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Articles from 2005 In October


Cattle-Fax: Cow Costs Vary Significantly Between Regions

Based on a survey of cow-calf producers, Cattle-Fax recently reported the cash costs to carry a cow in various regions of the U.S. in 2004.

Table 1. Average Regional Cow Costs ($/Head), 2004a
Region Feed cost Labor cost Interest expense Other costs Total cash cost per cow
Northwest 206 63 19 91 379
Southwest 196 42 25 7 270
Midwest 219 37 19 51 326
Southern Plains 185 52 29 51 317
Southeast 165 45 26 46 282
U.S. avg. 194 48 24 49 315
aAdapted from Cattle-Fax ®, July, 2005.

Total cash costs were highest in the Northwest and lowest in the Southwest and Southeast. Feed costs were lowest in the Southeast and Southern Plains, and highest in the Midwest.

The national average for feed costs as a percentage of total costs was 62%. Therefore, working on reducing feed costs would appear to be a reasonable place to start in lowering cost of production and thereby enhancing profitability.

What's In Store For Land-Grant Universities?

Every so often, I need to get on my soapbox; this is one of those occasions. What's happening at your and my alma maters is a subject we in the cattle business should start to think about.

First, I'll establish the fact I spent a fair number of years at three different land-grant universities pursuing bachelor, master and doctorate degrees in animal science. I also spent more than five years in Extension work; I'm not exactly an uninformed bystander.

Second, I have a lot of friends at land-grant schools — people I respect for their knowledge of livestock production, nutrition, breeding, physiology and meat science. These people have tremendous knowledge and the ability to convey that information to producers.

This isn't meant to be critical of them; in fact, many of them share my concerns. They fight regularly to stay alive in a system that seems to appreciate their contributions less and less. They're the ones whose names you and I recognize and associate with our university. Their ranks are thinning.

Morrill Act of 1862

Land-grant colleges were established by the Morrill Act of 1862, which gave each state 30,000 acres of land per member of the state's delegation in Congress. In turn, the states sold this land to establish a college focused on agriculture, engineering and military science — the priorities of the day.

What these universities produced for U.S. agriculture was a place for research, training for young minds, and dissemination of new information to agricultural producers, in a system that was the envy of the rest of the world. It created a highly efficient agricultural production structure admired worldwide, and, not surprisingly, many countries send their brightest minds to study here in graduate programs.

But, the land-grant system is broken in some states; at the very least, it doesn't relate to producers as well as in the past. There's even talk of doing away with the colleges of agriculture in some major agricultural states.

I can cite many examples where animal science departments and staff have lost contact with their state's producer organizations and passed up recruitment opportunities at youth livestock events. They've even failed to show up at a state breed sale just a few hundred feet from their office.

Do you recognize ag faculty?

A former college teacher of mine who is retiring this fall says that, as an incoming freshman, he already knew a majority of the animal science faculty members through his involvement in 4-H and FFA. I suspect many livestock producers today wouldn't recognize the department head, by name or face, and have little contact with staff members.

Part of the problem is the system is a victim of its own success. It fulfilled the government's desires for a cheap food policy. As long as we enjoy ample supplies of high-quality, safe food in this country, government funding for agriculture research will not be a priority.

This has forced universities into the “research business” to seek research money from other sources. That's compromised the land-grant mission of unbiased research and information. It also has eliminated much of the good, applied research that needs to be done.

Additionally, part of the problem is self-inflicted. A misguided tenure system several years ago placed teaching and Extension well below research. The ability to bring in research dollars became the focus for advancement.

I imagine counting published research papers is much simpler and less subjective than evaluating the quality of undergraduate teaching or Extension outreach education. This has forced teachers and Extension staff to be good researchers; and the system awards good researchers with the administrative jobs (department head and dean positions) as promotions.

Is there any surprise we've spiraled downward to departments overloaded with narrowly focused researchers who can't relate to producers?

Am I old-fashioned?

I've done a little soul-searching in writing this piece. I've challenged myself with the question, “Am I getting old-fashioned?”

I don't think so. I'm not against cutting-edge research, but I think there's still an opportunity and need to balance research with teaching and Extension.

In the past, Extension filled an unofficial role of public relations. Producers were quick to pick up the flag and support their university. Could the recent trend contribute to universities' problems when state legislatures struggle with funding?

Another issue we need to wrestle with is one of preserving the past vs. preparing for the future. In agriculture, we're guilty of this every once in awhile.

