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Articles from 2012 In October

Rural Economy Strengthens; U.S. Competitiveness Sags

Hereford cattle grazing on grass

After experiencing negative fallout from drought conditions over the last three months, the rural U.S. economy soared higher, according to the October survey of bank CEOs in a 10-state area. In fact, The Rural Mainstreet Index (RMI), which ranges between 0 and 100 with 50.0 representing growth neutral, rose to a solid 56.6 from September’s weak 48.3. 

For the first time since June, RMI rose above growth neutral, says Ernie Goss, the Jack A. MacAllister chair in regional economics at Creighton University in Omaha, NE. “Our survey indicates the negative impacts of the drought are being more than offset by the positives of very strong incomes from high agriculture and energy prices,” he says.

Looking ahead, however, rural bankers are uncertain about 2013 and beyond. Bankers were asked whether they expect the U.S. to suffer an economic recession in 2013, and 25% think a recession is likely or very likely next year. Conversely, 30.8% think a 2013 recession is unlikely, or very unlikely.

The November elections are seen as very important for some in terms of clouding the outlook.“Forecasting how things will look in 2013, especially business owner sentiment, will depend greatly on what happens on the first Tuesday of November,” says Casey Regan, CEO of Premier Bank in Farmington, MN.

Meanwhile, Dale Bradley, CEO of The Citizens State Bank in Miltonvale, KS, echoed concerns of many other bankers about the potentially large impact of the record tax increase slated to go into effect on Jan. 1, 2013 and its negative impact on the economy.

A Closer Look: Important Year-End Tax Implications For Ranchers

There also are concerns about the U.S. economy. “U.S. economic competitiveness is in decline. Since 2009, the U.S. ranking has dropped from 15th to 19th among the 144 nations evaluated by the Fraser Institute. The primary factor damaging the U.S. ranking is the escalating size of the federal government, with U.S. federal spending as a percent of the nation's gross domestic product (GDP) climbing from 21.8% in 2008 to 24.1% in 2012,” Goss says.

“Moreover, between 2008 and 2012, overall private employment declined by 2.5%, while federal employment increased by 1.2%. As the size of the federal government rose, the national debt soared from $9.4 trillion in 2008 to $15.9 trillion in 2012, advancing by about 70% as the overall economy expanded by only 9%,” he says.  

Here’s a look at the results of the October RMI survey:

Farming: The farmland-price index (FPI) soared higher, climbing to 71.7 in October, the highest level since March of this year, from September’s 61.6. This is the 33rd consecutive month that FPI has risen above growth neutral.

“Except for a brief period this summer, farmland prices have expanded at a pace that, in my judgment, depends too heavily on high agriculture commodity prices and record low interest rates. The farm-equipment-sales index expanded to 60.5, its highest level since May of this year, and was up dramatically from September’s growth neutral 50.0,” Goss says.

Crop yields are down across the region with almost 70% of bankers indicating that 2012 yields will be lower than in 2011. Approximately 18.8% of bank leaders are reporting 2012 yields up from last year.

Banking: After expanding for seven straight months, loan demand unexpectedly plummeted in October. The loan-volume index sank to 44.2 from September’s 70.2. The checking-deposit index advanced to 66.7 from September’s 48.3, while the index for certificates of deposit and other savings instruments rose to an anemic 42.0 from 38.4 in September. “The 2012 drought failed to increase the demand for loans from farming and nonfarming organizations in the region,” Goss says. 

Hiring: October’s new hiring index (NHI) expanded to a tepid 51.5 from 50.9 in September. “Hiring for rural mainstreet businesses is growing but at a snail’s pace. Bankers report that uncertainty surrounding healthcare reform, the elections and the ‘fiscal cliff’ are restraining hiring even as the economy expands,” according to Goss.

Confidence: The confidence index, which reflects expectations for the economy six months out, increased to 50.7 from September’s 43.0. “As the rural mainstreet economy turned upward for the month, so did bankers’ outlook. The turnaround in the housing market is an important factor boosting economic confidence,” Goss adds.

