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Guest Opinions

Current Markets Promote Adding Gains From Forage

Written by John Ritten

By UW Extension Production Economist John Ritten

As many of you are surely aware by now, the USDA has lowered expected crop yields for corn recently. The current forecast calls for roughly 40 percent of the crop to go for feeding purposes and another 40 percent to go to ethanol production.  

Even with expected declines in exports due to the continued fragile global economy, this doesn’t leave a lot of extra corn to go around. Forecasts are for endings stocks to be only 714 million bushels, which translates to a stocks-to-use ratio of just over five percent. Only the 1995-1996 crop year has had a lower ratio in recent history, and this implies a very tight supply of corn, which is likely to translate into higher prices as we move into next year. In fact, the USDA has predicted that corn may well reach a new record high price in the coming months.  

While growers like this sort of news, the livestock industry often suffers when grain prices rise, and feeders will often pay less for cattle due to the high cost of feeding. While the increase in feed costs has had some downward pressure on calf prices, it seems the biggest pressure on calf prices is due to drought-related early marketings from the southern plains. Yet, even with the extra early-weaned calves, national calf prices have remained above the lows experienced in May.  With the increasing costs of grain, heavy feeder prices have remained strong, as feeders are willing to buy heavier animals in order to reduce feed needs. I foresee this trend continuing into the future.  

Another positive aspect for cattle prices is the continued reduction in national herd numbers. High cattle prices usually signal a need to rebuild the national herd, but the drought in the southern plains has forced additional liquidation this year, resulting in even lower July inventory numbers as compared to the lows seen last year. In fact, the U.S. is currently experiencing the lowest herd size since the early 1950s. The reduction in supply will continue to keep upward prices on cattle for at least a few years.

So, what should you do with this year’s calf crop? I don’t see any reason for calf prices to drop drastically this fall. However, as everyone begins to bring in calves, the typical seasonal dip in prices is to be expected. Remember that nationally there have already been a lot of calves marketed due to drought conditions, so given the already tight supply, and the fact that there will be even fewer calves available, the dip shouldn’t be too drastic. However, if you’ve got forage, you may want to hold some animals back to sell as yearlings next year.

Given the early placements of calves from the southern plains, feedlots have a lot of animals lighter than 600 pounds (some a lot lighter). These animals are projected to finish in the first quarter of next year, with a few finishing in the second quarter. Given the amount of feed needed to finish these animals, and the cost of grain that will be utilized, feeders will look for heavier animals next spring and summer.  

The American Agricultural Economics Association has released expectations of a decline in overall beef production of just under two percent for the remainder of this year, and close to a four percent reduction for next year. The resulting market impacts of this reduction in supply may very well lead to record cattle prices. The report states that live weight slaughter steer prices are expected to peak at over $120/cwt in the second quarter of next year. Likewise, the estimates are for yearling prices to be roughly $4/cwt higher in 2012 as compared to this year. With the increases in grain prices, the rollback between calf and feeder prices may be very close to zero in the coming year. We are seeing evidence of this in the Oklahoma markets already due to the high number of lightweight placements already in feedlots – 515-pound steers sold for $138.56, while 727-pound steers sold for $138.05 the first week of August. This implies a very high value to gains in stocker animals from forage based sources.

It is becoming clear that higher feed prices and changes in the price of grains relative to roughages means that cattle growth in feedlot settings is becoming more expensive as compared to cattle growth on pasture or range. Therefore, I would recommend adding as much weight as feasible to animals prior to marketing. While calf prices see a seasonal decline beginning in October, feeder steers in the 700- to 800-pound range begin to see a seasonal increase starting in May, and stay strong through the summer. Therefore, as long as you can hold some animals over winter and take advantage of some spring forage, there are likely some good opportunities for running yearlings, at least this year.

I would guess that, given the continued mandate for bio-fuels, this sort of arrangement of increased gain from forage prior to feedlot placements will continue to be needed if the cattle industry is to remain viable. So, if you are thinking of any sort of changes in your operation in the long-term, adding a yearling operation may prove to be profitable for years to come.

On a side note, adding a yearling enterprise (at the cost of reducing breeding stock numbers) has also been shown to reduce some of the risks associated with drought in Wyoming. Especially in this state, a diversified operation has more tools for dealing with the lack of forage we are all too familiar with during drought conditions.

Whatever you decide to do with your calves, enjoy this year. It is not often that producers in this state are faced with the type of moisture we have seen over the last year, and high (with a very realistic prospect of increasing) cattle prices. While I don’t think this combination will last forever, the declining herd numbers should keep cattle prices elevated for at least a few more years. However, as we all know, next year’s moisture is still a large unknown. Take advantage of your opportunities this year; next year is too far off to count on.

On a final note, if you’re a feeder, I’m sorry, the next year or two could be tough…