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Previous issues of the BEEF Cattle letter

Issue # 554

September 12, 2007

Pounds Trump Quality Every Time - Nevil C. Speer, PhD, MBA, Western Kentucky University (reprinted with permission on 9/7/07 from CattleNetwork.com)

No chinks in the armor! Packers simply can't catch a break given the leverage which cattle feeders currently hold in weekly market negotiations. August proved to be another lucrative month for sellers. Fed trade chopped along within a $90-to-$92 trading range during late-July and the first half of August. However, late-month action forced packers to give in to higher prices. Sales popped during the fourth week of the month as negotiations tacked on $3 in the south to finish at $93-$93.50 and $92-3 in the north. The spot market then jumped $1-2 ahead of Labor Day with sales occurring mostly $94-5 in both regions. Packers were able to fend off $97-8 asking prices as September opened for business; they held the market steady at $94-5 -uncertainty in the financial market coupled with weakness in the wholesale beef market squelched further advances for the time being.

The fed market's decline from its spring high was $11-12 over the course of just 7 weeks. During that May-to-June transition Choice cutout values drifted in excess of $20 lower. Conversely, the fed market's achievement of $95 marks a $10 advance since seasonal lows were established in late-June (from $83-4 in the north and $85-6 in the south with USDA's overall average being $85.75). However, much to packer dismay the recent climb back to the mid-$90's has been accompanied by meager gains in the wholesale market (the Choice cutout has added only $9-10) while drop credit has declined almost forty cents.

That's upside down from a packer operating margin perspective. More importantly, that's occurred during a period which typically provides processors with positive cash flow. Cutout values need to gain some traction. Conventional marketplace wisdom goes as follows: packers won't bid up prices until wholesale prices move higher. But lack of bargaining leverage negates that argument. Alternatively, some argue processors will go dark to offset negative operating margins. That's risky due to the incessant need to cover fixed costs and maintain customer relationships (and appears unlikely given that August/September throughput to date is averaging 665,000 head - more than 5,000 head better than last year).

Packers are caught in a tough spot. The market's primary driver: limited fed supply and excess capacity. Much of the fed market's recent strength was clearly revealed in USDA's August cattle-on-feed report: total inventory was 5% below last year's level. More notably, for the second consecutive month placement activity has slowed significantly. July placements were 17% behind last year's pace and 12% below the 5-year average. July marketings (1.99 mil head) were 3% larger compared to 2006. Those fundamentals have also provided support for the backend of the board at the CME. The December contract broke through $100 in late-August and retested $101 3 out of 4 trading sessions on either side of Labor Day.

That's all good news on the revenue side for cattle feeders. But like packers they have their own concerns to deal with - namely managing business from the cost side. The feeder market remains solid, supported by deferred live cattle futures even amidst advancing ration costs. CME's feeder cattle contract established a new all-time high of $119.80 on September 3. Excess feeding capacity has certainly stimulated business rivalry within the feeding sector and established a new level of prosperity for those with calves to sell. And favorable fall/winter grazing prospects in wheat pasture country further increase competition for calves. (Conversely, some reports indicate farmers may opt to delay planting and forgo grazing to maximize grain yields. Much of that will sort out in coming weeks.) Regardless, higher input costs have significantly added to concerns about availability of operating capital for feedyard managers.

August brought about a potentially important development for the beef complex. Meatingplace.com (Janey Gabbett, August 21) reported Wal-Mart will begin testing new fresh beef and pork products in 76 retail locations in 4 southeastern states (AL, FL, GA and MS). More significantly, the project centers around Wal-Mart's private label, "Genuine Steak House Brand" - a USDA Choice offering. Favorable consumer response in the test regions will lead to program expansion. If that occurs, the inherent question to follow revolves around demand for Choice product: does this potentially equate to a new support level for the Choice-Select spread?