As the pork and poultry industries consolidated and integrated, the role of the land-grant university in providing information to these industries diminished. It's not a cause-and-effect issue, however.

Is consolidation a solution?

Consolidation is driven by the desire to gain business efficiencies and meet consumers' demand for consistency. Hoping to keep the beef industry from consolidating by preserving the old land-grant system is an empty dream.

The solution may be in consolidating the land-grant system itself. Rural public schools and clustered county Extension programs provide the model. Does every state need a specialist in every discipline? Does every institution need to fund, equip and update expensive labs to conduct basic research?

From almost any angle we examine the situation, the cattle business increasingly is going to feel the impact of all of this in the coming years. As an example, Cornell University has no intention of replacing two scientists nearing retirement who played a major role in the genetic evaluation system we enjoy in the seedstock business. That will reduce to two the schools working on national cattle evaluation; a few years ago, there were four universities in the so-called Genetic Consortium.

Where we get the good information we'll need to compete in the future is something to think about.

Wayne Vanderwert is the executive director of the American Gelbvieh Association. Contact him at [email protected].

Taking On Tyson

Pat Goggins can't believe it. As a lead plaintiff in Pickett v. IBP, the Billings, MT, cattleman is astounded that a judge could so badly mismanage a trial and that an appellate court could so badly miss a case's point.

In August, a three-judge panel from Atlanta's 11th U.S. Circuit Court of Appeals issued its ruling in Pickett v. IBP — an appeal that asked for reinstatement of the case's 2004 district court jury decision. The jury originally found that Tyson's (formerly IBP's) procurement methods damaged nationwide cash cattle prices over an eight-year period. The jury subsequently ordered Tyson to return $1.28 billion to “a class” of the nation's cattle producers it believed was harmed.

Following the jury verdict, however, U.S. District Court Judge Lyle Strom, on a set of technicalities, granted Tyson's motion for “judgment as a matter of law” and entered final judgment in Tyson's favor. The ruling prompted the appeal to the 11th Circuit Court, which to the plaintiffs' chagrin unanimously affirmed Strom's decision.

“The Court missed the point by a country mile,” Goggins says after the latest turn in the now decade-old case. “It was clearly shown that marketing agreements and captive supplies take the competition right out of the fed-cattle business.”

He says the decision paves the way for a company like Tyson to use marketing agreements and captive supplies to illegally stake out its economic territory and drive independent ranchers and feeders out of business. Goggins says the only economic hope for the average cattle rancher is a climate of open market competition.

“The packers and their affiliates — the large, large cattle feeders — are all in the buggy together,” he says. “They want to take competitiveness in the markets away from the average cowman. It's scary. It sends chills up and down my spine.”

Beyond the effects of the decision at hand, though, Goggins worries there was a precedent set in this case — a precedent that could rock the underpinnings of our nation's judicial system.Goggins notes the 7th Amendment to the U.S. Constitution says, “In suits at common law, where the value in controversy shall exceed $20, the right of trial by jury shall be preserved, and no fact tried by a jury shall be otherwise re-examined in any court of the United States, than according to the rules of the common law.”

“This ruling sends a dangerous signal that a presiding judge in a federal case can throw out a jury's ruling,” Goggins explains. “Are we, in one fell swoop, not only going to wipe out competition in the marketplace, but wash out our jury system and go to a Fascist-style judicial system that eliminates the right to a trial before our peers?”

Adding insult to injury, the Circuit Court panel last month unanimously supported another district court decision ordering Goggins and the other plaintiffs to pay Tyson more than $70,000 in expenses related to the Montgomery trial.

The history of Pickett

Goggins' involvement in Pickett goes back to Day One of the case. In what's been hailed as the cattle industry's biggest trial in more than a century, Montgomery, AL, cattleman Henry Lee Pickett launched a lawsuit (originally filed against IBP) representing cattle producers who sell their fed cattle to meat-packing plants on the cash market. The suit, brought under the Packers and Stockyards Act (PSA), claimed Tyson used unfair and anticompetitive marketing agreements to deflate cash fed-cattle prices — and the market as a whole — in order to reap the benefits of lower prices.

The aim was to stop Tyson from using marketing agreements forever — and to recover losses incurred from resulting lower cash market prices.

In February 2004, after a four-week trial, a Montgomery jury found Tyson illegally used captive supplies to manipulate cattle markets and drive down prices. The jury found Tyson liable for $1.28 billion in damages incurred from February 1994 through October 2002.

