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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 # 487

May 17, 2006

Beef Complex Needs A Busy Summer! - Nevil Speer, PhD, MBA, Western Kentucky University (reprinted with permission from CattleNetwork.com, 5/10/06)

Scarcity is defined as the "want of provisions for the support of life." From an economic perspective, price and scarcity are positively related: price rises as relative scarcity of an item increases. That relationship inherently encourages rationing. The opposite is also true: declining scarcity (thus becoming relatively more abundant) causes a drop in prices. Meanwhile, items possessing relatively inelastic demand functions are characterized by a comparatively constant quantity of consumption and generally unresponsive to price shifts. Industries producing such items consequently operate in an environment where price is predominately dictated by relative scarcity and thus said to be "supply driven" - e.g. the beef complex.

Recognizing many readers are familiar with those basic tenets of market forces, sometimes review proves beneficial at critical junctures. Reminders of underlying fundamentals aids in dissecting major shifts of market momentum and/or direction. The beef complex is seemingly at that point: the market is being driven into negative territory and possesses further downside potential. Mainstream media doesn't normally dedicate much space to commodity industries (especially livestock) but meat supply abundance has become so extensive that it recently merited front-section coverage in the Wall Street Journal (May 4):

It turns out the latest twists in the protein business illustrate a couple of significant lessons about today's economy. One is that for all the sophisticated computerized models of production and inventories, business still suffers from booms and busts. When the price of cattle or hogs goes up, farmers and agribusiness giants raise more of them, tend to overdo it and then push the price so low that they yelp.

That coverage was largely in response to Tyson's second quarter results (ending April 1); weak company performance was predominately blamed on industry-wide protein oversupply.

Abundance of supply is indeed weighing on the market. Cattle feeders managed to score a victory midway through April and sold cattle at $84. However, since that point they've largely been on the backside of weekly negotiations. Two weeks later found month-ending trade $4-5 softer and settling largely at $79-80. That slide continued into May. Packers managed to squeeze another $1-2 out of the market; sales opened the month mostly $78-78.50. Simultaneously, surging boxed beef prices boosted packer margins to levels not seen for several years. Processors will work hard to maintain that momentum and keep the fed market in check. Case in point, this week's (May 8) business, as of Tuesday, has yet to see any packer bids.

April's decline was partially catalyzed by bearish pre-cattle-on-feed-report expectations. Subsequent late-April / early-May declines have largely resulted from report substantiation: report highlights include six straight months of increased placements coupled with only steady March marketings (see table below). All combined, April 1 feedyard inventory was pegged at 9% ahead of last year's mark. In accordance with last month, CME contracts turned lower following the report indicating bearish expectations weren't fully priced into the futures market. June and August Live Cattle have since regained some ground. As a side note, the last time the beef complex saw 6 straight months of year-over-year increases in placements was 2003; clearly, those replacements were being purchased into a very different profitability scenario.

At the outset, 2006 began with on a very solid note. Last year's marks were outdone in January and February. However, several key factors have since reversed the overall outlook and since that point the turnaround has been sharp. March fed cattle averaged $5 behind last year's pace. The gap widened in April being $10 back of year-ago levels. The cattle supply outlook is such that it will continue to pressure the market in a negative manner as summer progresses. The question becomes one of the depth and duration of that influence. As explained in previous MMP columns, currentness, or lack thereof, is a self-perpetuating phenomenon.

During the past several months there's been a large amount of media coverage relating packer margins and ensuing slaughter levels. Resultant of that coverage coupled with the importance of this summer's throughput I did some regression analysis to provide perspective and context for potential market moves as summer approaches.

The illustration below depicts fed steer / heifer slaughter levels relative to packer gross margins. Several things are important to keep in mind relative to this discussion. First, as review, gross margin equals revenue less cost of goods sold - it does not account for operating and/or administrative costs and should not be considered to be indicative of profitability.

Second, the Livestock Marketing Information Center (LMIC) calculates the weekly values based on spot markets; margins are not adjusted from either the buy or sell perspective with regards to contractual arrangements. Lastly, LMIC reports the value for a 1000-lb animal; all figures in the analysis below are adjusted to 1200-lb basis (reported margin multiplied by 1.2).