That question will be answered if and when Wal-Mart launches the program on a national basis. However, to summon some conjecture about the possibilities it's helpful to provide some background. The first illustration below represents the relative proportion of Choice cattle in the slaughter mix during the past ten years (including 2007 - through the month of July). Note that the trend has remained largely unchanged during that time frame. It's also notable that the percentage of Yield Grade 4's and 5's has increased from approximately 1% in 1997 to 8-10% over the past several years (including 2007).

That's somewhat counterintuitive given the resounding emphasis quality grade has received in recent years within academic and media circles. Why hasn't more improvement been made? In a nutshell: no economic incentive. The industry has provided producers with neither enduring nor compelling price signals to generate more Choice cattle. The second illustration depicts the weekly Choice-Select spread since 1997. There have been several key peaks along the way which capture the interest of observers but the trend is relatively flat. (As a side note, the spot spread fell below $5 on August 20). Despite lots of anecdotal observations to the contrary, the market reveals that demand for Choice product has NOT increased in the past decade.

Bottom-line: only one clear economic signal is being sent upstream to producers - MORE WEIGHT! In fact, the spread, when viewed in proportion to gains in the fed market, has declined. As such, the production sector has responded in a rational manner. In the face of higher prices the industry has emphasized incremental cost of gain and produced more pounds because that's the enduring price signal throughout the value chain. In the end the beef complex remains largely a commodity business. The market is volume driven. And despite lots of discussion regarding improving percentage of Choice cattle through genetics, health management, and improving precision of implant strategies weight remains the primary driver of revenue.

The production sector has responded very efficiently to that signal. For example, steer carcass weights were 26 lb. ahead of 2006 at the beginning of the year; that trend quickly plummeted to a 17 lb. deficit by mid-March because of winter weather. Since that time, though, steer weights have climbed higher and are now at all-time highs. That reversal is a testament to the industry's ability to generate throughput. Moreover, that price signal has complemented the cattle feeding sector which is burdened with excess capacity - signals for more weight means longer feeding periods helping to raise capacity utilization.

Some are advocating that the new program will change beef pricing fundamentals. For that to develop two primary events must occur: 1. Wal-Mart customers prove willing to purchase Choice product and 2. those purchases don't occur at the exclusion of other retail outlets. In other words, Wal-Mart's new program must establish new expectations and tastes among its retail consumer base thereby shifting demand. Those advocating such a shift would argue that Wal-Mart's emphasis will increase pull-through of Choice product amidst relatively flat supply - that scenario would widen the spread on a permanent basis.

However, it's also important to recognize that demand is influenced by the price of other goods (e.g. Select beef prices would decline making it more attractive). Moreover, Wal-Mart's program may simply result in reallocation of Choice product availability among various retail outlets. In either case, no major fundamental pricing shift would occur. Additionally, the industry has proven itself very efficient in responding to price signals: prolonged elevation of the spread will likely equate to increased production of Choice product thereby negating upside potential for the spread.

Will Wal-Mart's new marketing change fundamentals within the industry? That remains to be seen. Meanwhile, pertinent to this discussion a fitting and succinct summary of current price signals within the industry was offered several weeks ago by Dr. Derrell Peel, Oklahoma State University, at NIAA's ID/INFO EXPO: "Pounds trump quality every time."

Forage Focus: Using Drought-stressed Forages - Rory Lewandowski, Extension Educator, Ag/NR Athens County

During periods of drought such as we have experienced this growing season, many of our forages may accumulate nitrates in high concentrations. Feeding forages high in nitrates to livestock can cause health problems, and, in severe cases, result in animal death.

Most forage plants take up nitrogen from the soil in the nitrate form and under normal growing conditions quickly convert it in a progression to nitrite, ammonia and finally plant proteins and other nitrogenous compounds. However, when normal plant growth is slowed down or stopped, as we see in drought conditions, the plant will continue to uptake nitrate but the conversion to other forms does not take place and so nitrates accumulate in the plant.

