Comments from the director

Iowa Beef Center Director Dr. John Lawrence has a monthly column published in the Iowa Cattleman magazine discussing current happenings at the Iowa Beef Center and issues in the beef industry. His December column appears below. Also each month, he co-writes an article discussing the cattle market outlook with Shane Ellis, an ISU Extension livestock economist. To view that column, click here. To view previous columns, click here.

Animal Industry Research Report and other projects in the works

I am writing this column the day before the election and by the time you read it we will have determined our elected officials. The political ads will be replaced by Christmas advertisements. I can hardly wait to see the commercial for a gift followed by the statement, “I’m Santa Claus and I approve this message.”

One task that occurs each fall is the preparation of the Animal Industry Research Report that is released in January. In 2004 the Beef Research Report merged with other species reports that have existed for many years to form the Animal Industry Report with input from all departments and colleges on campus doing animal work. These reports provide an annual update of ongoing work, a summary of completed research and reports on applied research and demonstration projects. In 2008 there were 27 beef articles ranging from farm-level methods of storing and feeding distillers grains and solubles to lab work on pre-harvest treatment to improve beef tenderness. The 2009 Animal Industry Report will summarize several Iowa Beef Center mini-grant projects, work at outlying research farms and research on campus. The report is available online or on CD and beef articles will be linked to www.iowabeefcenter.org.

One of the projects that will be in the report this year will be a progress report on the amount and concentration of manure nutrients in deep-bedded cattle confinement buildings. The project is funded by the IBC and the Leopold Center for Sustainable Agriculture. Russ Euken and others are collecting manure samples that are analyzed at a commercial lab. They also have yield plots at varying manure and commercial fertilizer application rates. This work will be continued in the coming year and we are building a database of manure samples and volumes. If you are interested in helping the IBC collect data, contact your Extension Beef Field Specialist or call (515) 294-BEEF.

Other reports will summarize research on storage and feeding methods for modified distillers grains and solubles (MDGS). These methods include storage of just MDGS and MDGS mixed with ground hay and then stored. A second project evaluated performance of feeding MDGS at 60% dry matter of the ration mixed with hay and stored in a bunker or mixed at feeding.  There is also a report on finishing cattle with the 60% MDGS ration with no corn compared to a conventional diet and one that backgrounds on 60% MDGS before switching to a conventional diet for the last 90 days.
In addition to updates on current projects, I encourage you to review Animal Industry Reports or Beef Research Reports from earlier years. Old reports, going as far back as 1996, are available at www.iowabeefcenter.org.

Another fall IBC activity is the professional develop for our team members. It is an opportunity to bring our staff up to date on the latest research and new extension materials and decision aids. We met at the ICA building this year and Tom Shipley and Brian Waddingham participated in the training. These fall sessions are also a time that we begin planning our winter extension education programs. The focus this fall was on risk management, animal health challenges, reducing feed costs of cowherds and feedlots and capturing more value from feedlot manure.

A high priority topic that the IBIC and IBC will work on together is that of non-ambulatory or downers. The recent videos from inside hog buildings in Iowa and auction markets have brought the issue to the attention of the nation and the world. We can be angry at PETA or HSUS. We can be angry at the individuals who abused or mistreated animals. More importantly, however, we need to be sure our own house is order.

In addition to the ethical issues of responsible care of animals, there are new rules on what is accepted into the marketing system. Processor, auction markets and even local lockers are less forgiving of condition of the animals they accept. It is important that producers understand these rules. IBIC and IBC will have information about the culling decision and when to ship, rest or euthanize an animal.

We encourage you to visit our Web site at www.iowabeefcenter.org . In addition to our publications and decision tools we have added a monthly newsletter and a new podcast section. Those of you without teenage children may not be familiar with podcasts, but they are audio recordings that can be listened to online or downloaded and played later. You can even subscribe to our podcast to have new entries sent directly to you. These brief interviews probably will not offer earth-shattering research findings, but they will have helpful reminders of best management practices.