The illustration relates quantity and price functions. However, what's outlined below does not depict the aggregate supply function. Rather, it's a relatively simplistic means by which to gauge this summer's harvest as indicated by packer gross margins. Admittedly, many market analysts possess a variety of sophisticated models to project weekly harvest. However, the purpose of this discussion is to provide a general, fundamental framework of understanding for my readers. Of primary importance here: the analysis demonstrates underlying trends and characterizes the importance of harvest rate given the current inventory situation.

Four separate trend-lines are included within the graph. Those lines represent '04-'05 spring (January through April) and summer (May through August), respectively, along with 2006's spring trend-line. The fourth is a projected regression line for the coming summer based upon the previous three. Several items are significant from an analytical standpoint. First, as expected, there exists a positive relationship between gross margin and subsequent throughput. Moreover, the positive, upward slope of the trend-lines between '04 and '05 spring and summer are identical: each additional dollar of gross margin earned equates to response of additional throughput of 230 head per week (.23 multiplied by 1000). Secondly, and also in line with expectations, at any given margin level summer's weekly harvest is more aggressive.

Now let's look at 2006. Note the spring's r-squared value is nearly zero: the linear relationship between gross margin and weekly harvest is practically non-existent. Capacity decisions are defined by complexity and derived by a number of interacting variables. Clearly, those have all been in play this spring. The point being one must be careful in overstating the case with respect to analyses of packer margins as predictors of throughput.

That being said, though, the spring function equals .23X + 466; parallel to the spring '04-'05 regression but at a slightly higher level. Derivation of that equation and adjusting upwards for summer, based on '04-'05, establishes a projected summer equation of .23X + 528. The previous two-year average gross margin during the summer is approximately $170.

Assuming that level for 2006 against the function just outlined, weekly harvest is project to be approximately 565,000 head per week for 2006 - 11,000 head of last summer's pace.

Here's the dilemma: assume May 1 on-feed inventory will be pegged at approximately 11.49 mil head; 8% larger than 2005 or an additional 850,000 head. Working through 2006's added inventory over the period of six months requires weekly harvest rates to surpass last year by 35,000 head. Stated another way, summer fed steer / heifer harvest needs to average closer to 590,000 head per week - not 565,000 - to maintain currentness. That pace is very unlikely and represents a shortfall of nearly 25,000 head / week. Carryover could quickly become burdensome.

It's important to note here that gross margin is a function of both fed steer and wholesale beef prices. Margin improvement comes from either higher beef prices or lower fed prices. The former is somewhat unlikely given indications of resistance amidst waning demand and high fuel prices; that's a double whammy because it also likely means less throughput potential. The alternative is to gain margin by softening fed prices. The conundrum there is that softer prices make feedyards less inclined sellers.

What's the take-home message here? Regardless of the model, carryover looks to be burdensome as we approach fall. Cattle feeders need to aggressive marketers. That's a difficult task, though, in the face of a premium board and negative closeouts. Bringing the discussion full circle - abundant supply represents decreased scarcity meaning softer prices. The beef complex and its competitors are supply-laden. Look for some tough slugging in the days ahead.

Forage Focus: Have you seen this weed - Cressleaf Groundsel? - Stan Smith, PA, OSU Extension, Fairfield County

In recent years, cressleaf groundsel - Senecio glabellas - has become an increasing problem in no-till row crop fields and aging hay fields with less than acceptable stands. Of significance to livestock producers is the fact that cressleaf groundsel is currently included in Ohio's Noxious Weed List due to its poisonous characteristics.

OSU Extension beef and sheep veterinarian Dr. Bill Shulaw tells us that under typical grazing conditions in Ohio, it is unlikely that animals will consume significant quantities of cressleaf groundsel because of the availability of higher quality, more palatable forages. However, Shulaw says poisoning could result under unusual conditions, such as drought, where good quality forage is not available. Hay containing significant amounts of the plant may pose an even greater risk according to Shulaw.

Poisoning usually occurs as a result of consumption of the plants over several days to several months. Because the effect on the liver is cumulative, signs of poisoning can occur weeks to months after consumption of the plant ceases. The signs are directly attributable to liver degeneration and failure. Affected animals usually show depression and loss of appetite initially, and progress to neurological signs with head pressing, aimless walking, incoordination, and rectal straining.

In the OSU publication Cressleaf Groundsel, the plant is described as a member of the Aster/Composite family. It goes by many other names, including butterweed, yellowtop, golden ragwort, and yellow ragwort. It has a winter annual life cycle, meaning that it emerges in the fall and flowers in the spring. Cressleaf groundsel reproduces only from seeds. Each plant produces many (probably 100's of thousands) seeds that are readily moved by wind currents. It grows well in many different environments including saturated soils.

