OSU Beef Letter

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Well-known member
Jan 20, 2007
LaRue, Ohio
OSU Extension BEEF Team

BEEF Cattle questions may be directed to the OSU Extension BEEF Team through Stephen Boyles or Stan Smith, Editor

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Previous issues of the BEEF Cattle letter

Issue #593

June 25, 2008

Cattle Feeding in Ohio: For Fun or Profit? - Stan Smith, PA, Fairfield County OSU Extension

In the recent past as we've made decent money at home finishing cattle, I always had an excuse for not going on winter vacation. It was pretty solid. " . . . can't leave with cattle to feed in the winter." Considering today's economics, if Connie figures out I've filled the barn with feeders and locked in a loss just to avoid going to Florida or Black Butte this winter, the ensuing conversation won't be comfortable. I think it won't fly!

I have an earth shattering news flash! There aren't enough cost saving feed alternatives anywhere in this State of Ohio which will allow us to put together a cattle finishing budget for the next year which shows a profit. At least not at the feeder cattle prices we presently see and the feed costs we can anticipate today. Francis Fluharty, Coordinator of the Ohio Beef Industry Center puts it like this, "It's pretty simple, if corn is $7.50 per bushel (.1339/lb) and an average feed efficiency for calf-fed calves is 6.5:1, then the feed cost of gain would be .87 per pound not including things like minerals and protein (which may actually lower the cost). However, when the cost of the calf, interest, yardage, treatment cost, death loss, and labor are added, there is no possibility for a profit."

Of course, there are a few who suggest because we have our own calves to wean, the economics of retaining ownership and feeding them is somehow different, and profitable. Unfortunately, that dog won't hunt. The opportunity (to sell them) costs of our own calves is essentially the same as the value of those we may purchase. Simply put, cow/calf producers today will optimize profit by selling their feeder calves at today's projected prices to the western feedlots, or to Ohio feedlot owners who haven't run the numbers but who know that they've "always done it this way" and simply want to feed cattle!

So what's my point ? ? ?

We're in uncharted waters here. As Nevil Speer, animal science professor at Western Kentucky University recently suggested to me, the beef cattle industry is ". . . a new world with the business defined by chaos and complexity!" As was suggested last winter during our series of beef Extension meetings where we explored feed cost alternatives, it's now a time for understanding "New Realities" in the beef cattle business.

Before we go any further, I challenge you to run the numbers for yourself. If you don't have a user friendly tool you're presently using for feedlot budgeting, here's a link to the recently revised 2008 Ohio Enterprise Beef Budgets in both xls and pdf.

As a starting point, on the Budget page linked above, go to Slaughter Steer, Days on Feed = 232 and plug in a feeder calf price of $1.10 for a 650 lb calf (SEP, OCT and NOV 08 Feeders on the CME are $1.14 to $1.16 this morning), a finished steer price of $1.10 LIVE WEIGHT (The APR09 CME shows $1.16 right now, and the Ohio basis typically ranges from -$2 to -$10), cash corn is valued at $6.88/bu or $245/ton in Columbus and then for good measure zero out the costs of labor, management, and building charge. This scenario still loses money! Plug in your own estimates and see what it takes to return enough dollars to your pocket that you will be satisfied you filled the barn this year.

While many keep telling me to "just wait, calves will get cheaper, and it'll work then" many more are suggesting they don't see feeders coming down anytime soon. In fact, a friend who works at Blue Grass in KY says he's moving 8 weights at $1+ and he's not sure it won't continue that way.

Typically, we'd expect the value of feeder calves to come down to match up with the value of feed and the projected value of fed cattle, thus allowing some profit. At the current feed prices and projected value of fed cattle, how cheap do feeders need to get to see a profit? Regardless of why feeders are still high, presently somebody is willing to pay more than than those of us with small Ohio lots can afford for calves (and then haul the calves out to their lots with $4.50+ fuel!)

While it won't be popular with many Ohio feedlot owners, purely from a profitability standpoint one must consider leaving feedlots empty in 08-09. Better yet, perhaps it's time to explore alternative uses for our feedlots. Until profitability returns to traditional feedlot management as we've known it for decades, we might consider backgrounding in those lots, assembling and upgrading young bull calves into like kind pot load size groups for sale to western lots, or purchasing cull cows and fleshing them up a little, or maybe even storing machinery, grain or perhaps dry fertilizer in empty cattle barns??

