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Previous issues of the BEEF Cattle letter

Issue # 511

November 8, 2006

Feeder Cattle Prices and Higher Feed Prices - Brian Roe, Associate Professor AED Economics, Ohio State University, November 2006

Prices for corn and soybean meal have rallied over the past two months to the point where 2007 corn prices are projected to be in the top 5% of prices observed in the past 15 years and 2007 soybean meal prices are projected to be in the top 30% of prices observed over that same time period. Today's four weight calves will eat upwards of 30 bushels of corn on winter backgrounding rations that would take them to 750 pounds and then another 60 bushels of corn on the feedlot until slaughter. It logically follows that, just as car prices decline in the face of higher gas prices, so feeder cattle prices will decline in the face of higher feed prices. Furthermore, when gas prices spike, vehicles requiring the most gas face the most downward price pressure. The same is true for cattle as the lightweight feeders - the cattle with the most eating in front of them - will face the greatest downward price pressure.

For example, in 1996, when corn prices averaged over $4 a bushel, all feeder cattle prices averaged in the $50's and 3-4 cwt cattle sold for only 10% more than 7-8 cwt cattle. Usually, the price premium for 3-4 cwt cattle is about 30% above 7-8 cwt feeders. Compared to 1995, in which corn prices averaged around $2.50, 3-4 cwt feeder prices dropped about $20 while 7-8 cwt feeder prices dropped only about $10.

How will feed price increases work this year? Well, the price of the November 2006 CME feeder cattle contract dropped from around $118 at the beginning of September to around $102 in recent days. For a 750-pound feeder steer this is a loss of $120 per head. During that same time the December corn futures price rallied $1 and December soybean meal futures price rallied $30. Before it goes to slaughter, a 750-pound steer will eat about 60 bushels of corn, which now means an extra $60 of costs, and about 120 of meal, which now costs about $2 more. So about half of the drop in 750-pound feeder cattle futures prices can be chalked up to extra feed costs.

Lighter weight feeders have two disadvantages compared to heavier weights. First they will eat more total feed (at least 50% more under most feeding regimens) during their lifetimes. So, that means another $30 or so needs to come off the per-head price. Second, the consumption will come later, when corn prices are projected to be even more expensive. This could mean another $10 or so, on a per head basis. On a per hundred weight basis, this will show up in even more drastic terms for light weight feeders because the extra feed costs associated with them is spread over fewer total pounds of animal.

The price of 300-350 pound feeder steers in Kentucky auctions has only dropped $10 between early September and late October. This type of downward price movement is typical during the fall, suggesting that, perhaps, local buyers have not yet fully taken increased feed costs into mind yet. My standard feeder cattle price model has some dramatic price decreases projected over the next 6 months (see graphs below). This is based upon how cash prices for various weight classes of feeder cattle have reacted to changes in feed prices and futures prices over the past decade. For example, it projects 300-400 pound feeder steer prices dropping by about $40 between now and April, which essentially reflects higher feed prices, while 700-800 pound feeder steer prices are projected to drop about $20. The general level of these projections may be a bit low, as the model works off average prices from public auction prices, which tend to be lower than private sales and graded sales, and it also works off data gathered from the Great Plains and assumes a fixed transportation costs, while local prices may reflect stronger local bidding conditions than have existed in the past. So please keep that in mind when interpreting the numbers. Of course, any relief in feed prices will also be quickly reflected in price projections.

June '07 Cattle Prices - Brian Roe, Associate Professor AED Economics, Ohio State University

So you just placed some 600-pound feeder cattle onto your feedlot and trying to decide whether to lock in recent June futures market prices, which have been trading around $86. The basis has been favorable in recent years, with cash prices averaging about $1 higher than futures market prices. If the average occurred this year, that paints a potential cash price of around $87 for next June.

The last time cash cattle prices in June averaged more than $87 was also the ONLY time that cash cattle prices in June have ever averaged more than $87 - during 2004. Recall, that was during the height of the Atkins craze, and cash prices averaged around $89. During 2005 and 2006 average cash prices were around $83 and $81, respectively.

So, why is the market offering prices that are $4 to $6 stronger than the last two years? Is it because there will be fewer cattle coming to market next June than during the past 2 years? Well, the USDA estimates that U.S. will produce about 1.5% more beef during the 2^nd quarter of 2007 than it did during the same period in 2006. Feed prices have dramatically risen since USDA's last projections, and these higher feed prices should reduce beef supplies next June in a couple of ways.