Following the verdict, Tyson's counsel asked Strom to set aside the jury's decision. The following April, Strom did so — ruling the plaintiffs' proof of damages wasn't sufficient and they couldn't disprove Tyson's claimed justifications for use of captive supplies or long-term contracts to acquire cattle.

While observing Pickett had presented “a very thin case,” Strom said there was no proof sellers of cattle in 1999 and 2000 were harmed. He said if the evidence the plaintiff presented at trial is insufficient for the jury to reasonably return a verdict for the plaintiff, “the defendant is entitled to judgment regardless of whether the jury did return a verdict.”

Strom also worried about how damages would be distributed and how the members of the class would be defined.

“No matter what verdict this jury comes back with, I'm not going to enter a judgment on that number if they bring one in because what we're talking about here includes people who are not members of the class,” Strom wrote in his ruling. His point was that the amount of reduction in the cash market price of cattle was too broad a measure of damages because it included those who sold some cattle outside the cash market.

Attorneys for Pickett immediately filed for an appeal claiming the jury, in fact, did base its decision on a reasonable review of the evidence. They argued that where the harm of captive supply outweighs any claimed benefits, the court should find the practice unlawful.

The Circuit Court felt there was evidence at trial to support the jury's finding that the use of marketing agreements resulted in lower prices for cattle both on the cash market and the market as a whole, but the plaintiffs couldn't prove Tyson was at fault.

And the Court agreed with Tyson's position that Pickett must establish more than that the use of marketing agreements have decreased cattle prices. “He must establish that their use has adversely affected competition,” the Court said.

“Unromantic” markets

Goggins isn't buying any of it and says there's no way a court panel can, in an hour-long hearing, grasp the enormity of the issues in a six-week long case.

“It's terribly unfair the Court was so one-sided and very discouraging to cattlemen across America,” he says. “They didn't hear the witnesses or the arguments. They didn't even consider testimony of the plaintiffs.”

The Circuit Court counters in its subsequent ruling on trial costs that, although it took a long time to try, “the case was not especially complicated,” nor the legal issues “particularly novel or difficult.”

In its 33-page ruling, the Court consistently maintains the PSA exists solely to prevent unfair marketing practices, price fixing, manipulation and monopolization.

In two classic statements, the panel maintains, “The PSA was enacted to ensure the market worked, and markets are notoriously unromantic… While talk about the independence of cattle farmers has emotional appeal, the PSA was not enacted to protect the independence of producers from market forces.”

In issuing the ruling, the Court also claims the jury may have been swayed more by emotion than the evidence relating to competition and markets. And the panel referred directly to opening remarks made by the plaintiff's lead counsel, David Domina, Omaha, NE.

“We're talking here about a part of America's economy that is perhaps in some ways the most romanticized part,” Domina said. “And over the years, the one thing the cattle business has stood for during the growth and the development of our country has been independence, fierce independence, meaningful and forceful independence.”

The price of independence

Goggins thinks the Court's insinuation that Domina unduly influenced the Strom jury with his passion rings of “blasphemy” to independent cattlemen.

“How can passion be a bad thing?” Goggins asks. “Domina did a masterful job — he had them nailed.”

Still, the Court implies, passion aside, that some cattlemen place a higher premium on economic independence than others. It granted that with marketing agreements, producers do lose some independence because meat packers dictate delivery date and adjust the price to cattle's actual yield.

“Some producers find the advantages of marketing agreements worth any loss of independence; it was, after all, producers who came up with the idea of marketing agreements,” the Court says. “Other producers, like Pickett, place a higher premium on independence and prefer the cash market.”

The Circuit Court contends another district court got it right in Griffin v. Smithfield Food Inc., when pork producers argued against pork packers' procurement methods. Producers who didn't want to sell their hogs through marketing agreements sued under the PSA, contending the packer's conduct was unfair and manipulated or controlled prices.

In that case, however, the District Court ruled, “The [producers'] evidence demonstrates economic developments in their industry have overtaken them; their evidence does not demonstrate their economic woes were caused by any actionable wrongdoing of Smithfield under the PSA or any other theory.”

“Exactly the same is true here,” the 11th Circuit Court panel says. “Pickett and his fellow class members could have entered into marketing agreements with Tyson.”

The Court further explains that producers, in their economic pursuits, are “entitled to their marketing preferences, but they're not entitled to force those preferences on others and on the packers.”

