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HUNTIN' DAYLIGHT -- FINALLY, AND THEN?

By: Wes Ishmael

When fed cattle prices finally reached $80/cwt., in the Southern Plains at the end of January, then climbed up to $82 for the first time in two years, it was hard to feel anything but relief. Even though feedlots had started turning a profit a few months prior to that, following an historic equity drain at the hands of consecutive losses for too many months past a year, the $80 mark signaled that the industry had finally turned the corner on production and currentness, a turn that was expected by many at least a year earlier.

In fact, USDA's outlook bolsters the reality, pegging a national inventory of cattle and calves at 96.1 million head, slightly under the beginning number for 2002. Spun differently, these cattle numbers define a record 14th year of the current cattle cycle. Even though the USDA numbers point to more heifer retention than a year ago—an initial indication that herd liquidation is ending—increased exports and slaughter, coupled with reduced imports are expected to make for lower overall numbers next year.

What this should mean short term is that all production segments have a chance to turn a profit at the same time. In their 2003 Market Outlook presented during the annual National Cattlemen's Beef Association (NCBA) meeting in Nashville, Cattle-Fax reported: “Cattlemen should expect higher average prices for all classes of cattle during 2003.”

More specifically, driven by tighter fed cattle supplies and lower beef production—keep in mind even with dwindling numbers, increased carcass weights made 2002 another near-record to record year for beef production—Cattle-Fax estimates fed cattle prices will average $73-$74/cwt. this year, which would be $6/cwt. more on average than last year. As cattle supplies decline and cattle feeders finally start turning some consistent profit, Cattle-Fax pegs 750 weight feeder steers at approximately $82/cwt. this year, up $3-$4/cwt. from last year. Likewise, at approximately $5/cwt. higher Cattle-Fax estimates 500 weight feeder steer calves to trade in the $95-$96/cwt. range this year.

Other market forecasters and ultimate reality may paint a picture a couple of dollars on either side of these numbers, but barring some sort of industry-wide weather or economic disaster, the point is if you've got beef cattle this year you should be positioned to make a profit.

What Next

Longer term, what turning this corner on numbers means is open for plenty of debate. Again, assuming average weather and current to lower grain costs—which obviously are wild cards this year, what with perilously low ending corn stocks and drought that is apparently expanding across the central and northern plains, and other parts of the country, rather than abating—you'd expect the next cattle cycle to begin late this year at earliest, but maybe not even until later next year when enough heifers are retained to expand the nation's cowherd. That's what you'd expect.

Shifting fundamental dynamics could change all of that. For instance, the tonnage that steamrolled the market flatter and longer than plenty of folks predicted, despite falling cow numbers, still adds volatility. In fact, a strong case can be made that when herd rebuilding begins it may not last as long or run as deep as in previous cycles. If that's the case, traditional penciling on how much can be spent to buy cows or develop heifers and how long it will take for them to turn a profit changes. In other words, a flattening of the cycle would necessitate a change in old rule-of-thumb calculations.

Even if that's not the case, and the next cycle returns to a traditional pattern, this trip through the cycle trough and the record long period of liquidation underscores the importance of spending as much time on marketing cattle as producing them.

Marketing Basics

First of all, in a marketing session for folks attending this year's Cattlemen's College at NCBA, Cattle-Fax advised one of the first steps in developing a profitable marketing plan is understanding where your operation exists in the current industry profile of profitability.

“The average cow/calf producer has made about $3.04 per head since 1980. On average high return producers realize about $65 per head higher profits than an average producer, while low return producers return about $54 per head lower profits than average,” says Cattle-Fax. “High return producers (low cost and high production) have been profitable most of the time over the past 20 years. Low return producers are likely eroding away the equity in their land.”

Think of that. In a business that is breakeven on the average, as a commodity business should be, high return producers are turning $119 more on each cow each year than low return producers. Knowing where on that spectrum you currently exist and what your goals are offer solid footing for knowing how much potential there is for change and where changes might be made.

As an example, Cattle-Fax reports the annual average cow cost for high return producers is $259 per head versus $357 per head for low return producers. The specific numbers vary by region of the country, but the range is basically the same no matter what region an operation exists in.

On the other side of the cost equation, using Southwest Standardized Performance Analysis data for comparison, the top 25 percent of net income producers had an average 88.1 percent calving percentage versus 86.3 percent for average producers in the data set. Top producers had an 84.8 percent weaned calf crop percentage compared to 83.1 percent for average producers. The list goes on.

“In the long run, commodity businesses offer profit opportunities only to those who have lower than average costs of production, superior performance or better than average returns,” says Cattle-Fax.

Market Reality

In addition to understanding where you sit on the net income spectrum, which necessitates knowing specific costs and performance measures, Cattle-Fax advises producers to be realistic in their profit goals. As an example, while $20 per head may sound like a paltry sum for cattle feeding profit, they point out an average $20 per head profit over the past three years—basis $150 collateral investment and 160 days on feed—would have been equivalent to a 30 percent annualized return on investment.

With that in mind, Cattle-Fax notes, without risk management, the market only allows cattle feeders to market cattle and make more than $50 per head in profit. Yet, many producers are reluctant to lock in a specific profit margin in the hopes of hitting a sporadic homerun.

So, what is the profit goal, and is it realistic?

Of course, one of the most effective hedges comes on the buying side of the equation. Some say that old saw: “Bought right is half-sold,” is more like three-quarters sold these days as margins grow narrower.

Likewise, cattle market cycles being what they are, seasonal trends are tough to bet against unless you can figure out why this the year: 550-weight feeder calves won't bring the highest prices in March and April; 750-weight feeder cattle won't see the high market in January and February; fed cattle won't top out in March and April; and cull cows won't have the most value from March to May. Cattle-Fax points out 80 percent of the time these seasonal trends hold up, so if you're bucking the odds, there had better be a reason.

All of this is before technical risk management tools such as the futures market or basis contracts are even considered. For what it's worth, Cattle-Fax, NCBA, the Chicago Mercantile Exchange, and about a dozen state cattle associations—including Kentucky and Florida—are teaming up to offer members intense marketing and risk management workshops beginning this May. For specific dates, contact NCBA at 303-694-0305.

Thankfully, there will never be any marketing guarantees since reward necessitates risk. But just starting with these basics can drastically improve willy-nilly and traditional, “we ship them the third Thursday of ever October because…” marketing plans and marketing performance, no matter what the cattle cycle does or doesn't do.

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