Plants do not accumulate nitrates at equal levels. There are certain plants that are more likely to accumulate nitrates. Some of these plants include: sorghum, corn, oats, sudangrass, millet, turnips, and even orchardgrass and fescue. Among these species, we generally associate the annual forages with accumulating higher nitrate levels than the perennial grasses. Certain weed species such as pigweed and lambsquarter will also accumulate nitrates in high levels. The degree to which even these listed plants accumulate nitrates is influenced by nitrogen fertilization prior to a drought. In other words, pastures or fields fertilized with nitrogen are more likely to see nitrate accumulations at high levels compared to non-fertilized situations.

Be aware that the first week or two following significant rains that break a drought is a time when plants can accumulate high levels of nitrate. This is because wet soils have an increase in microbe activity that leads to a flush of soil nitrate being available. Plants recovering from a drought take up large nitrate amounts, in excess of what they are able to process into nitrites, amino acids and proteins. It can take one to two weeks before nitrates are fully processed and a balance is reached in the plant. Generally nitrates will accumulate in the highest concentrations in the stalks and stems of plants and are lowest in new leaf growth.

It is actually not the nitrate in forages that causes the potential poisoning in livestock but rather the conversion of the nitrate to nitrite. The nitrite ion oxidizes ferrous iron in blood hemoglobin to the ferric state, forming methemoglobin, which is unable to act as an oxygen carrier. If enough of the hemoglobin is changed to methemoglobin then tissues begin to die from lack of oxygen. At sub-lethal levels the animal experiences abdominal pain, diarrhea, muscle weakness and in coordination. As severity and toxicity increases symptoms will include bluish discoloration to mucous membranes and unpigmented areas, torpor, coma and finally, death of the animal.

There are some animal factors that determine to what extent nitrate concentrations in forages can affect animal health. It has been found that animals in good body condition on diets with good energy levels can tolerate up to 50% of their hemoglobin being converted to methemoglobin without serious effects, while this level may be lethal to animals in poor condition and/or on low energy diets. Fasting can also increase the potential for nitrate poisoning. Animals held off feed before having access to forages that have accumulated nitrates are more likely to have symptoms of nitrate poisoning compared to animals that have been maintained with adequate dry matter intake. Research has also demonstrated that animals have the ability to adapt to nitrate levels. Animals that have been consumed diets with gradually increasing nitrate levels can tolerate a higher end point of nitrates in the diet as compared to animals exposed to a high level suddenly.

What are the best ways to handle forages that may have accumulated high levels of nitrates? First assess the risk. Is the forage one that is a known nitrate accumulator? Was nitrogen fertilizer applied? If the answer to these questions is yes, then it may be a good idea to get the forage tested for nitrates before feeding to know what kind of potential toxicity exists. Results may be reported as nitrate-nitrogen or as nitrate. At nitrate-nitrogen levels up to 1000 ppm and nitrate levels of 4400 ppm the forage is safe to feed at up to 100% of the ration. Above these levels, the forages may still be used but at a percentage of the total ration. Generally when nitrate-nitrogen reaches 4000 ppm or nitrate level is above 17000 ppm the forage should not be fed at any percentage in the ration. Other factors that determine at what level and to what extent a forage with nitrates can be fed is whether or not the animal is pregnant, what condition the animal is in and the energy level of the ration.

Forages that have accumulated nitrates but that have been ensiled can be safer to feed than that same forage cut and made as dry hay. Once forage has been cut for hay and dried, the nitrate levels will not change. Forage that goes through the ensiling process will convert some of the nitrates into a gas and end up with a lower nitrate concentration after the fermentation process is complete, generally at least 21 days. Feeding green chop or grazing forages high in nitrates is risky. Again, if a nitrate problem is suspected, test the forage before feeding.

