NEWS for North Dakotans
Agriculture Communication, North Dakota State University
7 Morrill Hall, Fargo, ND 58105-5665
March 30, 2000
Harlan Hughes, Extension Livestock Economist
NDSU Extension Service
Note to readers: I am retiring from North Dakota State University effective March 31. This is the last Market Advisor that I will be writing as an Extension Livestock Economist with NDSU. My personal plans are to take the summer off and teach six grandkids to waterski.
My wife is going to teach one more year, and then she will retire in May of 2001. We plan on summering in Fargo and wintering in Mankato, Minn., where my wife teaches. After that, we have a travel trailer and are planning on visiting all kinds of interesting places around the United States and Canada. We might even accept an invitation to camp a few days at your ranch.
I plan on staying involved in the beef industry as I will continue my speaking engagements around the United States and Canada. I already have some speaking engagements lined up for this summer and fall. If you need a conference speaker, give me a call at (218) 585-4426. NDSU will be maintaining my Web page, and you should see a transition of this Web page over the next several months. After a summer break, I plan on continuing my writings by starting up a beef advisory newsletter on a subscription basis. Stay tuned.
I want to express my sincere thanks to all of my readers for the support and feedback on the Market Advisor and all of my educational programs. I am going to miss NDSU as it has been a neat place to work. There are really some super people working there! I am also going to miss working with North Dakota's IRM cooperators who taught me almost everything I know about the beef cow business. I am, however, definitely looking forward to this career change, and I hope that you will continue contacting me and sharing with me what is on your mind.
This Week's Topic
If you are going to run grass cattle this year, be aware of where we are in the cattle cycle and its resulting beef price cycle. Adjust your production system accordingly. Grass cattle profit margins are projected to be slim for conventional grazing systems, at $14 to $17 per head, but a production adjustment may just turn this year's grass cattle into a sizeable profit venture. My analysis suggests that going on grass this year with lightweight calves and then staying on grass late into October could generate a $52-per-head profit after paying for the grass.
In the turnaround phase of the cattle cycle, which we are in now, it takes a price turnaround to trigger a cattle numbers turnaround. Comparing last year's $85 grass cattle prices to this spring's projection -- $94-$96 per hundredweight for 625-pound grass cattle -- suggests that grass cattle are running at least $10 per hundredweight more than last year. We have already experienced the price turnaround in this cattle cycle, and it certainly should trigger a numbers turnaround.
The critical issue is not if but when are ranchers going to divert heifers from the feedlot to breeding herds during this cattle cycle. When this diversion occurs, feeder cattle demand will exceed feeder cattle supply, and feeder cattle prices will strengthen even more. We have excess feedlot capacity, and the underutilization of this capacity is going to become acute.
The key to the above profit projection is strong feeder prices this fall. So, what kind of price can we expect off grass this fall? Jim Mintert, Kansas State University agricultural economist, recently stated: "Futures-based price forecasts for 700- to 800-pound steers are near $82 for mid-March, but climb into the mid-$80s for most of the spring and summer. Based upon current futures prices, heavyweight feeders are expected to trade in the upper $80s by late fall. If basis this fall is more positive than average, cash prices could break $90 by December."
The normal seasonal pattern for 700- to 800-pound yearlings is for the September price to exceed the August or October price while November's and December's prices are lower. I read Jim's projections to suggest a countercyclical fall marketing pattern.
My futures-based price projections for March 24 are posted on the Web at www.ag.ndsu.nodak.edu/cow/prices/dksum.pdf. (You will need Adobe Acrobat Reader to read this.) These projections suggest that 750- to 800-pound steers off grass in September could bring $85 to $87 per hundredweight -- very much in line with Dr. Mintert's projections. My October 2000 price projections currently suggest 825- to 850-pound yearlings off grass in October could average in the low- to mid-$80 per hundredweight. Prices should even strengthen by fall.
So, I'm suggesting that cattle producers implement a revised grass production system and go on grass light this year and stay on grass into October. I would go so far as to suggest targeting 850-pound or heavier steers off grass this year. Feeder cattle demand, relative to supply, is projected to be strong this fall -- even for overweight grass feeders.
Given my price projections, let's look at the projected buy/sell margins for my revised production system: buying 500-pound calves in late March, growing them in a drylot until grass at a target of 1.25 pound average daily gain at a cost of 30 cents per pound, and then going on grass in mid-May at 565 pounds and coming off grass in October at 830 pounds. The midpoint of my projections suggests 565-pound steers going on grass at $97 and 830-pound steers coming off grass at $86, for a minus $11 buy/sell margin. This minus $11 buy/sell margin generates a projected marketing loss of $62 per head. Cattlemen will need to make up this marketing loss with low-cost gain while on grass.
This large negative buy/sell margin is a key factor in my recommendation that cattlemen run on grass longer this year. In addition, the market price is projected to strengthen counter seasonal into the fourth quarter of this year. These two factors can combine to make marketing grass cattle profitable during the turnaround phase of the cattle cycle -- provided you change your production system accordingly.
Because cattle cycles do repeat, let's look at the average buy/sell margins in the turnaround phase of the last cattle cycle. In 1987, North Dakota's buy/sell margin was a positive $3.44, even more favorable than 1999's favorable minus $1.62 buy/sell margin. In 1988, the buy/sell margin for grass cattle went to a negative $9.37, and in 1989 it went to a negative $6.50. This, then, suggests a grass cattle negative buy/sell margin of minus $9 to $10 this year and minus $6 to $7 for next year.
I priced grass into my forecasts at $10 per steer each month for a $51 grass bill per steer. Couple this with $21 interest cost for 153 days (March into October) along with a death loss charge and I get a projected cost of gain of 40 cents per pound. Including marketing costs increases this cost of gain to 43 cents per pound. Marketing the 265 pounds of gain at 43 cents profit (86 cents minus 43 cents) gives a projected profit of $114 per head from the pounds gained. Subtract the $62 marketing loss, and I have a projected profit from this revised grass system at $52 per head. Not bad for a second year in the cattle cycle turnaround. The key is to buy lightweight calves early to put on grass and then graze them into October before marketing them.
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Source: Harlan Hughes (701) 231-7380
Editor: Tom Jirik (701) 231-9629
Click here for a pdf version of this graphic. (17KB b&w pie chart)