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

October 15, 1998

The Market Advisor: This Is the Year for Beef Cow Producers to Pencil Out Their Marketing Alternatives

Harlan Hughes, Extension Livestock Economist
NDSU Extension Service

As I travel around the northern plains talking to beef cow producers, I sense they are considerably discouraged about the current agricultural situation. This discouragement seems to feed on itself because producers believe that all of agriculture is in trouble. This simply is not true. My current budgets suggest that there are considerably more profit opportunities in marketing 1998 calves than ever existed in marketing 1997 calves.

Last year, northern plains weaning prices for 500- to 600-pound steer calves were in the mid-to-high $80 range. We now know how last year's calves were overvalued, which resulted in substantial losses for the cattlemen that retained them. To date, this year's 500- to 600-pound steer calves are running in the mid-to-high $70 range. Given today's corn prices, 1998 calves are now undervalued to the point that there is considerable projected profit between this year's weaning and slaughter.

I predict that the first slaughter cattle that will be sold for a profit are those light-weight, slow-track 1997 calves whose marketings were delayed seven to eight months by first being wintered at low rates of gain, put on grass in the spring of 1998, sold off grass this fall and now are to be slaughtered in late 1998. The second group of undervalued feeders is the new-crop 1998 fast-track calves, fed to be marketed in April and May 1999.

Why such a dramatic switch in profitable production strategies from one year to the next?

We know that cattle cycles cause beef price cycles. We also know that cattle cycles, and the resulting beef price cycles, typically run in 10-year intervals. We can break the 10-year cattle cycles into expansion, contraction, and turn-around phases. We also know that beef supply lags the cattle number downturn by two to three years. This lag in the beef supply's downturn, and the resulting beef price cycle turnup, is due to feeding instead of breeding heifers and the increased selling of cull cowsboth actions adding to an already-large beef supply.

A larger number of 1996 and 1997 heifers have now been fed and slaughtered which resulted in a flood of beef dumped on the market in 1997 and 1998. With the extra pounds from heavier slaughter weights this year, and Canadian imports, 1998 is projected to have the second-highest beef production on recordsecond only to the record beef production in 1976.

The cattle cycle downturn in 1995 was amplified by the southern plain's 1996 drought liquidations adding to the beef supply. High feed grain prices in 1996 and in early 1997, coupled with continued large beef supplies, kept considerable pressure on cattle prices.

The accumulated smaller calf crops are projected to substantially reduce 1999's beef supply and should trigger a price upturn in 1999maybe even a rapid one. So rapid, in fact, that you cannot use last year's experiences to guide this year's marketing decisions.

The traditional beef cow producer who gets his price signals from last year's experience, has the potential of being caught on the wrong side of the market this year. My phone calls suggest that, indeed, some producers and bankers are looking at the wrong side of this market.

In the turnaround phase, you and your banker absolutely have to look forward, not backward. You have to focus on marketing strategies designed specifically for the turnaround phase of the beef price cycle. Using only one marketing strategy through all phases of a beef price cycle simply does not work very well.

The key tool for formulating profitable marketing strategies for the turnaround phase of the beef price cycle is your pencil. You use your pencil to prepare budgets projecting your potential economic returns from alternative production and marketing strategies. This year you certainly do not have to be a rocket scientist to pencil out forward-looking budgets that uncover some profitable marketing alternatives. My budgets show that today you can lock in your corn prices, lock in your slaughter market prices, and you can lock in a $57 per head profit. That's 259 percent more profit than I am projecting by selling at weaning.

My penciled budgets suggest a $120 profit potential between weaning and slaughter. If you go after all of this profit, northern plains beef cow producers could get up to $90 per hundredweight for their calves through retained ownership in the northern plains, or up to $85 per hundredweight for their calves marketed through retained ownership and fed in a central plains custom feedlot. These calf market prices were calculated by attributing slaughter profits back to the break-even value of the calves going into a calf-fed budget. On the other hand, my budgets suggests that the smallest profit potential that you, or your banker, can select is to use last year's experience to conclude that you should sell this year's calves at weaning.

If you are going to share the potential profits in your 1998 calves, the thumb rule that I am suggesting now is to use $80 per hundredweight as your decision point. If you can get more than $80 per hundredweight for your steer calves (assuming a $6 to $8 heifer discount), sell at weaning. If you will have to take less than $80 per hundredweight, consider backgrounding and/or retained ownership to capture more of the profits.

Your income tax situation can also affect the economic profitability of your specific marketing alternatives. Remember, your profit-maximization goal needs to be to maximize after-tax income and not minimize income tax payments.

A key component of any budget is the planning prices you use. Each week I generate a new set of planning prices developed from local sale barn prices and sale barn price-slides adjusted forward by the current feeder cattle futures market prices. I prepare a new set of planning price projections for fall 1998, January 1999, March 1999 and Spring 1999 and they are stored each week on my Web page.

Based on the week of Oct. 5, I am projecting 500- to 600-pound steer calves to sell at this year's weaning time in the mid-$70s. If this $75 market price is applied to my IRM demo-herd budget, it projects a $22 per cow earned return to unpaid family and operator labor, management, and equity capital. This compares to North Dakota's Farm Business Management herds' average of $30 per cow in earned returns last year. Cost of production are projected down in 1998, but market prices are also projected down in 1998.

I prepare a weekly set of budgets designed to reflect current northern plains marketing alternatives for 1998 calves. My current alternative marketing budgets are on my Web page (http://www.ag.ndsu.nodak.edu/cow) under the weekly market prices button under the Dickinson Price Projection Summary hot line.

If you have access to the Internet, please pull off my latest budgets. If you do not have Internet access, ask your extension agent to print out my budgets for you. You might even want to access these budgets weekly. If you want my secretary to send you a free copy, please call Sandy at (701) 231-8642 and request a copy of these budgets.

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Source: Harlan Hughes (701) 231-7380

hhughes@ndsuext.nodak.edu

Editor: Tom Jirik (701) 231-9629

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