HUNTIN' DAYLIGHT -- DROUGHT ACCELERATES SHIFT

by: Wes Ishmael

“This is a once-in-a-generation drought,” says Billy Cook, senior vice president and director of the Agricultural Division for the Samuel Roberts Noble Foundation at Ardmore, OK. “We haven't seen this type of heat and lack of precipitation since the record-setting drought of the mid-1950s or even the Dust Bowl.”

According to Hugh Aljoe, consultation program manager for the Noble Foundation, most crops in the drought areas have produced only about 25 percent of the total yield compared to last year, with some farmers having experienced almost complete crop losses as in the case of wheat.

And that's just Oklahoma. Move South across the Red River and most of Texas has been declared a natural disaster area due to the ‘exceptional' and ‘extreme' drought conditions. By the first part of August, more than 90 percent of Texas was in an extreme drought; 75 percent in an exceptional drought, according to the U.S. Drought Monitor.

Throughout the Lone Star state—home to more beef cows than any other state—with the exception of small pockets where there has been rain, producers continue to struggle with dropping irrigation well and stock-water tank levels, desiccated pastures and hay shortages, according to reports from Texas AgriLife Extension Service personnel.

“All range and pastures are in extremely bad condition,” says Lyle Zoeller, AgriLife Extension agent for Coryell County, west of Waco. “All classes of livestock are being fed heavily. Many cows are going to local market, as well as most calves 300 lbs. and over. There is no hay available in area; most is coming from out of state. Low-water sources are now forcing sales of cattle.”

“Producers continue to cull herds as grazing gets shorter,” says Mark Currie, AgriLife Extension agent for Polk County, south of Lufkin. “Time is running out for producers to make enough hay for their herds for winter feeding — even if they survive the summer. Livestock water continues to be a problem for many producers as stock tanks and creeks get lower or dry up. ”

Depending on your plumb line and abacus, at least 25 percent of the nation's beef cow herd is in the drought area, as well as the heartland of the industry's yearling grass country.

“Many Southwestern cattle ranchers have totally run out of options and the hay situation through the mid-section of the United States has become colossal,” say analysts with the Agricultural Marketing Service (AMS). “Hay brokers from Texas, Oklahoma, and Kansas are beating the bushes as far as 1,000 miles away in search of any quality of bales to fill needs in parched areas. A convoy of trucks can be seen heading in this direction loaded with roughage, even egg-shaped, half-rotten round bales from seasons past plucked from hedge-rows in the Midwest...Delivered alfalfa has been quoted up to $300/ton. For many, price is no longer a bargaining tool; simple availability is the only variable on which to haggle.”

Hay was already going to be short heading into the current growing season due to the swapping out of acres to plant more corn and other row crops. Now, drought-driven demand for less supply is pushing prices higher for everyone.

As for corn, excess heat and sub-par precipitation in the Corn Belt has lowered production expectations, though the crop will likely be the third largest in history. According to the August World Agriculture Supply and Demand Estimates, the season-average price for new-crop corn is projected at $6.20-$7.20 per bushel.

So, the opportunity to build rations with corn to limp through a drought isn't what it used to be.

What's more, areas of the nation overwhelmed by the current drought may not get much relief this fall and winter, according to the National Weather Service Climate Prediction Center.

The La Niña that fostered the current hotter and drier conditions in the Southwest could re-develop almost as quickly as it drifted toward neutral this spring and summer. Besides current sea surface temperatures pointing in that direction, analysts say there is an historical tendency for strong La Niñas (last winter) to be followed by a weaker one the following winter.

If so, the question facing many producers may not be how or whether to hold cows until this fall, but rather how or whether to hold them until next spring.

In other words, whether or not you run cows and stocker in the drought area, you're being impacted by it now; the entire industry will continue to be impacted by it going forward.

Short Supplies Support Price

Of course, that goes for the other side of the ledger, too. Short cattle supplies continue to support record and near-record high prices.

“Feeder cattle markets continue to show somewhat surprising strength, especially given the harsh weather conditions present this summer,” says Derrell Peel, extension livestock marketing specialist at Oklahoma State University. He explains that calf prices have been pressured by the drought-related runs of early-weaned calves but are still above the low prices of May.

“Many of this fall's calves have already been marketed this summer,” Peel explains. “Heavy-feeder prices increased to new seasonal highs in early July and are still holding at remarkably strong levels (in mid-August). The rollback between calf and feeder prices is very narrow; almost zero in some cases, resulting in very high stocker value of gain.”

In fact, so many cattle were moving from drought areas this summer that sale barns had to turn sellers away; there wasn't enough room for them, hours in the day to sell them or trucks to haul them.

All of this early marketing by so many, on top of the industry pulling so many forward the past year—including heifers that would normally be kept for replacements—puts a question mark on the typical fall run of calves, as well as marketing patterns heading into next year. On one hand, buyers have been procuring cattle earlier so they don't miss out, which could alter demand this Fall. On the other hand, supplies will be lighter.

Peering into next year, James Robb, director of the Livestock Marketing Information Center (LMIC), says in an August In the Cattle Markets, “The dominant factor influencing calf and yearling markets in 2012 will be grain prices. Crop-year ending corn stocks will only amount to a few weeks of usage in 2012. Grain prices are expected to remain volatile, causing potentially large price swings in calf and yearling prices.”

Robb says forecasts call for a small increase in Southern Plains calf and yearling prices next year.

“Calf prices could post modest year-on-year declines during much of the first half of 2012. But in the second half of the year prices could post annual gains,” Robb says. “In fact, calf prices in the fall quarter of the year could eclipse 2011's by several dollars per hundredweight.”

Likewise, assuming a normal growing season, Robb says the weakest yearling prices could be in the first quarter of 2012. He explains, “…a very strong fed cattle market should keep yearling prices above 2011's for the second half of the year. For the year, 700-800 lbs. steers in the Southern Plains are forecast to average in the $129-$137/cwt. range, which would be slightly above 2011's.”

Emmit Rawls, agricultural economist at the University of Tennessee points out in an August Tennessee Market Highlights, “Due to the early run of cows from the drought stricken states, cow slaughter this fall should not increase seasonally as much as normal. Hence, cow prices could hold up better than usual.”

“Even in best case scenario, we will not see additional beef on the table until 2015,” says Brett Stuart, an economist with CattleFax. He was addressing participants at this year's Texas A&M Beef Cattle Short Course in College Station.

“Supplies are going to be very tight for the next five plus years,” Stuart says. “There are good days ahead; that's the bottom line.”

He forecasts average fed steer prices at approximately $95/cwt. to $125/cwt. through 2015. His projection for steer calves at 550 lbs. is an average in the range of $140-$170/cwt. for the next several years.

It boils down to supply of cattle relative to beef demand.

According to the mid-year Cattle Inventory report released by USDA in July the beef cow herd (31.4 million head) is one percent less than a year earlier. More telling, beef replacement heifers (4.2 million head) are five percent less. That's before knowing the extent of this summer's drought-forced liquidation.

None of that will change the shift toward a smaller industry infrastructure—ultimately less packing capacity, fewer cattle feeders and all of the rest—but it will accelerate it.







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