Goggins allows that packers need to manage their cattle supplies; and he points out he's not asking that packers be forbidden to use forward contacts for procurement.

“If they want to forward contract with your feedlot, establish a price they'll give when the cattle are delivered and give a down payment — beautiful,” he says. “It's open, above board — it's competitive.”

The fear factor

Now, the obvious question Goggins is trying to answer is, “What's next?” He says the $1.28 billion is not the issue.

“We were never in this fight for the money,” he says on behalf of the Pickett plaintiffs. “All we're trying to do is get the packer out of the marketing business so the average rancher can get a fair shake.”

Domina agrees the plaintiffs have suffered a crucial setback, but it doesn't mean the case is over.

“We expect to ask for review by the entire 11th Circuit and the U.S. Supreme Court,” he explains. “Certainly, the three-judge panel's decision is a major disappointment. I'm especially disappointed with this ruling in view of the attentive efforts of the jury.”

Beyond the courtroom, he and others are pinning some hope on a proposal introduced in Congress (S. 960, “Captive Supply Reform Act)” by Sen. Mike Enzi (R-WY). S. 960 would amend the PSA with respect to producer-packer forward contracts. The bill, referred to the Senate Committee on Agriculture, Nutrition, and Forestry, would:

  • require the inclusion of fixed dollar amount base pricing and public bidding;

  • prohibit formula pricing;

  • limit individual contract size; and

  • exclude from the definition of “formula price,” futures-based prices and base adjustments resulting from factors outside packer control.

Goggins isn't holding his breath. He says the clock is ticking for the future of independent cattlemen — and 1,200 cattle auctions across the country.

“If packers are allowed to run amok, they'll ruin our industry as we know it,” Goggins says. “Without competition, the fear factor takes over; and baby, do the packers know how to create fear.”

To view the entire opinion from the 11th Circuit Court of Appeals, go to www.ca11.uscourts.gov/opinions/weekops.php.

Certified Red Angus milestone

The Red Angus Association of America (RAAA) tagged and marketed almost 100,000 calves last year under its Certified Red Angus (CRA) feeder calf program. Marked with the program's yellow tag, the calves are genotypically identified to create value-based marketing opportunities for producers, RAAA says.

CRA is a USDA-approved and audited, genetically and source-verified feeder calf program. Thus, producers using Red Angus genetics can enroll their cattle to take advantage of unique marketing opportunities through special Red Angus Feeder Calf auctions or Red Angus highlighted lots in major video auctions, says Greg Comstock, RAAA marketing programs coordinator.

In addition, the yellow tag offers access to the Angus America grid, which pays branded product premiums on Red and Black Angus cattle with no differentiation in value for hide color. To learn more, visit www.redangus1.org or call RAAA at 940/387-3502.

Preconditioning calves still pays

I had to read Clint Peck's article, “From Niche To Norm,” in the August issue of BEEF (page A2) several times. He seemed to be saying preconditioned calves no longer bring a “premium” because everyone is doing it.

In 1994, Superior Livestock started its VAC program. At that time, about 33% of the calves we sold had some sort of preconditioning shots in them prior to shipping. In 2004, about 80% of the calves had some sort of vaccination program, so this confirms his thoughts.

What I do disagree with, however, is that the price differentiation has been “competed away.”

Each year, we send all our auction data to Colorado State University for a statistical analysis of the difference in price between calves sold in one of our VAC programs and those sold with no preconditioning shots. That data shows that in each year since 1994, the price difference has widened (see page 22).

In 2004, when compared to an unvaccinated calf coming off the cow, our VAC 45 calves brought a premium of $7.91/cwt., while our VAC 34 calves brought $3.47/cwt. more. This is based on data from 3,431 lots or approximately 384,000 head of calves sold between May and September of that year.

In 1995, the VAC 45 difference was $2.47/cwt. and the VAC 34 was $1.35.

You may be right that the premium has been “competed away,” but the discount on calves with no preconditioning shots hasn't.

I hope your readers don't believe it's no longer economically rewarding to precondition their calves because there's no price difference. We see that price difference every auction.
Paul Branch
Business Manager
Superior Livestock Auction

Tragedy brings compassion

As our family reaches the five-year milestone following our daughter's burn injuries, we reflect on what a roller coaster journey it has been. We are still humbled by the compassion and support from BEEF readers who learned about our tragedy through my “Rancher's Journal” column.