First, it will likely decrease the average weight of cattle coming off feedlots next spring, which will reduce overall beef supplies. Second, it will likely mean that cattle will spend fewer total days on the feedlot, which could affect the timing of cattle sales. This is particularly important as the number of lightweight feeder cattle (less than 600 pounds) placed on feed during July, August and September was up 29% compared to the previous year. Higher feed prices could mean that this clump of light cattle will come to market largely before June, meaning all of USDA's projected increase in supply could be bunched during the earlier months of the quarter.

So, for the sake of argument, let's suppose June 2007 supplies will be similar to last year rather than 1.5% higher. Last year's price was still $4 lower than what the futures market is projecting today. Can demand alone be enough of a driver to support a $4 increase in June prices? Domestic demand for beef has softened by about 5% so far this year, though demand for cattle has strengthened by about 3%. This means that processors are feeling pinched as they must bid high to fill the slaughter house but face weaker demand from retail customers. Indeed, in response to this type of pinch, Tyson, Swift and others recently reduced cattle slaughter hours in order to control their bidding in cash cattle markets. It is hard to see cattle demand continuing to appreciate in the face of softening retail demand and being the source of the $4 premium over 2006.

This puts the onus on foreign demand. The resumption of trade with Japan has progressed slowly, with August exports well short of the volume achieved after the initial re-opening last December and January. South Korean trade has stalled as U.S. exporters are not entirely clear what degree of imperfection in the product might spark a re-closure of the Korean market to U.S. beef. USDA has second projected quarter exports in 2007 to be up only 16% compared to 2006. This is equivalent to maintaining our exports with all our existing trading partners plus having current trade levels with Japan triple and having trade with South Korea increase to the level of trade we currently have with Japan.

In short, I think slow, steady demand improvements from Japan and South Korea may deliver June prices around $84 or $85, but we would need more rapid market share recovery in these countries to get us to the prices currently trading on the CME. Interestingly, while the June contract appears optimistic about demand, the August contract, which has been trading around $85, appears pessimistic about demand when one goes through the same exercise as I have conducted for the June contract above.

Livestock Revenue Protection contracts, available from many crop insurance agents, do offer some downside price protection. A price floor of $80.65 can be purchased for $2.90 per hundredweight of cattle to be marketed, providing an effective price floor just under $78. This is not a great deal because the insurance premiums for these contracts are driven by the options market for CME cattle contracts, and the price of options are quite high because there is so much uncertainty concerning next June's prices. However, for the risk averse, there may be other combinations of CME futures and options (e.g., sell a futures contract and buying a higher-priced call option) that could lock in a range of prices without such a high premium.

Fall Nutritional Considerations - Rory Lewandowski, Extension Educator, Athens County

The fall season provides an opportunity for the spring calving cow/calf producer to economically restore body condition to thin cows. During this period most spring calving cows will be the mid-gestation stage of reproduction. As always the producer needs to be aware of the nutritional requirements of the cow at various production stages and have an understanding of forage quality in order to match up nutritional needs with forage options.

Nutrient requirements for cows in mid-gestation are the lowest of any production stage. This means that low quality feedstuffs can be utilized to meet nutrient requirements of cows that do not need to improve body condition and better quality feedstuffs can economically put gain on cows that need to improve body condition before late gestation. Using crude protein (CP) and total digestible nutrients (TDN) as indicators, the mid-gestation cow requires a diet containing 7.0 % CP and 48.8%TDN according to Beef NRC (National Research Council) recommendations. Remember that pregnant heifers still have a growth requirement that must be met in addition to body maintenance requirements, so their ration needs to provide higher levels of CP and TDN; somewhere in the 54 to 55 % range for TDN and around 8 to 8.5% CP at this mid-gestation stage.