What are the factors to watch?

Cattle prices will be driven by positive supply factors and relatively negative demand issues

2008 cannot end soon enough for most cattle producers. ISU Estimated Returns indicated that yearling feeders experienced losses in 16 of the last 17 months. August sales were slightly above breakeven when fed prices were in the upper $90s. Breakeven costs increased through the fall on higher purchased feeder cattle, but fed cattle selling prices plunged with the stock market. By the end of October calf prices had declined to a point where a positive return could be hedged for summer sales. The lower calf prices were below cost of production for cowherds.

Looking ahead to 2009 and beyond, cattle prices will be driven by generally positive supply factors and relatively negative demand issues. So what are the factors to watch? First, as was discussed last month in this column, the credit and financial crisis has both a psychological and fundamental impact on the cattle market. Consumers are more conservative in their spending, impacting beef purchases but also the overall economy, which impacts beef purchases as the economy slows. The government has taken action to stabilize and restart the economy, but it will take time. Watch what happens to unemployment, inflation, consumer confidence, and exports. Beef demand is linked to consumer spending.

Second, tighter credit to finance inventory and increased value of the US dollar is reducing exports and in some cases domestic sales. In particular, Mexico and South Korea were our two largest beef export markets during late summer and fall. However, sales to these countries fell dramatically when the value of their currencies fell 20-30 percent relative to the US dollar during October.

Third, the recent drop in fed cattle prices may trigger a backlog in marketings adding to the supply of beef. If it occurs, a psychological-, currency- and credit-related demand problem becomes a fundamental supply problem and it requires time to work through. Steer and heifer carcass weights continue to run heavier than last year’s record.
Fourth, steer and heifer slaughter January through October has been down 1 percent and 0.1 percent, respectively, compared to the same time period in 2007. However, beef and milk cow slaughter has been up 14 percent and 4 percent, respectively pushing total slaughter to 1 percent higher than 2007 levels. Beef cow slaughter is expected to continue given the price of calves and feed. Dairy cow slaughter is expected to increase due to lower milk prices. Total beef supplies should decline in 2009 on lower feedlot placements, but the size of the cut will depend on carcass weights and cow slaughter.

Fall Marketing Decisions
While price forecasting is never an exact science, there is more uncertainty than usual this fall. The figure below is a probability distribution of June Live Cattle prices based on the implied volatility reflected in options premiums on November first in 2005 and 2008. The probability of a price being a given price or lower is the area under the curve to the left of that price. Note that June futures in 2008 are $5.50/cwt higher than they were in 2005. Also note that there is much more uncertainty this year. The graph shows that there is a much greater chance of prices above $97 next June (43 percent), but also a chance of prices below $77 (15 percent). In 2005, there was less of a chance of high prices, but also a lower probability of very low prices.

Give this type uncertainty and the greater potential for recovering before June it may be a year to position for higher prices, but have some protection in the case of lower prices. One example would be to background calves into the spring. If the fed cattle market rallies, feeder cattle prices will likely follow. Selling calves at weaning eliminates the chance of lower prices, but is also forgoes higher prices later on. Backgrounding the calves and buying LRP insurance or a put option protects against price declines, but allow for higher prices if they occur.

Likewise, finishing calves to sell in June is about a breakeven proposition at this writing, but there is risk and opportunity depending on the market. A futures hedge will protect against lower prices, but prevents higher prices. Put options or LRP provide the best of both, risk protection and higher price opportunity. However, the volatility in the market makes these tools costly, nearly double the premium for similar protection compared to 2005 ($6.13 v. $3.10 per cwt).

Tighter beef supplies points toward a recovery in cattle prices, but demand factors will limit the potential and may push prices lower yet, particularly if carcass weights become burdensome. Prices are more volatile than earlier years indicating that, while record prices are possible under the right conditions, the risk of even lower prices looms large.

To view previous columns, click here.

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