Thank you to all who helped carry us through with prayers, letters of encouragement and donations to Andrea's medical fund. There is no way to pay back all the help we received; we can only try to pay it forward by helping other people.

To that purpose, I wrote the book “Beyond the Flames; A Family Touched by Fire,” in hopes our story might inspire other people going through life-changing crises.

The book was published by Oak Tree Press late last year, and if you are interested in our story you can order it from the publisher www.oaktreebooks.com, from BarnesandNoble.com or from me at 208/756-2841. There is also some information about the book on my Web site: www.heathersmiththomas.com.

I want to thank your readers who have helped my family. Andrea still has impairments from her injury, but she doesn't let those stop her from leading a full life. She wears her burn scars beautifully, with no self cosciousness. Her goal, like ours, is to help others and she is able to do that most effectively because she can relate to tragedy and suffering. She is an inspiration to us all.
Heather Thomas
Salmon, ID

What are you waiting for?

I've read “middle age” is when you begin considering the number of years you have left. I've also read men in their 50s are more conscious of — and worry more about — their remaining time than men in their 60s and beyond.

It's as though an internal mechanism is triggered in our 50s to remind us we've put off some important personal goals, and it's time to get started.

In coaching farm and ranch folks, I've found they invariably have a dream of what they'd like to do someday. It might be a trip, a community project, learning a skill or helping in a third-world country.

Most, however, don't have a plan to realize it. They put it off until they “get time” or “can afford it,” not realizing most dreams are far easier to achieve than they think. All that's needed is a plan.

Europe on a shoestring

One couple's dream was to visit Europe and tour some organic farms. They'd switched to organic production six years before I met them, and they wanted to see how others did it.

They'd put off any planning because they assumed it was too expensive. I challenged them and within eight months they took the trip by getting creative and devising a couple of ways to save a lot of money:

  • A business executive they knew traveled a lot. They traded some grass-finished organic beef for enough of his air miles to get round-trip tickets.

  • They connected with some organic farms in Europe through World-Wide Opportunities on Organic Farms (www.wwoof.org) and volunteered their time on a number of organic farms in exchange for room and board. They toured a lot of country, learned more about organic farming and met some very interesting people on a budget less than half what they expected.

Some people I talk to gave up their dreams so long ago they don't think about them anymore. They say they're too old, it's too expensive, or any number of other excuses.

When I challenge their assumptions, they often realize they've simply been telling themselves the same stories their parents told them long ago. Maybe the stories weren't true.

The time is now

If you're starting to feel a bit anxious about your remaining time and have dreams or goals yet to achieve, this might be a good time to make a plan. If you don't know what your dreams are, here's a simple exercise to help you find what really matters to you:

Write down the answers to these three questions. Don't ponder them. Just write down what comes to you. Devote about two minutes per question.

  1. If you knew you were to die in five years, how would you live until then?

  2. If you knew you were to die in six months, how would you live until then?

  3. If you learned you were to drop dead in 24 hours, what would be your regret?

Once you answer these questions, start planning to do the important things that showed up.

I saw a direct marketing ad long ago with a tagline that said something like: “Six months from now, you could be on your way to living the life you have always dreamed of, or you could just be six months older. You decide.”

That edgy feeling you have about getting to the end of your journey might be trying to tell you something. Pretty soon you'll be six months older anyway.

Edmonton-based Noel McNaughton lectures to groups on “Farming/Ranching at Midlife — Strategies for a Successful Second Age.” To learn more, call 780/432-5492, e-mail [email protected], or visit www.midlife-men.com.

Another useful exercise:

It's five years from today. Answer these questions in the present tense: (for example, it is 2009, I am 58 years old.)

  1. Your age (I am _ years old.)

  2. The ages of your spouse and children.

  3. What you are doing for a living?

  4. In which recreational/social activities do you participate?

  5. Where you are living? What kind of accommodations you have?

  6. Who are the most important people in your life?

  7. What lifetime dreams/objectives have you have achieved in the previous five years?

  8. What did you do in the previous five years to realize those dreams/objectives?

  9. What obstacles did you overcome to achieve your dreams?

  10. What attitudes/beliefs did you have to change to achieve your dreams?

Multiple Moves

A straight hedge may not work. An at-the-money put option is probably too high. Forward pricing with the packer is likely a loss. So cattle feeder Robby Kirkland often relies on multiple strategies that utilize two or more marketing tools to help corral a profit.

