Comments from the director: November 2007

Iowa Beef Center Director Dr. John Lawrence has a monthly column published in the Iowa Cattlemen magazine, published by the Iowa Cattlemen's Association, discussing the current happenings at the Beef Center and issues in the beef industry. Below is his November column about the IBC. To view his colunn about the cattle market outlook, which he co-writes with Shane Ellis, ISU Extension livestock economist, click here.

Thinking of starting or expanding a feedlot?

Consider these factors first

Many farmers are thinking about adding or growing a cattle feeding enterprise on their farm to bring in the next generation or to simply capture the opportunities that ethanol coproducts offer cattle feeders. This major investment deserves careful thought and planning as you will live with it for many years to come. The decisions also are more complex when you factor in cattle performance, profitability, labor availability, regulations, nutrient management and other factors that impact feedlot success.

The Iowa Beef Center at Iowa State University has developed the following list of factors that should be considered before building any fence or pouring any concrete. These are general questions that often have site-specific and farm-specific answers. In many cases, there are more detailed assessment tools that can help determine the answers or address any shortfalls.  Most of these you can mull over while in the combine or truck this fall to prepare for the more detailed calculations this winter.

Human resource questions
Business management, as well as cattle management and labor skills, are essential for a successful cattle feeding enterprise. Discuss these questions with your family and employees.

• Why do you want to grow the feedlot? What are your objectives, and do family members and employees agree?
• Are you personally committed to feeding cattle long enough to justify an investment in facilities (i.e., for the next 10 years)? If not, is there a succession plan?
• Have you developed a management team? Include consultants in nutrition, animal health, marketing, engineering, financing, etc. Have you discussed your plan with them?
• Do you have a plan to “market” your idea to neighbors and community members? 
• Do you have, or can you hire, the labor to feed more cattle?
• Do you have, or can you acquire, the skills or expertise to successfully feed cattle, including:
• Marketing of fed cattle and purchasing of feeder cattle
• Risk management for cattle and feed inputs
• Cattle management (reading bunks, walking pens, sorting cattle, treating cattle)
• Technology (computers, software, ultrasound, etc.)

Farm resource questions
Look at the feedlot enterprise in the context of the whole farm system. Are there synergies that can be captured by adding/growing a feedlot, or is it a stand-alone enterprise?

• Are the feeds (grain and forage) produced on your farm better marketed through cattle than crops in the long term?
• Have you taken inventory of local feed byproduct opportunities? This may include more than ethanol coproducts, such as grain screenings, seed corn refuse, etc.
• Is there enough land application area near the site for manure application? Is there enough land to capture the full value of the manure nutrients?
• Can existing machinery and buildings be used more efficiently? Will additional infrastructure and equipment need to be purchased?
• Do you have sufficient equity and borrowing capacity to add the pen space, cattle and feed inventory being considered without putting the farm business at risk?
• Do you have a long-range budget, cash-flow budget and repayment plan? How long is the period of repayment? What kind of return on your investment do you anticipate? Is this realistic?

Site selection questions
Some of the questions pertain to the farm, while others pertain to the specific location of the pens. Both are important.

• Is the site easily accessible for trucks hauling livestock and feeds (for example, the condition of road year-round, weight restrictions, etc.)? 
• Does the site have sufficient separation distance to avoid neighbor nuisance from dust, odors, flies and noise?
• Does the site already have, or can it economically obtain, sufficient:
• Electrical supply?
• Water supply (ponds, wells, rural water) for up to 20 gallons per-head per-day?
• Wind protection for winter conditions?
• Exposure to summer breezes?
• In regard to an open feedlot, does the site have:
• South-facing exposure for winter feeding?
• Slopes of 2-8 percent to provide good pen drainage?
• Drainage diversion of clean water uphill from the lot?
• Does the site have good separation from streams, ponds and lakes, or is there sufficient ground available (size about equal to that of the feedlot area) preferably below the site that can be used for runoff infiltration or as a holding basin?
• If the feeding operation is more than 1,000-head capacity, can requirements of a NPDES (National Pollutant Discharge Elimination System) permit be met? 
• Does the site allow pens and solids settling basins to be separated from wells by at least 400 feet (1,000 feet for public wells)?
• Does the site meet separation distances in http://www.iowadnr.com/afo/files/distreq.doc
• Is it possible to grow in the location in the future? Answer the questions above for a larger feedlot capacity.

