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CATTLE TODAY

HUNTIN' DAYLIGHT -- PASTURE AND THE CYCLE

by: Wes Ishmael

"As volatile grains compete for acreage, urban sprawl continues to spread, and conservationists set land aside, bovines may be the ones left out," said analysts with the Agricultural Marketing Service earlier this month. "Last fall's corn market and this summer's wheat rally is putting the squeeze on the grazing and hay production portion of our nation's available agriculture acres. It seems like only a few years ago that our grain markets were plagued with overproduction from new hybrid seeds and fertilization."

Notwithstanding the drought gripping the Southeast, pasture prices were already painful. If you were hunting grass this year, you won't be shocked to know that pasture lease rates were the highest on record.

According to the annual 2007 Land Value and Cash Rents Summary from the National Agricultural Statistics Service last month pasture cash rents averaged $12 per acre, which was $1.20 more per acre than in 2006.

In fact, cash rents for pasture have increased 41 percent since 2000 ($8.50 per acre. Average pasture value has more than doubled in the same period of time-$1,160 per acre this year, compared to $531 per acre in 2000. For rent by state, see Table 1.

"The increase in farm real estate values continues to be driven by a combination of many factors, which include strong commodity prices and farm programs, outside investments, favorable interest rates and tax incentives, and continued commercial and residential development," explains the report on land values and lease rates.

Though folks in some parts of the nation were able to put up hay for the first time in a couple of years, a dearth of stocks mean prices will remain high even where it's most available.

Despite expectations for 2.5 percent more hay this year, analysts at the Livestock Marketing Information Center (LMIC) noted in August, "...national average hay prices for the 2007-08 crop-marketing year are expected to eclipse the record set last year by several dollars per ton. Nationally, U.S. hay stocks will increase compared to a year ago, but will remain at historically low levels. In fact, at the end of the 2007-08 crop-marketing year, hay stocks could be near 2006's, which was the smallest in relevant history. Also, record high hay prices are the result of very high overall feedstuff prices."

Bottom line, AMS analysts note, "Cattle farmers aren't about to push their stocking rates after only one year of above average moisture and supplemental feeding is rarely feasible."

What the Numbers Say
All of that is to say that the cattle inventory has stalled and might even decline based on January 1 numbers. Consider the indicators this summer.

The July Cattle on Feed report shocked even the more bullish traders. Placements were 17 percent below a year earlier at 1.62 million head for net placements of 1.56 million head, the lowest July placements since the series began in 1996.

Though the degree of decline was surprising, the placement of more, heavier cattle wasn't. All told 31 percent fewer cattle 699 lbs. or lighter were placed in July compared to a year earlier. That follows 27 percent fewer of that weight class being placed in June, compared to 2006.

According to analysts at the Livestock Marketing Information Center (LMIC), "In future months, year-to-year increases in heavyweight feeders placed into feedlots will continue due to improved pasture and range conditions and economic incentives to grow cattle on forages."

The August 1 Cattle on Feed number - 10.3 million head - was five percent below a year earlier. Marketings for July were two million head, three percent more than 2006 and four percent more than in 2005.

"Changing to older and heavier weight cattle entering feedlots is an important situation and will reduce the amount of time typical cattle are in U.S. feedlots. So, a five percent annual decline in the summer on-feed inventory will not translate into five percent fewer slaughter steers and heifers sold. Still, the recent inventory numbers suggest that fed cattle prices will move higher this fall," explain LMIC analysts.

Moreover, reflecting on the mid-year Cattle Inventory report, analysts at the Economic Research Service explained in the Livestock, Dairy and Poultry Outlook: "The report indicates that cattle inventory growth has stalled, at best, or peaked, at worst, for the cattle cycle that first expanded in 2005, up from a cyclical low cattle and calf inventory of 103.6 million head on July 1, 2004 (including a low total cow inventory of 42.4 million head). The last cycle with a short expansion phase occurred during the cycle that began from a low point on January 1, 1979, peaked in 1982 after only three years of cattle inventory expansion, and ended at a low point in 1990 after eight years of liquidation."

"The Cattle on Feed report released on July 20 also provided information on heifers on feed on July 1. Heifers accounted for 36.6 percent of cattle on feed, up from about 34 percent on July 1, 2006 and 2005," explain ERS analysts. "This number is consistent with the reduced beef replacement inventory in the July Cattle Inventory report. These numbers should provide some support for fed cattle and beef prices over the short run, despite the remaining potential for a seasonal price bottom."

"Total U.S. commercial cattle slaughter in 2007 is expected to be just fewer than 33.9 million head, up about 200,000 head from a year ago," say the folks at LMIC. "Much of the yearly increase in slaughter will come from cows and heifers. U.S. slaughter is forecast to decline about 1 percent in 2008. The supply of cattle and beef will be supportive of cattle prices for the balance of 2007 and at least throughout 2009. Looking ahead, most of the price surprises, positive and negative, will come from the demand side. From a cattle and beef perspective, those demand factors are underpinned by overall U.S. domestic economic conditions, foreign demand for beef and by-products, and competition from other meats and poultry."

A Different Cycle?
Spun differently, while few would argue the cattle cycle has gone the way of nickel-coffee, it's sure different.

"The cattle cycle has changed. The trend is for flat to declining cattle inventory numbers. The reasons are dry weather, sharply higher corn prices, average age of cow-calf producers and the significantly higher costs of producing a calf. "That's what Bill Helming, noted agribusiness consultant and economist told participants at the National Institute of Animal Agriculture ID InfoExpo in August.

That's a mouthful.

On the one hand, excessive cattle feeding capacity chasing a smaller inventory has propped up a higher price floor beneath calves than would have occurred otherwise with increasing feed prices.

"The demand for pasture and grass by ranchers and stocker cattle operators will increase significantly as a result of putting on more weight before steers and heifers are placed on feed. This is because of significantly higher corn prices," said Helming. He believes feedlot capacity utilization will be in the 65-75 percent range at best and that packer capacity utilization will be in the 70-80 percent range at best. So, competition from feeders and packers will support prices.

On the other hand, though cattle feeders want heavier cattle at the feedlot to dilute costs of gain, grazing land and ground for growing harvested forage is being squeezed, as noted earlier.

Incidentally, chatter around the market analysis community is that corn prices will move significantly higher next year, even with a record crop this year and stocks that are marginally replenished. The thought is that escalating soybean prices won't allow as many acres to be planted to corn as this year's near-record number.

So, it appears increasing production costs limit the incentive and ability for cow-calf expansion.

"We're at basically the same level of calf prices we were at this time last year, but with corn prices fully a dollar higher," notes Derrell Peel, livestock marketing specialist at Oklahoma State University. "It's not that corn prices aren't having an effect on the markets, but it's more in terms of price relationships than price."

With high feeder prices due to supply and high feedlot breakeven prices due to feed prices and the high cost of feeders, Peel explains, "There is an opportunity (for stocker producers this fall) to look at putting additional weight on animals...Rather than turning stocker cattle over at lighter weights, producers should evaluate potential for additional time and gain..."

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