Home and retail sales: The October home-sales index advanced to a healthy 59.8 from September’s 58.8. The October retail-sales index increased to a still weak 48.6 from 42.9 in September. “As in the national economy, the rural mainstreet housing market is improving. On the other hand, the drought appears to be having negative impacts on retail buying,” Goss says.

Despite the upturn in the rural mainstreet economy and rising confidence, bank CEOs expect holiday sales to grow by only 2.3% from last year. More than one-fourth of the bankers, or 27.9%, expect either no change or a downturn in retail sales from last year.

State-by-state outlook

Each month, community bank presidents and CEOs in nonurban, agriculturally and energy-dependent portions of a 10-state area are surveyed regarding current economic conditions in their communities and their projected economic outlooks six months down the road. Bankers from Colorado, Illinois, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota and Wyoming are included.

This survey represents an early snapshot of the economy of rural, agriculturally and energy-dependent portions of the nation. The RMI is a unique index covering 10 regional states, focusing on approximately 200 rural communities with an average population of 1,300. It gives the most current real-time analysis of the rural economy.

Colorado: After two months of moving below growth neural, Colorado’s RMI moved above 50.0 for October, rising to 53.0 from 45.2 in September. FPI and ranchland price index (RPI) increased to 52.4 from September’s 48.4. Colorado’s NHI for October was 49.8, up from 39.8 in September.

Illinois: For the first time since May of this year, Illinois’ RMI moved above growth neutral, climbing to 56.5 from September’s much weaker 48.0. FPI bounced higher with an October reading of 65.1, up significantly from September’s 54.6. NHI increased to a still weak 45.8 from 44.0 in September.

Iowa: The RMI for Iowa for October advanced to 57.0 from 48.7 in September. FPI expanded to 70.2 from 62.8 in September, while NHI slipped to 49.1 from September’s 49.4. 

Kansas: October RMI climbed to 57.3 from September’s 49.5. FPI rose to 71.7, down from September’s much lower 62.8, and the state’s NHI increased slightly to 50.2 from 49.1 in September.

Minnesota: October RMI rose to 57.2 from September’s 51.7, while FPI bounced to 76.3 from 71.1 in September, and NHI dipped to 53.2 from September’s 54.9. Pete Haddeland, CEO of First National Bank in Mahnomen, says, “Our elevators are full, and they are dumping grain on the ground. Our mainstreet business is improving.”

Missouri: RMI rose to 53.9 from September’s regional low of 41.6. FPI increased to 51.2, a regional low, from 50.2, while NHI inched up to 48.5 from 48.1 in September. Don Reynolds, president of Regional Missouri Bank in Salisbury, reports, “Crop yields are better than expected, but still less than half of last year.”

Nebraska: For the first time since June, Nebraska’s rural economy moved into positive territory. The October RMI rose to 56.1 from September’s much weaker 48.8. FPI advanced to 66.5 from 59.2 in September, and NHI declined to a weak 46.6 from September’s 47.0. Cameron Mathis, Tilden Bank in Creighton, says dryland yields were very poor, but irrigated yields were very good. “Pastures are non-existent. Cattle producers could have real problems next year,” he says

North Dakota: RMI for October advanced to a regional high 67.1 from 60.5 in September, while FPI expanded to 82.3 from September’s 68.9, and NHI rose to 77.5 from 68.0. Scott Tewksbury, CEO of Heartland State Bank in Edgeley, says much of his trade territory is reporting yield surprises on the up side. “Although not universal, many farmers are reporting yields above long term averages on both corn and soybeans,” he says.

South Dakota: October RMI for South Dakota increased to 56.5 from 48.3 in September. FPI climbed to 68.4 from September’s 58.1, while NHI rose to a still weak 47.9 from 46.3 in September. David Callies, CEO of Minor County Bank in Howard, says, “Crop yields were down, but higher prices helped offset this. Drought is a major concern going into winter.”

Wyoming: October RMI expanded to 57.8 from 46.9 in September. FPI and RPI both expanded to 68.6 from 52.9 in September, while the NHI remained below growth neutral with an October reading of 48.1, up from 42.9 in September.