Kirkland and his father, Perry, operate Kirkland Feedyard Inc. in Vega, TX. Whether it's company-owned cattle or a customer's pens that need marketing, he tries to stay a step or two ahead of what's currently on the futures board and what fed steers or heifers might bring from the packer.

“It's a shame you have to play the futures market to make it work, but it's come to that,” Kirkland says. He notes outside forces like trading funds, the foreign-market situation, and tight feeder cattle supplies have created too many variables that impact prices.

George Enloe, co-owner of Amarillo (TX) Brokerage Co., adds, “Feeding margins have been worse for longer than I can remember. If you buy feeder cattle that show a $50 to $80/head loss when they finish, you absolutely cannot hedge.”

Enloe's company offers a program to enable feeding customers, as well as cow-calf and stocker operators, to consider numerous marketing strategies to find one that best fits the risk-management level they seek. But even those plans, which range from a simple put-option insurance policy to a sophisticated system using futures and options, may not pull out a profit with today's margins.

Kirkland's creative marketing often involves what he terms “legging into a synthetic hedge,” which actually isn't as complex as it sounds. But it requires constant monitoring of the Chicago Mercantile Exchange futures price for a given contract month.

He basically sets his sights on a particular hedge price. To achieve that price, he's often forced to buy a call option and then lock in the futures price if and when the market moves upward. He “legs” into it.

“If I want to hedge in a price of $90/cwt. and the market is at $86 for cattle to be delivered in early 2006, I'll look at buying the $90 February call option,” Kirkland says. “I'd try to hold the cost of the call at $1 to $1.50/cwt. Then, when the market rallies up to the $90 level, I'd hedge the cattle and have my calls in place to open the topside back up.”

To protect against the market crashing, he may buy out-of-the-money put options to set a floor.

“The puts are a safety net,” he says. “They keep you from pushing the panic button if the market goes down.”

Kirkland says he normally doesn't get too far out in his marketing.

“I try to stay two contract months out,” he says. “In the summer, when August futures rolled out, I tried to fill December (there are no September or November live cattle futures contracts) for cattle to be delivered then.”

He also works with feeding clients who request help with their risk management.

“We find out what type of risk tolerance a customer may have,” he says. “If the customer wants to limit losses to $50/head, we can do that with futures, options or a combination of both. But we might limit his profit potential to $50 at the same time.”

The level of risk a cattle feeder requires is also considered by Amarillo Brokerage in its Ag EMS (Equity Management Services) program. Enloe notes many of the firm's customers are larger feeding companies. These outfits normally have their own risk management teams who require basic brokerage services.

But Ag EMS enables smaller operators to maintain a disciplined marketing program without spending a lot of time at it.

“It enables producers to concentrate on what they do best — putting pounds on their cattle in the most efficient way possible,” Enloe says.

In a typical program, Enloe and his associates first help the producer or feeder customer analyze his breakeven price for one or more lots of cattle. With that breakeven in place various marketing possibilities are examined using futures and options trading. Up to six different marketing strategies are laid out for the customer to consider.

“We help the customer analyze the various strategies to determine which one best meets his risk management needs,” Enloe says. “Those needs will vary from feeder to feeder, or even from one lot of cattle to another.”

Once the marketing strategy has been selected, the brokerage firm institutes the trade positions. Customers receive a monthly statement detailing how each transaction is performing.

“If we see the opportunity to enhance a position due to changes in market factors, we'll consult with the customer and make any requested changes in the position,” Enloe says.

The cost of the program can vary, but an average producer feeding one to 500 head should expect to pay about $5/head. But, as Enloe emphasized earlier, “Risk management is next to impossible when breakevens are $3 to $7/cwt. over futures and $7 to $11/cwt. over cash.”

A “highly speculative position?”

John Anderson, Mississippi State University livestock marketing economist, says using more complex futures and options strategies to try to wring a higher profit out of the market can be a highly speculative proposition.

“The producer may still think of such strategies in terms of hedging cash fed cattle but, in practice, many of these strategies really amount to trying to make money from speculative positions in the futures market in order to enhance cash market returns,” Anderson says. “There's nothing necessarily wrong with this as long as the producer understands this is likely to actually increase risk rather than reduce it, which is what we expect from a straight hedge.”

He says it's difficult to find any black ink on cattle coming out of the feedyard in early 2006.