As you make those tough choices, I'd challenge you to utilize the OSU Extension beef budgets and explore the alternatives in great detail. It may also be time to take another look at risk management tools such as Livestock Risk Protection (LRP) insurance in an effort to lock in a profit if/when one presents itself.

Nevil Speer recently suggested, "Agriculture is no longer simply about working long hours. It now requires information, risk management, careful budget analysis, etc...." Speer also suggests that what we are really discussing is "change management" . . . perhaps the hardest thing in the world to do. However, he goes on to suggest it's a concept that's " . . . increasingly important to the most important industry in the world - feeding people!"

Living With Higher Feed Costs - John Lawrence, Iowa Extension livestock Economist

Livestock producers are well aware that feed costs are higher than they were two years ago. The higher prices are expected to encourage increased world production of grains and oilseeds, but growing demand for food, feed, and fuel will remain strong. While we can debate what the new price levels will be, there is nearly universal agreement that higher grain prices are not a passing fad. Eventually, we expect for livestock and poultry prices to increase in response to the higher feed costs and reach a level that yields enough margin to sustain the industry. However, the transition may not be smooth or timely. The challenge for producers is to survive the short-term transition and prepare for long-run success.

Cattle and hog producers have had significant losses on animals sold since the fall of 2007. In addition to higher feed prices, there will also be greater grain price volatility. The loss of equity, higher input costs and price volatility lead to greater risk for producers. Short term survival and long term management in the future will require a review and possible revision both production and business practices.

The first step is to recognize that the world has changed. Strategies that worked well when corn was under $2/bu and was readily available may not work when its price is over $5/bu and may be difficult to buy when you need it. Second, implementation of changes in management and practices is important. Recognizing that things have changed isn't worth much unless you adjust to the change. Put another way, how do you change your habits that were developed with feed costs were low. Many times the change needed is not a one time correction, but rather an ongoing practice that must be continued.

There are several other published articles that address production practices for dealing with higher feed costs. I want to focus more on business management to address surviving in higher feed costs.

What will feed prices be? Given enough time, more land will come into grain production world wide, yields will increase, livestock demand for grain will decline, and cellulosic ethanol production will be commercially viable filling part of ethanol demand. These expected changes in supply and demand will help moderate corn prices. However, in the coming year or two corn prices are expected remain near $5/bu for the 2008/09 crop year. This spring's delayed plantings may push that number higher as will adverse weather during the growing season. A recent study by the Center for Agricultural and Rural Development (CARD) indicates that even a bummer crop would only lower crop year average prices to near $4/bu, but a sever drought could put average prices to near $8/bu.

This study reinforces two important management considerations. First do not wait for $2 corn, but rather anything near $4 will probably be a good purchase. Second, price may go very high if weather problems occur. Do you have a strategic reserve of corn to get through a period of very high prices or will you have to buy grain during these volatile times? Do you have borrowing capacity and storage to purchase some or all of your feed needs if the opportunity presents it self?

When will livestock prices adjust? There are two ways that commodity prices can increase; higher demand or lower supply. Domestic demand depends largely on the price of competing meats, consumer income, and consumer preference. Rising feed costs has impacted all animal proteins so prices of competing meats are expected to be impacted somewhat similarly. Consumer spending is being negatively impacted by a weaker economy and rising gas prices and there is little indication that they prefer pork or beef more than they did before, all else equal. Demand also depends on exports and pork exports have been strong in recent months. Beef exports continue to grow slowly and there is hope that South Korea will be supportive for exports. After a slow start in 2007, pork exports have increased rapidly in since fall. At least a portion of the increased sales are likely related to the lower pork prices that occurred in October - March and may decline somewhat during the higher prices of summer.

Given the demand outlook, livestock production will likely have to decline to return to profitability to livestock and poultry producers at the higher feed costs. Liquidation of both the hog and beef cattle breeding herds has begun. Beef cow and heifer slaughter are higher than the year before. This adds to the current supply of beef, but will reduce supplies in the future. Higher pasture and forage costs and downward pressure on calf prices are squeezing cowherd margins will continue to encourage a reduction in cowherds. Lower placements of cattle into feedlots will reduce slaughter later 2008 and prices are forecast to be higher than we saw in the spring. However, sustained higher price levels will require further reductions cattle inventories.