Obviously, there are more factors that determine a successful feedlot, but if you cannot adequately address these questions, the next ones are more difficult. Site selection is important, but most people have options of where to build. Farm resources often can be altered, but they may be more difficult than selecting a site. Human resources can be hired and trained for some aspects of cattle feeding. However, if you as the manager do not have the skills or the drive to grow your cattle operation, it will be an uphill battle.

Cattle prices enter fall in strong position

In spite of “bad” news for beef demand, cattle prices enter the fall in a strong position. Beef is near record-high retail prices, and there is evidence that grocery and restaurant retailers are featuring lower-priced cuts or grades to keep consumers. While higher gas prices have been with us for long enough for consumers to adjust, there is concern about the impact of higher interest rates on homeowners with variable rate mortgages. In general, factors that affect disposable income hit beef first.

Further upstream, packers faces challenges as well. With short supplies of market ready cattle, resulting in higher prices, packer margins have been lower than 2006 levels for most of the year. That condition may continue into the winter. Higher hide and offal values have helped revenue, but larger supplies of cheaper pork and poultry will pressure retail and wholesale beef prices. Fourth-quarter supplies of pork and poultry are forecast to set new records. Live hog prices in the $30s are expected, the lowest since the fourth quarter of 2003. Broiler supplies posted a year-over-year decline of 4.7 percent in the first quarter of 2007, the largest such decline since 1975, and are expected to be up 2.7 percent in the fourth quarter.

Fed cattle prices were below $90 for 11 weeks of this year and below $85 only one week, and we could trade over $100 before Christmas. Although carcass weights have been near record levels, fed cattle supplies are relatively tight and are expected to get tighter as we move through the fall. Weights will continue to be heavier than last year for a several reasons: 1) weather should not be as bad as the record wet winter of 2006-07; 2) heavier placement weights of feeder cattle will lead to heavier carcass weights; and 3) feed costs should be lower and cattle prices should be higher than a year ago, which encourages heavier weights.

Cull cows slaughter was higher though the first half of this year than 2006, but it is expected to be lower than year-earlier levels through the second half of 2007, since drought caused higher cow liquidation last year. Feed conditions are better this fall, and herds likely will try to rebuild. Cull cow prices are expected to remain above 2006 levels this fall. The U.S. is set to allow over 30-month (OTM) cattle and beef from OTM cattle into the country beginning Nov. 19, 2007. The additional supply could pressure cow prices, but it is expected to be small. The rule allows for the importation of cattle born on or after March 1, 1999, with proof of birthdate. The U.S. Department of Agriculture estimates that number would be around 75,000 head. OTM meat and meat products will be allowed, provided specified risk materials are removed prior to importation. Finally, there is less incentive to import beef or cattle from Canada since their dollar is par with the U.S. dollar.

Calf and yearling prices traded near year-earlier levels in late September, but unlike last year, they are expected to remain relatively strong moving forward. Better feed conditions this year and the feedlot’s desire for heavier placements have led to lower placements of lighter weight cattle. The resulting fewer days on feed, new pen space in the northern Cornbelt, and additional heifer retention to rebuild the cowherd will support feeder cattle prices this fall and winter.

The table below is a useful tool for forecasting feeder cattle prices. It is an estimated breakeven for steers based on projected fed cattle selling prices and corn price.  It is the most a buyer could pay for the animal given a set of assumptions about performance, other costs and profit objectives. Buyers may have different expectations of these variables or different plans for the cattle (i.e., calves going to wheat pasture, grid premiums, etc.) than lead them to pay more or less than the projected price.

Based on this simple exercise, we can begin to see what feedlots can afford to pay for feeder cattle. With $3 corn and $94 fed cattle at slaughter, the most they could pay for 650-pound steer calves and break even is $124. If corn increases by 20 cents per bushel, the break-even purchase price decreases by $1-2/cwt.  A $2/cwt increase in selling price is worth $3-4/cwt on a 650-pound steer calf.

In summary, feeder cattle prices are expected to remain at profitable levels for sellers, but they will be a challenge for buyers. Likewise, packers will face pressure at the retail level from lower-priced competing meats and cautious consumer spending, which will limit wholesale beef prices. With that said, fed cattle prices over $100 next spring are being forecast and may occur yet this year.

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