upward, livestock owners should also be increasing the legume content of their pastures to take advantage of the nitrogen fixing ability of leguminous plants.

Pasture fertility and nutrient concentrations within a pasture are not uniform, but are dynamic and changing, reflecting the movement of livestock using the pasture. Good grazing management can help to increase the uniformity of nutrient deposition leading to an increase in pasture productivity.

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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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