By mid-May hog prices neared breakeven, but feed and total costs are expected to trend higher and prices are expected to decline again in the fall and red ink will likely return. The sow herd liquidation underway is expected to lead to hog higher prices in 2009. There is concern that the reprieve this summer may slow or stop the liquidation that is needed to return to profitable levels with the higher feed costs. Pork production from October 1, 2007 to mid-May 2008 was 10.1% higher than the same period the year before. Getting prices back to late 2006 - early 2007 levels will not be profitable in 2009. Export growth will help. The US exported approximately 15% of its production in 2007. Through the first three months of 2008 exports are 40% higher than the same period in 2007. If this pace is maintained, total demand will increase 6%. In addition, Canada has reduced its breeding herd. But, the bottom line is that the US will need to significantly reduce its breeding herd to achieve long term profitability. Some estimates predict a reduction of 10% or more is needed in the higher corn price era.

Managing risk - Grain prices will be volatile and sensitive to weather this growing season. Likewise, hog and cattle prices will be volatile as we move from high supplies to lower supplies. Exports, the economy, producer reactions to volatile corn prices will all impact these selling prices. Producers are encouraged to recognize these risks and focus on the margin between revenue and costs rather than simply prices. While opportunities will exist in volatile markets, it may be wiser to be more cautious in the months ahead.

Futures, options, forward contracts and livestock insurance products are tools that can help protect producers from significant shocks to their operating margins. Locking in an acceptable margin on at least a portion of your production may be a better strategy than hoping things work out for the best. If you are not familiar with these tools look for a opportunity to learn more about them a workshops and online seminars that are offered by Iowa State University, the Chicago Mercantile Exchange, Iowa Farm Bureau and others.

Changing Expectations In The U.S. Economy - Derrell S. Peel. OSU Extension Livestock Marketing Specialist

The shock waves of dramatically higher energy prices are reverberating through every corner of the U.S. and are likely to continue for the foreseeable future. The impacts are obvious in some regards and much more subtle in others, but are widespread and only just beginning to be manifested in many cases. There is a growing cry of hysteria-tinged voices asking how we will survive in a world of high energy prices.

A change such as this ultimately must lead to a change in the expectations of all consumers and producers. This process takes time and involves several stages. The first stage is one of assuming the impact is a short run shock that will soon pass. Consumers make no or very minor temporary adjustments in spending habits and accept the fact the costs are higher and the money does not go as far. Producers accept smaller returns and margins but make no significant changes in the production process.

At some point in time, producers and consumers reach stage two where the change has not passed and it is no longer possible to avoid making more significant changes. Consumers, for example, may still have the gas guzzler but make changes in driving habits and recognize that they may want to buy a different vehicle when the time comes. Consumers begin to significantly alter eating habits by eating out less and changing food purchasing choices. Producers make more significant efforts to find cheaper inputs and manage production costs. However, in stage two, neither consumers nor producers have fundamentally changed their lifestyles nor ways of doing business. It appears to me that many consumers and producers in the U.S. are in or very near stage two at this time.

Stage three occurs when consumers and producers stop asking how they can continue with the status quo (assuming the change is permanent) and begin asking how we fundamentally change what and how we produce and consume. It does not appear that many producers or consumers have reached stage three yet. Consider the reluctance of the airline industry to fundamentally reassess a business model that clearly is not working. For the most part we are still asking how to keep doing what we have done rather than asking how we can use an entirely new approach to do things. The process of long run adjustments to our economy does not begin until we change the long-run expectations of consumers and producers.

These adjustments are not easy or quick. Many will take up to a decade and some much more than that. The suburban-sprawl, car culture that is so dear to us in the U.S. has been developing continuously since the 1950s. For example, we do not have nor can we effectively use things like public transportation to a much greater degree in the short run, even if our expectations have changed enough to make us willing to use it. However, over time, we may recognize the need to invest in more and different public transportation infrastructure and adapt it to work in our suburban landscape. This and a multitude of other changes have yet to be recognized let alone embraced. The process will be painful, frightening and threatening for many people but like all changes will also offer a host of new opportunities previously unimagined by both producers and consumers.