“I think the most reasonable strategy is to look for something to minimize potential losses, such as buying a put or setting up a synthetic put, while leaving the upside open,” he says. “I know this isn't a very satisfying solution, but it's a sound strategy from a risk-management perspective.”

Kirkland says his multiple strategies of using a combination of call options and then hedges may not work if the bear market continues.

“We could see more puts used than in the past to protect a price when the market rallies,” he says. “But, again, the type of marketing strategy you use depends on the risk tolerance you have and what you're willing to risk in the market.”

Larry Stalcup is an Amarillo, TX-based writer on cattle marketing and risk management topics.

New Gains On Old Money

Thanks to some asthmatic mice, cattle feeders can add an extra 14 lbs. or so to carcass weight during the last 30 days on feed and receive about $2 for every $1 spent in the process.

That's the cost-to-benefit ratio cattle feeders are finding with a particular beta-agonist that increases protein synthesis (muscle growth — carcass yield) with available nutrients, without impacting fat deposition (carcass quality).

“In our yard, we're seeing 100% return on investment. The product costs us about $8/head, and we're seeing about $16 in return,” says Chris Burris, general manager of Ward Feedyard, Larned, KS.

The returns are coming in the form of added weight gain, added carcass gain, and increased ribeye size and cutability, which adds up to increased efficiency.

The road to adoption

First, let's get the mice out of the way. Popular research lore has it that scientists were trying to develop anti-asthma drugs. Time and again, they noticed the mice receiving a particular class of compounds became noticeably more muscular than those not receiving it. A little more research and — presto — beta-agonists emerged as potential muscle enhancers for the livestock industry.

At further risk of offending the scientists in the crowd, a beta-agonist is basically a repartitioning agent that either redirects existing nutrients toward increased protein synthesis (muscle growth), or slows protein degradation. Consequently, beta-agonists can yield more net muscle, either by maintaining more muscle (reducing degredation) or actually building more muscle (synthesis).

For perspective, zilpaterol, a beta-agonist used for beef production in other countries, reportedly has a negative effect on carcass quality, reducing protein degradation at the expense of quality-building fat. It's not currently approved for use in the U.S.

The only beta-agonist currently being used by the U.S. beef industry — ractopamine hydrochloride (developed and marketed by Elanco Animal Health as Optaflexx) has proven to have little, if any, impact on fat deposition. It alters protein metabolism in the animal, redirecting nutrients to build more muscle (synthesis).

Since beta-agonists alter protein metabolism, they have no application early in an animal's life. At that stage, protein synthesis already runs high, relative to fat deposition. It's later in the life of cattle, as they become more mature and protein synthesis slows, that beta-agonists can provide a boost.

As with implants — though no other single current technology comes close to the net economic gains available with implants — the allure of beta-agonists has always been the potential to cost-effectively increase cattle performance and efficiency. Icing on the cake, the thinking went, would be the ability to enhance the muscle profile of cattle that typically fall short in that area.

Ractopamine hydrochloride is proving its mettle on all counts. Approved by the Food and Drug Administration (FDA) for feeding to steers and heifers during the last 28-42 days of the finishing phase, this beta-agonist is consistently increasing live weight, carcass weight and carcass yield, without taking anything away from carcass quality.

More specifically, in research for label approval, Optaflexx served up 17 lbs. more live weight, 14 lbs. more carcass weight, 0.3 sq. in. more ribeye area, and 0.3% more dressing percent when fed according to label directions.

While weight gain and carcass gain are similar in beef and dairy cattle, research has shown Optaflexx to increase ribeye size more in the lighter-muscled dairy cattle.

Incidentally, this beta-agonist had already been approved and was being adopted by the pork industry as Paylean®.

Besides the pre-approval research conducted by Elanco, subsequent independent research has shown similar results. At Kansas State University, for example, cattle fed 200 mg of ractopamine hydrochloride daily (the label-approved dose) for the final 29 days on feed gained 17.9% faster on a carcass-adjusted basis than those not receiving it. Steers fed the compound gained 19.7 lbs. more carcass weight overall — 11.2 lbs. more during the 29 days ractopamine was fed — and were 14% more feed efficient during those last 29 days.

Sorting through all of this took cattle feeders a while. The research looked promising, but feeders wanted to get a feel of it in their own operations before diving in. They wanted to know if the benefits were additive to those received with implants (they are). They wondered if it altered animal behavior (so far, not at all). And, they wanted to corroborate the fact that it wouldn't dilute quality grades (it hasn't).