Nearly all species of Senecio are considered potentially toxic plants because they contain compounds called pyrrolizidine alkaloids (PAs). These are metabolized in the liver to other compounds that are toxic, primarily to the liver cells. The PAs are found in the plant throughout the growing season but appear to be at their highest levels when the plant is in the bud to flower stage. The flowering portions of the plant and the youngest tissues generally contain the highest concentrations. PAs are not destroyed by the hay-making and curing process. Ensiling of forages may reduce the concentration of PAs, but will not entirely eliminate them. Sheep are considered more resistant to the effects of PAs than cattle and horses, and have been used in some areas to control the plant. However, sheep are susceptible to poisoning if they consume sufficient amounts.

For more information on identifying cressleaf groundsel, see OSU Bulletin 866 at this link: http://ohioline.osu.edu/b866/b866_12.html

For more information on management and control of the plant, go to this PDF version of the publication Cressleaf Groundsel: http://agcrops.osu.edu/weeds/documents/Cressleaf_groundsel_article_-_p.pdf

Hay in a Day, or "Haylage" in a Day - Paul Craig, Penn State Extension Educator

For the past few years Tom Kilcer, a fellow County Agent from New York, has been investigating management of swath width of forage crops to maximize the harvest of the highest quality forages. Tom points out that profitability in the dairy industry hinges on the quantity and the quality of forages fed.

Forage investigators note that the quality of the forage that reaches the cow's mouth is dependant on three factors: when you start harvesting, how long it takes for you to complete harvest and how much quality is lost during harvest. Tom's work on swath management shows how much quality loss during harvest is affected by HOW you harvest hay crop silage.

Tom began his work by comparing the net energy of lactation (Nel) of a forage crop in the field ((0.65 to 0.75 Nel) to fermented samples with Nel of 0.47 to 0.57 Nel. The dairyman's question should be: Where did this energy go?

The answer is that the energy is lost during the drying process. The longer it takes forage to dry to the ideal moisture content for chopping, the longer the forage is respiring in the field. During respiration the cut plant continues to use plant sugars, contained in the plant cells. Respiration of these cells continues until the plant is fermented as a haylage crop or dried sufficiently as a hay crop. In addition to energy losses, dry matter losses can be significant. How producers manage their hay swath can greatly affect the time of haylage harvest. Producers in Tom's area of New York and in parts of south-central Pennsylvania are beginning to use wide swath management to more rapidly shorten the time from cutting to harvest to minimize this period.

The drying rate of hay crops is influenced the most by sunlight hitting the forages which increases the swath temperature and reduces humidity. A full width swath increases the drying surface of the swath by 2.8 times. In Tom's trials he has shown that moisture reductions from 85% to 60% can be reached in as little as 5 to 7 hours, hence the term Haylage in a Day. The bottom line is that the forage produced with minimal respiration results in higher nutrient content of the forage. Tom's work found forages with 300 pounds more milk potential for every ton of dry matter produced.

Think about laundry drying. A dense pile of laundry does not dry, neither does haylage. The rate of water loss is dependant on the amount of the forage that intercepts sunlight. The greater the amount of forage surface exposure exposed to sunlight will have a greater affect on drying rate than either conditioning, mixing or turning the mown swath.

Clearly the management of a forage swath can have a huge impact on the rate of drying. Open your hay harvesting equipment to get maximum sunlight interception to get Haylage in a Day.

A grazing management workshop is scheduled for Thursday evening June 15, 6:00 p.m. to 9:00 p.m. and Saturday June 17, 8:30 a.m. till 3:00 p.m. at the Summitcrest Farms in Columbiana County. This grazing school is designed for the producer with valuable information provided in a fun atmosphere. The grazing school will help producer with potential EQIP applications.

The speakers will be Pete Conkle, Columbiana SWCD; Jeff McCutcheon, OSU Extension and Bob Hendershot, USDA-NRCS. Registration is limited to the first 40 people. Registration cost is $30 and includes the famous Ohio Forage and Grassland Council Pasture for Profit Notebook, refreshments and lunch on Saturday. Contact Columbiana SWCD (ph: 1.877.345.1198) to reserve a spot.

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

Fairfield County Agriculture and Natural Resources