NEWS for North Dakotans
Agriculture Communication, North Dakota State University
7 Morrill Hall, Fargo, ND 58105-5665
September 30, 1999
Harlan Hughes, Extension Livestock Economist
NDSU Extension Service
I suggest that your marketing plan for 1999 calves needs to be based on six critical planning prices spread out over the next 15 months. These six critical planning prices, in chronological order, are: 1) price of weaned calves this fall, 2) price of backgrounded calves after the first of the year, 3) price of yearlings going on grass next spring, 4) price of slaughter cattle in late spring or early summer, 5) price of yearlings coming off grass in the fall of 2000 and 6) price of slaughter steers at the end of year 2000 . Once you have established these six planning prices, you will be able to develop a marketing plan that optimizes your projected profit from the marketing alternatives available for your 1999 calves. Your optimum marketing plan should also take risk and income tax consequences into account.
Rising cattle prices, surplus feeds, low costs of gain and now eight months of cattle feeding profits are all factors influencing planning prices for marketing 1999 calves. These four factors have collectively added considerable optimism to today's cattle industry, and these factors all need to be taken into account when you establish your 1999 planning prices.
Those who follow my writings know that I am still a believer that cattle cycles are alive and well and that cattle cycles cause beef price cycles. I am convinced that cattle cycles are caused by the biological lag in producers' production responses to favorable market prices. Since nobody is proposing changing the biology of the beef cow, I am suggesting that the cattle cycle is live and well.
Cattle cycle theory suggests that the current upward trend in cattle prices is part of the long-run impact of the last three years' of decreasing all-cattle numbers. In spite of decreasing all-cattle numbers, record cattle-on-feed numbers have been reported in 1999. In fact, cattlemen have been doing everything they could to delay the marketings of 1996, 1997 and 1998 calf crops. A study of past cattle cycles suggests that delayed marketings were experienced in past cattle cycles and that cattle-on-feed numbers peak about three years after the all-cattle number peaks. This, in turn, suggests that the backlog of 1996, 1997 and 1998 yearling steers and heifers have about been worked through and cattle-on-feed in year 2000 is now projected to decrease.
Cattlemen have also marketed large numbers of heifer calves as slaughter heifers, and there are still a lot of heifers on feed. Since a large number of 1998 heifers have been directed toward feedlots rather than breeding, we are assured that the all-cattle number will again decrease in the Jan. 1, 2000 all-cattle inventory. In fact, cattlemen will need to retain 1999 heifer calves for breeding if we are going to have the U.S. all-cattle number turn upward in year 2001. North Dakota cattlemen are indicating that they have bills to pay from previous years and that they will not be holding back extra 1999 heifers for breeding. We will have to wait and see what the current run-up in calf prices actually does to heifer calf retention this fall.
My analysis suggests that cattle prices tend to go in approximate 10-year cycles. During the 1994 through 1998 five-year downside of the beef prices cycle, North Dakota's 500- to 600-pound October steer calf prices averaged $74 per hundredweight for the period. Last year (October 1998) 500- to 600-pound steer calves averaged $77 in western North Dakota. I am currently projecting October 1999 weaning prices for 500- to 600-pound steer calves in the high $80 or low $90s. I am also projecting a 1999 through 2003 five-year October average of $91 per hundredweight for 500- to 600-pound calves. This price projection suggests 500- to 600-pound steer calves could average $17 per hundredweight higher during the next five-year period as compared to the last five-year period.
Combine where we are in the beef price cycle with all kinds of surplus feeds and you have a stronger feeder calf market for 1999. Reports from the Southeast U.S. markets suggest that cattle feeders (more specifically one major cattle feeder) have already been aggressively buying feeder calves this late summer. Farmers in Iowa and southern Minnesota are suggesting that they are going to market their low-priced feed grains through cattle. North Dakota has a large quantity of sprouted feed grains that must now be marketed through cattle. All of this suggests a strong feeder calf market this fall.
Western Kansas costs of gain have trended steadily downward since February 1996, and cost of gain in feedlots during the next 12 months should be very, very low. Costs of gain in western Kansas for this next year are projected to be in the very low $40s. Costs of gain in the northern plains will be even lower.
North Dakota's lower feed costs of gain are partially offset by increased marketing costs. Nevertheless, I am projecting total finishing costs of gain in North Dakota (including our higher marketing costs) in the very low $40s. With the expected low costs of gain this year, the key for profitable marketing plans for your 1999 calves is going to be the size of the buy/sell margin that you will encounter in the marketing of the cattle. Due to cyclical wide buy/sell margins at this point in the beef price cycle, marketing is going to be even more important during the next few years.
I published my early September planning prices in my last Market Advisor. I have developed a price projection system that I will use to update these price projections weekly. My plans are to post these revised weekly price projections on my Web site at www.ag.ndsu.nodak.edu/cow under the "weekly prices" hot button. I want to use this Market Advisor to point out my current projections for the six critical marketing prices for evaluating marketing plans for 1999 calves. I will use these six critical planning prices in my next Market Advisor to evaluate critical marketing alternatives.
Let's take a look at these six critical planning prices. My mid-September projections put 500- to 600-pound calves this fall in the low $90s -- say $92 per hundredweight. Selling $92 steer calves at weaning projects a typical earned net return of $100 to $110 per cow from the beef cow profit center.
Next, let's look at the backgrounding profit center. I am projecting that these same calves backgrounded to 800 pounds after the first of the year would sell for $79 per hundredweight. With $92 calves going into the feedlot and coming out at $79, we have a negative $13 buy/sell margin -- larger than average.
Someone will buy these 800-pound feeders after the first of the year at $79 and finish them at 1,250 pounds in June 2000. My projections have these animals coming out of the feedlot at $67 for a buy/sell margin of a negative $12 -- quite large.
Finally, let's look at grass cattle in year 2000. My projections suggest $85 cattle going on grass and $82 cattle coming off grass giving a negative $5 buy/sell margin. This suggests that grass cattle will again be profitable in year 2000.
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Source: Harlan Hughes (701) 231-7380
Editor: Gary Moran (701) 231-7865
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