Even though FDA approved Optaflexx in summer 2003, cattle feeders didn't adopt the technology in a significant way until last fall, says Grady Bishop, Elanco's Optaflexx marketing associate. Since then, Bishop explains, “We've seen a dramatic increase in adoption, both in terms of new users and in expanded use by those already using it. We're even slightly ahead of our expectations for this point in time.”

Besides seeing the results for themselves, the cautious adoption had to do with the fact the new technology presents an added management challenge to feedyards. After all, adding a ration increases logistical complexity — figuring out how many trucks, drivers and routes will be required, as an example. But, given the narrow window of opportunity to receive the maximum economic potential of feeding ractopamine, feeders also had to evaluate how much control they had in marketing their cattle.

As Burris says, “28 days prior to harvest you're making the commitment that you'll market the cattle 28 days later.”

In other words, if you know for sure you can ship cattle within the 14-day marketing window allowed by label use (28-42 days), the decision is fairly straightforward. If you're not sure, making the decision begets more questions.

Market timing is key

Like other production technologies, beta-agonists have a benefit curve. Maximum returns occur when cattle receive Optaflexx for the label-approved 28-42 days. If cattle are marketed before receiving the compound for 28 days, potential is left on the table. Feed them longer — this is theory since it's not approved for feeding more than 42 days — and the benefits relative to the cost decline quickly.

Holding cattle for a week or two after they've received ractopamine for the approved period of time isn't an economically sound option, either. The physiological benefits dissipate a week or so after the beta-agonist is removed from the diet. In other words, you'd have the additional money in feeding it, but carcass performance would revert to what it would have been without the beta-agonist.

This reality may also be one reason Bishop says feedyards first used Optaflexx on company-owned cattle. Aside from trying new technology on their own cattle first rather than those of customers', it gave them more control over when to market cattle. Customers, after all, just like feedyard managers, have been known to fight the market.

“Yards that have tight control of the marketing window jumped on it,” Bishop says. “Yards with less control on the marketing window have been more reluctant to adopt it.”

With that said, Bishop explains, “The yards using it today run the gamut from large corporate entities to the mid-size and small independent yards. We have some clients who feed it to every pen, some who only feed it to steers, some who only feed it to company cattle, and some who only feed it to selected pens of customer cattle.”

One commonality is that users tend to market a high percentage of their cattle on grids and formulas. As Burris emphasizes, “The returns we're seeing from feeding Optaflexx in our yard are based on marketing cattle on a formula. To get the full value of feeding Optaflexx, you have to sell cattle on a carcass-weight basis.”

What's more, the folks getting the most out of the new technology may be those managing it the most simply.

For instance, Iowa State University researchers looked at how best to manage the technology in a part of the world where topping pens — sorting market-ready cattle from pens as they're ready rather than all at once — is a common practice. They concluded sorting cattle into outcome groups ahead of the last 28 days on feed — so all cattle could receive ractopamine — was a viable option to simply feeding it to the last market draft in the pen.

Spun another way, Bishop says, “It's certainly more of a challenge to feed it to a pen here and a pen there as opposed to yards where it's a standard part of feeding cattle the last 28-42 days… As with any new technology, there's a learning curve. As we work with customers, we find they may have to change some things initially to take advantage of Optaflexx, but over time those things are no longer issues.”

Especially with feeder cattle priced so high, the basic benefit of ractopamine may be too hard to ignore. “The more weight we can put on them, the cheaper the breakeven becomes,” Burris says.

USDA opts for private ID database

USDA unveiled its guiding principles last month for the development of a public/private partnership that “enables the private sector to maintain animal movement data as part of the National Animal Identification System (NAIS).” The four guiding principles are:

  • The system must be able to track animals from point of origin to processing within 48 hours without unnecessary burden to producers and other stakeholders.

  • The system's architecture must be developed without unduly increasing the size and role of government.

  • The system must be flexible enough to utilize existing technologies and incorporate new ID technologies as they develop.

  • Animal movement data should be maintained in a private system that can be readily accessed when necessary by state and federal animal health authorities.

USDA plans a stakeholder meeting to discuss expectations for the tracking system, user requirements and system specs. For more on NAIS, visit www.usda.gov/nais.

The private data system eliminates one concern regarding a publicly held database — confidentiality of producer information. Records in a publicly held database theoretically would be open to access under the Freedom of Information Act.