North Dakota Cattle Taking Hold In Kazakhstan

Transplanted North Dakota cattle are thriving in Kazakhstan's cold climate, but many of the former Soviet republic's cowboys are still greenhorns. So it hired Great Plains ranch hands to help out and is sending some of its own to the U.S. for training, a state trade official says.

Dean Gorder, executive director of the North Dakota Trade Office, said about a dozen Kazakh cowboys will visit North Dakota ranches next month for an intensive, two-week crash course in tending cattle.

"There is no classroom work," Gorder says. "It's hands-on working with cows."
About 5,000 Angus and Hereford cows bred to withstand North Dakota's brutally cold winters have been air-freighted to Kazakhstan over the past two years as part of a decade-long effort to rebuild the former Soviet republic's cattle industry.
Most of Kazakhstan's cattle were sold or slaughtered after the collapse of the Soviet Union in 1991, and its herd had been reduced from about 35 million animals in the early 1990s to about 2 million.

Gorder, who is returning from Kazakhstan this week, says the country's new cattle herd appears to be thriving. That’s thanks largely to North Dakota's cattle genetics and help from North Dakota, Nebraska and Kansas cowboys hired by the oil-rich country that stretches from Central Asia into Eastern Europe.

To read the entire article, click here.

Industry At A Glance: Cutout Price Spreads

Comprehensive cutout price spreads

Monitoring market conditions from week to week is always important. However, from a long-run business perspective, influence upon the value chain requires sustained price signals. In other words, investing in change around management and marketing is futile if there’s no assurance of payoff over an extended period of time.

For instance, last week’s “Industry At A Glance” chart and discussion emphasized the importance of price signals in regard to the long-term increase in carcass weights over time. The market has also been sending some clear signals on the quality/program side. The Choice/Select spread encroached $20/cwt. last year and has now seasonally crept to $15 at the end of October; more importantly, the long-term (52-week) average is currently about $10/cwt.

comprehensive cutout prime branded choice

Meanwhile, the branded program spread has surpassed $20 and the 52-week average is closing in on $17/cwt. (keep in mind, branded program premiums include both lower and upper Choice).

The real story, though, is in the Prime/Select spread, which has seen a dramatic uptick in the past several years, and the 52-week moving average has now surpassed $50/cwt.! These are encouraging signals from a final-demand perspective; consumers are increasingly emphasizing a willingness to pay for high-quality, program-backed beef products.

As such, the market is clearly trying to pull more high-quality product to meet that demand. What influence might these developments have on supply management decisions in the production sector in the months and years to come? Let’s have a discussion; leave your comments below.

Production Sector Environment Continues To Shift

Production Sector Environment Continues To Shift

A great TV or book series always strings you along. Their strategy is to keep you captivated by providing just enough clues along the way to hold your interest, but never enough to ensure confidence about the final outcome. The result is you end up hooked until the very end.

So it goes with this year’s cattle-on-feed reports. Important signals about the business have percolated during the past 6-12 months, but they’ve come intermittently, along with other noise and subplots in the beef complex. Last month’s report, though, provided some pertinent indicators around the collective decision-making throughout the supply chain.

The first aspect revolves around the cow-calf sector. October’s report also includes a quarterly assessment of the inventory’s composition. Figure 1 reflects the relative proportion of heifers on feed over time. The data reflect feedlot heifer numbers drifting lower and, subsequently, the intention to rebuild the cowherd. However, that interpretation needs some broader context.

heifers as proportion of total on feed

Sure, there’s a better appetite to keep back some females, but the change is very incremental, which leaves the overall trend relatively flat. In other words, the commercial sector is treading very carefully with any plans for expansion. This reluctance exists for many reasons, including volatile feed prices, surging land values, weather challenges, demographics, and a general anxiety about duration risk associated with heifer investment.

