Place your bets. Record cash and futures prices paid for cattle, in tandem with ongoing drought-decimated forage supplies, will test plenty of producers' gambling mettle this fall.
On one hand, a rule of thumb used by retained ownership proponents suggests that holding cattle, especially through the stocker phase, offers an economic boost on average. That's if your guts and bank account can stand it.
The logic runs this way: retain ownership to minimize your losses when cattle are plentiful and prices are low; retain ownership to exploit an up market when cattle numbers are short and prices are high.
On the other hand, well, we've never been down a road quite like this one.
“If you could tell me we'll definitely start retaining heifers this year and begin rebuilding the national herd, that rule might still hold up,” says Rodney Jones, a livestock production specialist with Kansas State University Research and Extension. “But we've been getting the economic signal to begin expanding for three years now. Forage supplies in the West haven't allowed the industry to do that.”
The Drought Component
So, without heifer retention thinning already short cattle numbers, Jones won't lay odds on how much kick is left in an already historically stratospheric market.
In fact, Jones says, “I'm sending the strongest message I ever have to producers that if you're faced with any type of forage constraint, it's difficult to come up with a retained ownership program that works this fall.”
Specifically, Jones recently ran some projections for retained ownership through dry-lot backgrounding and finishing. The basis was producers in Kansas, who are still grinding through drought, as are producers in many states in the Plains, West and Southwest.
“For all of the options considered, the projected breakeven figures are considerably higher than the expected sale price. The result is a projected loss of $30-$50/head for each program compared to selling the calves now,” says Jones. And that was before fed cattle traded for $92/cwt. in Nebraska, setting the stage for higher feeder prices.
Jones didn't pencil hold 'em or fold 'em options for wheat calves because expectations started out weak, even with some late August rains in the heart of wheat pasture country.
As always, there is plenty of room for exceptions to the prediction. Some parts of the country are blessed with forage. Wheat pasture could still come on as strong as last year, etc.
For that matter, Jones is quick to point out he made similar predictions and recommendations last fall.
“With the benefit of hindsight, the futures price forecasts made last August for early 2003 were simply too low for the prices that materialized,” explains Jones. “Forage conditions were tight then, too, but the market rebounded more significantly than the futures market told us it would.”
Of course, in terms of maximizing profit, he adds there was still more to be made selling the calves, then buying back the futures.
Then as now, Jones continues, “If you believe futures forecasts today and decide to retain ownership, you're saying that you expect cash prices to move higher.”
Take The Money Now
When fed cattle are commanding as much as some feeder weight cattle, that's a tough expectation to swallow with a straight face, fundamentals or not.
Either way, finding the opportunity continues to revolve around a firm grasp on the breakeven in calves, relative to what they can be sold for, relative to whether there is extra goody to be had adding pounds and at what cost.
What's different this time around, says Jones, is that there are some forces out there that haven't been there previously. In addition to cyclically low numbers and drought, there is the absence of Canadian cattle and beef since the end of May, coupled with steamy domestic and export beef demand. The economic signals have kept feedlot show lists extraordinarily current and carcass weights down substantially from a year ago.
“We've been used to fed cattle trading for $65-$80/cwt. Maybe now the floor has moved up and they'll trade for $75-$90/cwt. for the next 20 years, but I'm not willing to bet on it yet,” says Jones.
Instead, he believes if there was ever a time to take the money and run, this might be it.
“Cattle and calf prices are currently very strong from an historical perspective, and much stronger than when many producers were faced with similar decisions last year,” says Jones. “When faced with tight resources, these high prices may be hard to pass up.”
FMD Surfaces In Argentina
Argentina's national agricultural and food health and quality agency (Senasa) has confirmed an outbreak of foot-and-mouth disease (FMD) in the northern province of Salta. The date of initial detection of this FMD outbreak was Aug. 28. Estimated date of first infection was at least 30 days before the initial detection of the incident.
In July, Argentina had been declared “free of FMD with vaccination” since there were no outbreaks registered in the country for a period of 18 months.
Senasa proceeded with the immediate slaughter of the 18 pigs and their contacts from the infected property. In order to comply with the regulations issued by OIE, Senasa must destroy all outbreak-associated animals to recover its status of “zone free of FMD with vaccination” within 180 days.
Argentina had a major outbreak of FMD in 2001. The U.S. then closed its market to imports of fresh Argentine beef, which had been allowed entry under a strict tariff rate quota of 20,000 metric tons/year.
An investigation into the source of agent and the origin of the infection is under way. The outbreak is due to a Type O FMD virus, the same virus type isolated from cattle in a community production system in Chuquisaca, Bolivia in July 2003.