NEWS for North Dakotans
Agriculture Communication, North Dakota State University
7 Morrill Hall, Fargo, ND 58105-5665
January 20, 2000
Harlan Hughes, Extension Livestock Economist
NDSU Extension Service
Optimism has clearly returned to the cattle industry as opportunities for profitable marketing of 1999 calves became numerous. Feeder cattle supplies are starting to tighten, so feedlots will become more aggressive in bidding for replacement feeders. In fact, today's prices already are so strong that, according to my projections, cattlemen are bidding away much of the downstream profits on 1999 calves.
Because there are not enough 700- to 800-pound yearlings to meet feedlot demand, feedlots are starting to feed calves. This, in turn, guarantees even fewer available yearlings for this year and beyond. Cow-calf producers, with initial control over their 2000 calves, are now moving into the driver's seat with respect to calf marketings.
Three economic forces have brought about the optimism in the beef industry. First, beef demand has increased for the first time in 20-plus years. Consumers, feeling their stock market wealth, are spending like there is no end to the current business cycle. Consumers are eating out and eating beef. Demand for high choice and prime beef is at an all-time record high.
Second, low feed grain prices are resulting in feedlot costs of gain in western Kansas in the low $40s and feed costs of gain in the northern plains in the high $30s. Finally, the northern plains has considerable damaged food grains and oil seeds that must be consumed by cattle, so many northern plains backgrounding lots are full of 1999 calves.
These factors, coupled with the increased calves being fed in commercial feedlots, lead me to expect a shortage of grass cattle for summer 2000. All of this contributes to current high optimism, strong feeder cattle prices and projected strong feeder cattle prices for the next three or four years. The major factor that would negate this optimism is a below-average corn crop in the Corn Belt.
Over the next year or two cow calf producers are predicted to respond to these high calf prices by holding back additional replacement heifer calves for breeding. Once this happens, we will see an even greater shortage of feeder cattle. Once cattlemen collectively decide to breed their heifers rather than sell them as feeders, feeder cattle price premiums over slaughter cattle prices will widen considerably--perhaps even become record wide--as the supply of feeder cattle gets smaller.
Managers of two major private feedlots told me recently that they do not see corporate feedlots backing down in the number of cattle that they feed. As a result, these private feedlots were concerned about how they will source feeder cattle. I expect these private feedlots to aggressively pursue alliances with beef cow producers to ensure a continued feeder cattle supply. This should be a win-win situation for both the feedlot operators and the selected cow-calf producers.
For those of you who still own 1999 calves, the markets are currently strong and my projections are for the strong markets to continue. I routinely publish an economic evaluation of 10 marketing alternatives for 1999 calves, and my latest marketing evaluations (budgets) are posted on my web page www.ag.ndsu.nodak.edu/cow under the " weekly cattle prices" hot button. Let me summarize four of the 10 marketing projections published on my Web page for the week of Jan. 14.
Selling at weaning: My demonstration 156-cow herd, with an average weaning weight of 565 pounds, is calculated to have netted $102 per cow selling 1999 calves in late October.
This compares to a calculated earned returns of $33 per cow with 1998 calves. These steer calves would have averaged $91 per hundredweight if sold in western North Dakota during the month of October. The calculated $102 is the earned net returns to unpaid family and operator labor, management, and equity capital invested in the cow herd. This is the earned returns in 1999 to this ranch family's three resources consumed by the cow herd.
I am anxious to get started conducting Integrated Resource Management (IRM) 1999 calf cost and return analyses for individual northern plains beef cow cooperators to see how the 1999 year turned out for each of them. I hope to start this year's IRM analyses in mid-February.
Backgrounding and selling 800-pound feeders during the last week in January: This marketing alternative assumes that the calves were weaned and put in the backgrounding lot valued at the $91 weaning price, pushed hard to attain a target of 2.59 pounds average daily gain to weigh 800 pounds by the last week in January. The projected selling price is $84, netting a return to this family's resources of $52 per calf. Remember, this is in addition to the $102 earned from producing weaned calves. I refer to the $102 beef cow returns as the pre-weaning profits and to $52 backgrounding profits as the post-weaning profits.
Finishing backgrounded calves: This marketing alternative assumes that the backgrounded calves from the second marketing alternative above were fed in a rancher-owned North Dakota feedlot and finished at 1,250 pounds targeting a mid-June market. They went into the feedlot at 800 pounds valued at $84 per hundredweight and are projected to gain 3.3 pounds per day. Given my projected mid June selling price of $70, they should earn a return to the family's resources of $9 per head. Remember, this is an additional $9 above and beyond the $102 pre-weaning profits and the added $52 backgrounding profits. With this kind of projected return from finishing, however, I am now recommending that ranchers let someone else finish their 1999 backgrounded calves.
The economic reality is that backgrounding and then finishing is generally a high-cost way to produce beef. A few years ago I conducted a study suggesting that backgrounding and then finishing an animal costs 11 percent more to produce beef than did feeding them as calf-feds. This extra cost comes from slowing down these fast-track cattle in the backgrounding phase. These delayed finished backgrounded animals also tend to hit the lower summer seasonal slaughter market prices. In short, these animals typically cost more and return less.
Growing and finishing these 1999 calves as calf-feds: This marketing alternative assumes that the calves are put in a custom North Dakota feedlot at 565 pounds and are grown and finished in that lot. The target marketing date is late-May, weighing 1,175 pounds. The May slaughter cattle market projected in the $72 ranges results in a earned net return of $87 post-weaning profits. If somehow these calf-feds could have been early weaned and targeted for the seasonally high April market, profits would have been projected even higher.
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Source: Harlan Hughes (701) 231-7380
Editor: Tom Jirik (701) 231-9629