The second story surrounds feedyard trading strategies. September placements were down sharply and established a new low in the series for the month. That comes on the heels of last month’s sluggish pace (second-slowest August on record). None of that’s really surprising, given costly replacements, burdensome feed prices and heightened risk within the current operating environment. Overall, placements are 6% behind last year’s pace through September.

That brings us around to the other side of the balance sheet – marketings. September’s shipments were disappointing (though somewhat muted by 2012 having two fewer marketing days in September vs. 2011). Nonetheless, the discussion returns us to May’s column detailing the work ahead between April and September. Most notably, weekly shipments needed to average about 465,000 head to remain current. But that didn’t happen, as the pace was closer to about 444,000 head.

 Joint consideration of placements and marketings reflect an overall theme of lagging throughput (Figure 2). This year’s collective pace is second only to 2009 (then driven by the financial crisis and a struggling market). Feedyard managers are carefully managing the swap and are much more reserved about inventory turnover.

cumulative cattle placements through September

Carcass weights continue to get bigger

When the impending rotation is unfavorable (especially considering the capital at risk) and closeout cash flow turns negative, the rational strategy for feedlot managers is to defer the swap as long as possible. Thus, cattle stay on feed longer, generate more weight and create additional revenue, while avoiding management headaches and the risk associated with new arrivals.

That strategy is evidenced by the recent surge in carcass weights (Figure 3). Despite higher ration costs, steer carcass weights peaked in excess of 880 lbs. in mid October. Bigger weights may still be in store given that seasonal weight sometimes peaks in November. Moreover, the 120-day, on-feed inventory is record large for October (3.6 million head vs. 3.0 million head in 2011) and now accounts for one-third of the total cattle on feed. That influence is two-fold:

  • One, it’ll take time to work through that population, meaning bigger cattle and more weight;
  • Two, leverage will be hard to maintain on the selling side for the next several months, though that should transition quickly as we move into spring.

beef steer carcass weights

Finally, the packer merits some discussion here. Therein enters consideration of regional differences. In aggregate, through September, only two months have witnessed placements exceeding year-ago levels (February and May). But there’s an exception to be considered. Placements in the three-state region of Nebraska, Iowa and South Dakota have lagged 2011 only two months (April and September) out of nine. Moreover, total placements in the region are 5% ahead of 2011, while placements in Kansas and Texas are both running 8% behind last year’s delivery rate.

That’s not a new trend (Figure 4) and underscores the evolving nature of the feeding industry. As mentioned in June:  “…cattle feeders in the Nebraska/Iowa/South Dakota region operate under different business dynamics vs. larger operations in the High Plains. Many are diversified businesses allowing for greater marketing flexibility from week-to-week.” But what’s most important, especially in light of excess packing capacity, is the influence on the fed market and likelihood of impending rationalization. Clearly, beef processors are playing catch-up in the southern region, while supply is much more comfortable in the north.

monthly feedyard placement chart

There’s never space enough to do it all justice. The discussion above revolves around the production sector but overlooks adjustments also occurring among food-service vendors, restaurateurs and food retailers. This month’s discussion also ignores the weekly and monthly market developments.

The priority, though, is to illustrate the shifting environment within the production sector around those markets. And seemingly, the pace of change is accelerating and mandating ever-faster response from all players in the value chain. With that in mind, as always, it’s critical to remain objective and stay informed.

price summary for October Monthly Market Preview

Nevil Speer is a Western Kentucky University professor of animal science. Contact him at [email protected].

Ranchland Holds Steady In Texas, Surrounding Region

Ranchland Holds Steady In Texas, Surrounding Region

If there’s one thing you won’t hear ag bankers in the Federal Reserve Bank of Dallas district, or their customers, say is “rain, rain go away; come again another day.”

In a quarterly survey of ag bankers in the 11th Federal Reserve District, which is comprised of Texas, Southern New Mexico and Northern Louisiana, bankers were nearly unanimous in saying that a second year of drought was making life difficult, and some soaking rain would brighten the outlook considerably.

