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HUNTIN' DAYLIGHT -- HISTORIC BUT SPOOKY

by: Wes Ishmael

If the beef industry can sustain current consumer beef demand, tomorrow's bad old times in the cow-calf business might be a $100/cwt. calf market.

Consider that for the week ending April 8, USDA reported a load of 520 lb. steers bringing $160/cwt. at the sale barn in Bassett, Neb., and 350 six-weight stockers bringing $141.24/cwt. at the auction in Green City, Mo. The week before an incredulous feeder told us about a set of three-weight calves in the Central Plains priced to him at $171/cwt.

That's despite the fact that plenty of folks figured calf prices had reached their cyclical peak last August when price records were dropping faster than false teeth at a candied apple convention.

“In the Southern Plains, for the first quarter of 2005, the year-to-year increase in 500-600 lb. steer prices was $19.39/cwt.(+18 percent). For the quarter, the annual price increase for 700-800 lb. steers and slaughter steers was $14.92 (+17 percent) and $8.82 (+11 percent), respectively,” according to the Livestock Market Information Center (LMIC). LMIC analysts say key drivers to this escalated price support include: 1) cyclically tight feeder cattle supplies; 2) rather strong slaughter steer prices; and 3) large year-to-year declines in corn and other feedstuff prices.

“On a quarterly basis, lightweight feeder (<600 lb.) cattle prices are forecasted to set an all time record high in the second (spring) quarter of 2005, eclipsing the levels set last summer,” says LMIC. “Calf prices will likely remain strong for the balance of the year, but are forecast to be below 2004's by the fourth quarter of the year. Still, U.S. operations are expected to receive calf prices this fall that are the second highest ever for that quarter, but 5-12 percent below a year earlier. For calendar year 2005, cash calf prices are forecast to be above 2004's, setting a new all time high, and to set the annual high for this cattle cycle.”

Feeder steer (700-800 lbs) prices are expected to remain strong in 2005, as well, although LMIC analysts expect average annual prices slightly below 2004's, due to expected economic losses in the feedlot sector, which will limit gains in the market.

“After strong year-to-year increases for slaughter steer prices in early 2005, the balance of the year will bring slight increases, at best. For the remainder of the year, slaughter steer prices are forecast to mirror the normal seasonal pattern, setting seasonal lows this summer,” says LMIC.

More impressive for cow-calf producers is the fact that feeders are growing in value over time relative to fed cattle. Yes, current price spreads between feeders and their heavier counterparts are at historic highs. More than that, however, feeders in 2003 were selling at a 40 percent premium to fed cattle, compared to 15-20 percent in 1955. That's according to an analysis prepared for the Growth Enhancement Information Technology Team by Rod Preston, Texas Tech University Thornton Professor Emeritus and by Tom Elam, an adjunct fellow of the Hudson Institute's Center for Global Food Issues (more later).

     

Risk Is A Four-Letter Word

If there's a downside to such a price environment it's that higher prices and increased value mean there is more risk in need of managing.

For example, if you're were a stocker operator this spring, try shoving this spring's calf prices up against a futures market that hadn't yet adopted the reality of the new price plateau achieved by the industry during the past 18-24 months. There was next to zero opportunity to hedge in acceptable profits.

For cow-calf producers, too, the price of expansion—the equity required—has increased significantly, even as other input costs such as fuel have increased freight costs and narrowed margins more than they would have been otherwise.

There are lots of ways to manage risk, everything from the diversification that is retaining ownership in calves at least through a backgrounding and/or stocking phase, to contracting inputs further out and as part of larger procurement groups, to aiming cattle for specific markets while retaining mainstream intrinsic value.

There are creative marketing tools to manage risk, too. If folks aren't in a position to use the futures market itself, or if that arena doesn't represent needed opportunity, there are puts and options, forward contracts, shared equity arrangements, and the list goes on.

More than anything, though, one of the most effective and most affordable risk management tools available to producers continues to be the production technology available to them.

In the report mentioned earlier, Preston and Elam examined the impact of pharmaceutical technology on the beef industry, specifically, but they also examined how genetics, nutritional management and technology in the grain industry have changed beef production during the past 50 years.

“In 2004, we have a more plentiful, less expensive and higher quality beef supply than we did in 1955,” say the researchers. “That we have managed to simultaneously increase efficiency, quality and production, while reducing the real price of beef, is a testament to the remarkable work of thousands of men and women involved in this industry over the past 50 years. As a result of their efforts, the industry produces more and higher quality beef than it would have had these productivity increases not occurred…The primary benefits of increased productivity have accrued to the cattle industry and to U.S. beef consumers.”

While all technologies adopted by the industry have played a role, the researchers explain, “The most significant impact of technology on U.S. beef production has been to increase grain-fed beef production and indirectly decrease non-fed beef production. Our ability to feed cattle high grain diets, which has been the result of a synergistic combination of a number of technologies, has been the most significant source of increased beef productivity, efficiency and product quality over the past 50 years.”

Consider the amazing production gains at the hands of pharmaceutical technologies such as implants and ionophores, which have improved feed conversion 23 percent and increased average daily gain 59 percent in the feedlot. Add in dairy genetics, which have increased milk production dramatically, opening up more resources for beef cattle, while also swapping more beef carcasses for fewer dairy ones. Tack on increasingly astute nutritional management of different classes of cattle. And, don't forget improved genetics and technology in the grain industry, which has quadrupled corn production in the past 50 years.

According to Preston and Elam, these improvements have resulted in 80 percent more beef production per head in the inventory. In other words, the industry today is producing record beef tonnage with a herd size almost identical to 1955. That beef is costing consumers 26 percent less than it did in 1955 when adjusted for inflation. And the list goes on.

These gains are due to the entire mix of technologies employed by the industry, as well as their additive and synergistic effects.

“Through a combination of research, technology development and innovation, the U.S. beef industry has increased the productivity of its herd by over 80 percent in the last 50 years. Pharmaceutical technology has been the most important single technology directly applied in the production of beef,” say the researchers. “Genetics, nutrition, pasture management, stocker management and feedlot management have also played important roles. Increases in crop yields and reduction in the real price of grains have been pivotal in the growth of the feedlot industry. The overall impact has been to help keep beef competitive in cost and quality in the consumer's market basket.”

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