NEWS for North Dakotans
Agriculture Communication, North Dakota State University
7 Morrill Hall, Fargo, ND 58105-5665

October 1, 1998

The Market Advisor: Now Is the Time for Beef Cow Producers to Prepare a Five-Year IRM Business Plan

Harlan Hughes, Extension Livestock Economist
NDSU Extension Service

The U.S. cattle feeding industry has experienced 17 consecutive months of cattle feeding losses. Industry spokesmen suggest that $2.6 billion dollars of equity has been lost from the cattle feeding sector through August 1998. Some investors have abandoned the cattle feeding business and some feedlots are up for sale.

Clearly, agriculture in general has entered into a new era of added price risk and the beef industry is no exception. This $2.6 billion equity loss assumes that no risk management protection was used. The economic rewards for risk management have been high during these troubled times. Those who put risk management in place did not experience the magnitude of cattle feeding losses faced by those who were unprotected. Unfortunately, very, very few North Dakota producers and bankers that I have talked with took action to manage risk last year; however, those that did use risk management tools this year may have earned enough to pay their risk management premiums for the next several years.

As the profit situation begins to change, producers need to take a lesson from the past few years and develop management plans that look beyond the coming season and maximize profit and minimize losses over the long term. The following are some points to consider as you begin to develop that plan.

Lower slaughter cattle prices lead to lower feeder cattle prices. Cattle feeders tend to bid replacement feeders back into their lots based on the price that they received for the slaughter cattle just sold. As a result, feeder cattle prices are currently under considerable pressure—a situation that is projected to change in late 1998 and early 1999. It appears that feeder cattle prices may have bottomed out. I look for a gradual increase in feeder prices during the fourth quarter of 1998 and the first four months of 1999. Slaughter cattle prices should also follow an upward trend over this same period.

Feeder cattle are substantially under-valued, and my analysis suggests that finishing today's yearlings off grass may well be the first group of cattle to turn a profit in a 22 month period. The second group of cattle that are projected to turn a profit are those "fast-track" 1998 calves that will be weaned directly into the feedlot and slaughtered in April/May 1999. If these projections are accurate, the beef industry will be launched into the next beef price cycle.

I expect fairly normal seasonal slaughter cattle price patterns in 1999—strong slaughter prices in April/May with annual slaughter price lows in the summer. Top profits will go to the cattle feeders who can deliver new-crop calves the earliest in April/May.

At this time, I am less sure about the profit potential for 1998 calves that will be traditionally backgrounded for modest average daily gains and then fed for high average daily gains for slaughter in June, July , and August of 1999. If we continue to feed large numbers of heifers, summer slaughter prices could again come under substantial price pressures as beef supplies increase again while supplies of competing meats are projected to still be very high next summer. My weekly revised projections and budgets are going on my web page (http://www.ag.ndsu.nodak.edu/cow/) under the "weekly cattle prices" button and then under the last few pages of the "Dickinson price projection summary" hot line. I encourage you to monitor these weekly projections. If you do not have access to the Web, you might ask your county agent to do it for you.

Some positive factors for 1998 feeder calf prices are low-priced feed grains and decreasing feeder cattle numbers. U.S. all-cattle numbers have been decreasing for the last three years, confirming that the U.S. beef industry is in the liquidation phase of the current cattle cycle. While feeder cattle numbers have been decreasing, heifer feeding has increased substantially. Feeding heifers instead of breeding them is favorable for reduced long-run beef production but leads to substantial increases in current beef production.

Once ranchers get the price signal to expand their herds, heifers will be diverted from feeding to breeding. However, I no longer think that this will happen with 1998 calves—it probably will be with 1999 calves. For the next 2-3 years, feeder cattle demand should exceed feeder cattle supply and ranchers should move into the driver's seat with respect to feeder cattle prices.

As feeder calf prices turn around, ranchers should accumulate profits over the next few years of favorable calf prices. The good times won't last forever, as beef prices are projected to turn downward in the middle of the next decade. Building financial reserves during the good times will be a critical risk management strategy for the long-run survival for beef cow operators.

Extremely low feed grain prices should stimulate Cornbelt farmers to market their 1998 corn through cattle. Cornbelt farmers should start buying feeder calves as soon as corn harvest is over. Remember that corn harvest is going to be 2-3 weeks early this year. If you are going to be in the market for feeder calves or feeder cattle, you might want to buy as soon as possible to make purchases ahead of the Cornbelt farmers.

Because of the cyclical nature of beef prices, replacement heifers held back during low price periods tend to calve during high price periods, and replacement heifers held back during high price periods tend to calve during low price periods. Iowa State University research suggests substantial economic rewards go to producers who manage their herds so they can sell more calves during periods of high prices and sell fewer calves during periods of low calf prices.

Traditional producers tend to do just the opposite of what the Iowa State research suggests. We can expect traditional ranchers to use 1999's favorable beef prices as a price signal to start rebuilding their beef cow herds by holding back more replacement heifers. Next year's calves will be bred in year 2000 and start calving in 2001. About the time that these added heifers will start producing additional feeder calves, calf prices will turn downward and the price signal will be to reduce feeder calf numbers. This suggests that the traditional rancher will be selling less young stock during the next few years of favorable feeder calf prices and selling more calves during the years of low prices. I predict that many traditional North Dakota beef cow producers will fail to take full advantage of the up-coming increase in beef prices because of their traditional expansion strategies.

To overcome this prediction, NDSU researchers need to evaluate non-traditional business strategies in comparison to the traditional beef price cycle. Finally, beef cow producers need to implement 5-year Integrated Resource Management (IRM) Business Plans designed to enhance their long-run profits. The era of "just running cows for a profit" may have ended in 1993 and is being replaced with a new era of "running beef cows with an IRM business plan for profit." Where are you in this transition?

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Source: Harlan Hughes (701) 231-7380 hhughes@ndsuext.nodak.edu

Editor: Tom Jirik (701) 231-9629