That situation is particularly true for the livestock sector, the Dallas Fed says in a report of banking conditions in the third quarter of 2012. “Respondents voiced particular concern for the livestock sector as pasture conditions remain poor and ranchers face high feed costs due to elevated grain prices,” the bank reported.

A Closer Look: High Feed Costs To Force Structural Change

Crop results were mixed, but more favorable depending on how much rainfall was received. Cropland values rose in the third quarter, with irrigated land seeing the largest increase at around a 4% value gain from the second quarter.

Ranchland values, on the other hand, remained largely unchanged. But that doesn’t mean ranches are selling at bargain prices. “Bankers in the Central Texas region noted that other uses of land have pushed prices above an affordable level for farmers and ranchers to purchase land for agricultural use,” the Dallas Fed notes.

Overall, ranchland values averaged $1,490/acre in the district. In Texas, ranchland values averaged $1,782/acre but ranged widely, from just over $4,000/acre in Central Texas to $483/acre in the Northern High Plains. Northern Louisiana ranchland values rang the register at $1,844/acre and Southern New Mexico ranches traded at $255/acre.

National Land Values: Pasture Values Continue To Rise, But Lag Cropland

Demand for ag loans continued to decline in the third quarter, but not as steeply as prior quarters. Feeder cattle loans continued to see the largest drop in volumes compared with the same period a year ago, followed by dairy loans.

In fact, only 9% of the banks responding to the Dallas Fed survey reported an increase in feeder cattle loans. The majority, 64.7%, said they were holding steady and 26.3% reported making fewer loans in the third quarter than the previous year. Fixed rates on feeder cattle loans averaged 6.56% in the third quarter of this year compared with 6.71% last year, and variable rate loans averaged 6.04% this year compared with 6.11% in the third quarter of 2011.

View the Federal Reserve Bank of Dallas report.

Let’s Speculate On Corn Prices

combine corn harvest in field

In my area of eastern South Dakota, the corn and bean harvests are pretty much completed. Combines have been greased and cleaned and tucked away for the winter, and corn piles are being put to use as weaned calves belly up to the feedbunk. Without a doubt, the drought impacted corn yields across the country. Some growers are only harvesting crop insurance checks this year, while others had record-high yields, resulting in what is expected to be the third largest corn crop in U.S. history.

New Photo Gallery: Images From Harvest

According to USDA, “For the 2012-13 marketing year, total corn supplies were forecast in the Oct. 11 World Agricultural Supply And corn harvest combine in fieldDemand Estimates (WASDE) report at 11.8 billion bu. This level of supply is about 13% below 2011-12 marketing-year supplies. Season-average corn prices for the 2012-13 marketing year are forecast to fall within a range of $7.10-$8.50/bu., up from $6.20-$6.30 for 2011-12. Marketing-year corn prices in this range would be record high in nominal terms. Ending stocks for 2012-13 were reduced in the Oct. 11 WASDE to a projected 619 million bu., the lowest since 1995-96, when ending stocks were 426 million bu.”

With speculation increasing as the U.S. corn harvest nears completion, many ranchers are wondering how much it will cost them to feed their calves through the winter.

A Closer Look: Corn Crop Continues To Jangle Industry Nerves 

Does all the speculation really reflect the true corn supply and demand picture, or is it simply based on public perception and emotions? Columnist Alan Guebert challenges the whole system.

“If it’s a bad idea to play with matches, it’s an even worse idea to play with a blowtorch in a fireworks factory,” Guebert writes. “And yet that’s just what farmers and ranchers do every time they price their cattle, corn, cotton and other commodities in global markets dominated by high frequency trading driven by computers running algorithms developed by money-managers who don’t know cocoa beans from soybeans and don’t care. These supersonic freaks of finance, blogger Tyler Durden explained on the Zero Hedge website Oct. 2., ‘stuff quotes, front run each other, spoof, layer and generally make a mockery out of the thing formerly known as the market.’