Another way to look at mid-gestation nutritional requirements is to consider the actual pounds of crude protein or TDN that need to be ingested daily. According to NRC tables, an 1100 pound cow needs about 9.5 pounds of TDN daily and 1.4 pounds of crude protein during mid-gestation. To evaluate whether the cow is meeting these requirements requires that two factors must be considered, intake and feedstuff quality. These two factors are interrelated. Low quality feedstuffs limit intake and as feed quality increases, so will intake. For example, a low quality forage such as post-head stage fescue hay, or corn stalks with little grain, will limit cow intake to about 1.5% to 1.7% of body weight on a dry matter basis according to a publication from the University of Nebraska entitled "Feeding the Beef Cow Herd" publication number G95-1262-A. For an 1100-pound cow, this figures out to 16.5 to 18.7 pounds of this type of forage consumed on a dry matter basis each day (1100 x .015 or x .017). If our forage has a CP content of 7% and a TDN value of 49% this means that our cow is ingesting about 1.2 to 1.3 pounds of CP (16.5 or 18.7 x .07) and 8.1 to 9.2 pounds of TDN (16.5 or 18.7 x .49). At this rate, minimum body requirements are not being met and cows will lose some weight. In order for the NRC recommendations of 7.0% CP and 48.8% TDN to meet minimum body maintenance requirements, an 1100 pound cow has to be able to ingest 19.5 to 20 pounds dry matter of this quality forage each day. So, one management task that the cow/calf producer must do is to monitor the body condition of cattle when poor quality forage is fed to determine if intake is great enough to meet nutrient requirements.

As forage quality increases, passage through the rumen is faster and dry matter intake increases. Quoting again from the Nebraska publication mentioned above, when average quality forages are fed, dry matter intake for the dry cow is expected to be around 2.0 % of body weight, and when high quality forages are fed, dry cow intake can be figured in the 2.5% of body weight range. During mid gestation, if average quality forage is fed, maintenance requirements will be exceeded and cows will gain body condition.

The task for the cow/calf producer during the mid-gestation stage of production is to recognize differences in body condition scores between cows and to understand that first calf heifers have a higher nutritional requirement than older cows due to a growth requirement. Cows that need to gain body condition, along with first calf heifers should be grouped and provided with a forage that allows for growth and/or gain in body condition. Cows that are entering in good body condition can be fed on poorer quality forage that allows cows to just maintain body condition.

Forage Focus: Hay Is in the Barn . . . - Tom Keene, UK Hay Marketing Specialist

Now that November is here our thoughts turn to the Holidays. Ol' man winter is not far away and feeding hay probably isn't too far away either. So now is a good time to take inventory of what your stored feed needs are going to be and then determine "do I have enough hay to carry me through until new grass in late March or early April"?

Take inventory of your bale numbers, then weigh a few bales, do the math and see exactly how many tons of hay you have in inventory. Next, have a nutrient analysis test done on your hay. Your county agent can help you with this. After the analyses are returned, work with your agent to balance a ration that will give the desired results (maintenance, pounds of gain, pounds of milk, etc.) you want for your livestock over the winter.

Once the calculations are made you should know if you are going to have just enough hay, not enough (and might have to buy some hay) or excess that could be marketed commercially. Whatever the outcome you'll have good numbers and can plan accordingly.

If you are going to have excess hay, depending on how your hay tested, you may be able to sell your higher quality hay for a good price and feed your lower quality hay, thus creating more farm income from the '06 hay crop.

An update on the Ohio Heifer Development Program - Bill Doig, MS, Beef Program Specialist, OSUE/OCA

The Ohio heifer development program is in the final planning stages and will soon be available to producers. Currently, we are in the process of selecting two individuals that will become cooperators for heifer development. What does it take to become a cooperator? We are looking for 2 locations with the ability to develop approximately 50-200 head. Preferably, the locations will be in the Tobacco region of Southern Ohio due to the nature of the grant for the program. The development can be done on pasture, confinement, or a combination of the two. The chosen cooperators will be responsible for working with the Ohio heifer development committee and managing the heifer development process. If you have experience in raising heifers, feeding cattle in an intensely managed situation, or are looking to try new opportunities, don't hesitate to contact us. Essentially, this is a great business opportunity. If you are interested in being a cooperator and haven't filled an application out yet, there is still time. The applications can be found on www.ohiocattle.org. Those applications are due November 15th, 2006.

If you are interested in having heifers developed in the Ohio heifer development program, detailed information will be made available to the general public on or after November 20th, 2006. Please refer to www.ohiocattle.org for updates on the program. Ideally, once the cooperators are chosen and the locations become prepared for the program, heifers could be placed at the development centers by January of 2007. If you are concerned about properly managing your heifers until that time, please contact me for additional information. Interest in the program has been extremely high. Whether you are planning on retaining 1-100 heifers, this program will work for you. Any additional questions, comments, or concerns about the program should be directed to Bill Doig, 614.873.6736, or by emailing at bdoig@ohiobeef.org.

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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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