Today's roller-coaster cattle prices are largely attributable to extended drought in the western U.S. and western Canada, and the cattle cycle's delayed turnaround phase.
U.S. all-cattle numbers began falling in 1996, and this cycle's expansion phase was projected to start as early as 2001. But, the Sept. 11 terrorist attacks, discovery of bovine spongiform encephalopathy (BSE) in Japan and the multi-year drought have prevented the expansion from starting. As of mid-January 2003, we've yet to start building the North American cattle herd.
An overbuilt cattle feeding sector has done everything possible to keep cattle-on-feed numbers as high as possible, including importing Mexican and Canadian feeder cattle. The seven-year drop in U.S. feeder calves born has finally reduced the number of cattle-on-feed to below year-ago numbers (Figure 1 ).
The U.S. increase in feeder cattle numbers over the last three years is attributable to two factors:
Heifers have been diverted from breeding to feeding.
Feeder cattle imports have been high from Mexico and Canada.
With respect to the first, the tendency among Wyoming ranchers was to sell their 2002 calves rather than hold any back as replacement heifers. In fact, this was typical of many ranchers in the drought regions. The multi-year drought has added to the cattle-on-feed numbers even though fewer calves were being born.
While the U.S. drought centered in western cow country, Canada's drought was in its feed-grain production region. Canada is now importing corn from the Dakotas and Minnesota.
Drought-induced, high feed-grain prices in Canada, coupled with a weak Canadian dollar, led to Canada's export of more than 500,000 feeder calves to the U.S. Meanwhile, Mexican feeder cattle exports to the U.S. dropped this last year. The net result is that we're finally seeing a drop in cattle-on-feed numbers (Figure 1 ).
Summary Of 2001 Numbers
My 2001 routine simulations on traditional marketing alternatives summarized the economic profits from selling 2001 calves at weaning; backgrounding 2001 calves at a high average daily gain (ADG); backgrounding 2001 calves at a medium ADG; finishing the high ADG backgrounded calves in a second feedlot; growing and finishing 2001 calves in the same feedlot; and running 2000 calves as yearling steers on grass during the 2001 summer. The simulated profits from these five marketing alternatives are:
Selling at weaning: $113/cow.
Backgrounding all calves at high ADG: $7/head.
Backgrounding all calves at medium ADG: -$11/head.
Finishing the high ADG backgrounded calves: -$107/head.
Grow and finish calves in the same feedlot: -$53/head.
Running 2000 calves as yearlings on grass: $2/head.
As discussed in my previous Market Advisor, post-weaning of 2001 calves did not generate a positive profit.
Projected 2002 Numbers
The current, roller-coaster market makes it impossible to use last year's economic results to plan this year's calf marketing program. The numbers below represent my most recent (as of week of Jan. 17) summary of the same traditional marketing alternatives for 2002 calves. The projected profits from these seven marketing alternatives are:
Selling at weaning: $55/cow.
Backgrounding all calves at high ADG: $28/head.
Backgrounding all calves at medium ADG: $0/head.
Finishing the high ADG backgrounded calves: $8/head.
Grow and finish calves in the same feedlot: $104/head.
Running 2001 calves as yearlings on grass: $58/head.
Finish yearlings off grass: $12/head.
A seventh marketing alternative of finishing yearlings off grass was added to the 2002 marketing alternative list. My simulations suggest that 2003 may also be a year to run 2002-born yearling steers on grass during summer 2003.
The highest marketing alternative projected for 2002 is harvesting new-crop calves in the March and April 2003 time period. By the time you read this, we will be in the middle of this marketing alternative and you should be able to confirm this.
Finishing backgrounded calves to be harvested in June 2003, after the seasonal price peak, however, is projected to be about a breakeven deal at best and may even generate a negative return. Why such difference in April 2003-finished 2002 calves versus June 2003-finished 2002 calves?
Seasonal Price Index
In addition to the roller-coaster, annual average cattle prices, ranchers must also take seasonal price patterns into account. I published a chart of seasonal prices in my November BEEF “Market Advisor”.
While most years follow the seasonal pattern, amplification of the highs and lows are common in any given year. All indications are that 2003 is going to be one of those years.
The current futures market is showing $80+ February and April prices but $70 June prices and $69 August prices. While these prices follow the historical seasonal index, the magnitude of the market-price ups and downs are projected to be larger this year.
The net result is that cattlemen getting new crop calves to harvest first (in March and April 2003) are projected to smile all the way to the bank. Others may have just a so-so year again.
A Sneak Peak At 2003 Numbers
Looking backward doesn't work in today's markets. I encourage ranchers to develop their own set of forward-planning prices and use them for their price signals.
Using my current planning prices for marketing 2003 calves, I project profits from four of the traditional marketing alternatives for 2003 calves. These are:
Selling at weaning: $72/cow.
Backgrounding all calves at high ADG: $45/head.
Finishing the high-ADG, backgrounded calves: -$64/head.
Grow and finish calves in the same feedlot: $62/head.
Pre-weaning profits (selling at weaning) with 2003 calves are projected to be higher than pre-weaning profits with 2002 calves. However, drought-induced high feed prices are projected to take a toll on 2003 pre-weaning profits.
With respect to post-weaning profits, my simulations suggest the best marketing program for 2003 calves is to either background them at a high ADG or grow and finish them, again targeting the March/April, seasonal high market prices. Being the first to market “new crop” 2003 calves is projected to again be the most profitable.
The roller-coaster market suggests that optimum marketing of 2002 and 2003 calves should be obtained through similar marketing programs, something quite different from the optimum 2000 and 2001 marketing programs. The key to 2002 and 2003 profits is looking forward for your price signals.