“That these lightening fast, fabulously large, mostly unseen and nakedly speculative trades move markets is no secret; more than 100 recent academic and government studies have fingered them as the main driver in today’s neck-breaking price moves. Nor is it a secret that banks, big agbiz and traders are greasing every skid in Washington, D.C., to ensure every attempted regulation of this Big-Boy-in-the-Dark game will be fought in Congress and challenged in federal courts. Three items nearly guarantee their success in this fight: money, money and money.”

Guebert isn’t the only one scratching his head about the markets. Others are questioning the validity of forward contracting, as well.

University of Kentucky’s Cory Walters and Richard Preston say that
, “The 2012 corn crop has raised important questions about the validity of forward contracting. Forward contracts are a vital risk management tool because they remove price uncertainty. However, they must be used correctly to avoid increasing risk in other areas, namely yield risk. Risk stemming from revenue and costs rose dramatically in recent years. Production costs also increased dramatically, increasing the risk of losing more capital. Prices throughout the crop year varied tremendously, increasing the risk of ending up in the bottom third of prices. Farm yield risk was likely underestimated because, up until this year (especially for corn), yield has been friendly.”

While we wait for USDA’s final report on the 2012 corn harvest, I’m curious to hear how your corn crop yielded this year. Did the drought wipe out your crop, or did you experience your best year yet? Or, do you have to buy all your corn for your livestock? If so, what is it costing you? How will the escalated corn prices alter your management decisions? And, what are your thoughts about the markets? Is the commodity market system broken? Share your thoughts on all these questions in the comments section below.

Corn Stalk Bales An Option For Cost Saving

They look like an average big round bale of feed but the bales south of Pratt, KS, are made of corn stalks not the usual sorghum or alfalfa or CRP grass.

Mark Fincham is making the best of a bad situation and producing a feed product that is making money.

The drought has greatly reduced the amount of livestock feed available to cattle producers and feed lots. This gap has raised the cost of feed, including feed made from corn stalks, Fincham says.

"The value of corn stalks has gone up and we're taking advantage of that added value," Fincham says.

To assure the quality of bales, Fincham has had protein tests done on the corn stalks and the results have been higher than he expected.

Normally Fincham would just leave the stalks over the winter and work them into the soil in the spring as a natural fertilizer. Making bales with corn stalks is not a common practice.

However, getting a good price for a bale of corn stalks was just too much of a temptation so he turned a baling crew loose in the field to make corn stalk bales.

Making corn stalk bales is a time consuming process and the cost to produce bales usually outweighs the return on investment.

When corn is harvested, the stalks are pulled down through the corn headers and the ears are stripped off and run through the machine where the kernels are removed from the cob.

The stalks just lay on the ground and are either left there for grazing cattle over the winter or they are worked into the ground in the spring.

To read the entire article, click here.

New Video Explains Challenges Of Today’s Food System

Fall corn combine

How can today's food system meet the growing global demand to produce more food using fewer resources? That is the question posed by The Center For Food Integrity in a new video that provides some food for thought on the importance of agriculture and the environment.

Here are some highlights from the video:

  • Did you know 98% of the Earth’s water is the ocean, and only 2% is fresh water? Much of that water is locked up in the polar ice caps.
  • Global population is growing exponentially, with 200,000 new people on the planet every day.
  • By the end of the century, we will need to produce more food than what has been produced in the last 10,000 years combined in order to feed that growing population.
  • We will need to produce twice as many calories on the same amount of agricultural land  in order to protect the ecosystem.

The video answers the question, what is the right choice for people, animals and the planet? Find the answer by watching the video.

Conversations regarding sustainability continue to be a hot topic, with many questions and differing answers on issues such as: defining sustainability, discussing agriculture production methods, meeting demands for a growing planet, caring for the ecosystem, reducing our carbon footprint and preserving our natural resources.

Join The Discussion: What Is Sustainable Beef?

I believe agriculture plays an important part of this equation, in particular, beef production. BEEF magazine has a great Earth Day resource that explains how the cattle business and the environment are intricately related and how ranchers are great stewards of the land. 

What did you think about the video? How can ranchers feed a growing planet while preserving resources? What are the solutions to doing more with less? Join the conversation and leave your thoughts in the comments section below.