For more information about nitrates in forages, assessing risk or interpreting nitrate test results, review any of these internet sites:

http://cherokee.agecon.clemson.edu/mmm373.htm

http://virtual.clemson.edu/groups/psapublishing/DISASTER/drought/Drout12.htm

http://fieldcrop.msu.edu/documents/Nitrate%20accumulation%20in%20corn%20forages.pdf

To nominate replacement females to the program or for more information, go to www.ohiocattle.org to find a consignment form or call the OCA office at 614-873-6736. All forms should be returned to Bill Doig, OSUE/OCA Beef Program Specialist, 10600 US Highway 42, Marysville, Ohio, 43040.

Weekly Roberts Agricultural Commodity Market Report - Mike Roberts, Commodity Marketing Agent, Virginia Tech

LIVE CATTLE futures on the Chicago Mercantile Exchange (CME) were up on Monday except for the nearby October contract. The OCT'07LC contract settled at $95.700/cwt, off $0.400/cwt and $2.05/cwt lower than two weeks amid profit taking. DEC'07LC futures traded higher $0.300/cwt finishing at $99.750/cwt and $1.00/cwt lower than two weeks ago. Funds rolling positions and short covering were supportive of later months. Floor sources said that index funds rolled around 8,000 long positions from October into the December with the majority being moved near the close. Support was seen coming from expectations of tighter fat cattle supplies in the near-term but packers slowing slaughter rates provided downward pressure. Tyson Foods did not operate three of its eight U.S. beef plants on Monday due to poor margins. According to HedgersEdge.com, the average beef packer cutout margin for Monday was a negative $1.31/head, $10.09/head better than Friday and $8.79/head better than last week. Lower choice boxed beef last week and steady cash prices sparked the lower kill rates. USDA on Monday morning put choice boxed beef cutout up $0.59/cwt at $148.25/cwt. Fat cattle traded at $95/cwt in the Plains last Friday while USDA's 5-area price registered at $94.48/cwt - $94.58/cwt the same day. Cash sellers are still looking at decent prices. It might be okay to hold off pricing near-term corn inputs until after USDA's WASDE report is issued on Wednesday.

FEEDER CATTLE contracts at the CME closed up on Monday. The AUG'08FC contract was the only one that finished off. SEPT'07FC futures finished at $118.875/cwt, up $0.075/cwt. The October'07FC contract finished at $118.450/cwt, up $0.125/cwt. Gains on the day held on lower CBOT corn futures and good cash markets. Cash feeders remained strong. November/October spreading limited gains in the October as Index funds continued to roll long October positions into November. About 500 spreads were done very late in the day according to floor sources. The latest CME Feeder Cattle Index for September 6 was placed at $118.64/cwt, up $0.42/cwt. This is the highest it's been since almost one year ago. It is now a very good idea to aggressively sell cash feeders getting them off pastures. Hold off pricing corn supplies at least until after Wednesday.

CORN on the Chicago Board of Trade (CBOT) ended down on Monday. The SEPT'07 contract finished at $3.296/bu, off 1.4¢/bu from Friday. The DEC'07 contract finished lower at $3.460/bu, also off 1.4¢/bu. Harvest pressure continues to apply amid expectations that USDA will raise its U.S. corn crop forecast. USDA has already forecast a record 13.054 billion bu crop. Floor sources said the market was trading expectations that USDA would show the harvest at 4%-7% complete. USDA reported late on Monday that the U.S. corn crop was 8% complete at this time. Corn inspected for export was placed by USDA above estimates for 34-39 million bu at 43.958 million bu. Deliveries on the September corn contract were heavy at 1,610 lots. Funds sold 1,000-2,000 contracts. The CFTC Commitment of Traders report as of September 4 showed large speculators cutting net bull positions in CBOT corn by 18,000 contracts to 99,723 lots. Cash sellers having priced up to 50%-60% of this year's production are okay. It might not be a bad idea to price a little more before Wednesday, ahead of USDA's World Agriculture Supply Demand Estimate (WASDE) report due out by 8:30 a.m. that day. This year's prices will most likely continue to decline somewhat toward harvest.

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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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