April 17, 1996 Ames, Iowa Econ. Info WHAT IS THE IMPACT ON CATTLE PRICES OF THE MONFORT SUSPENSION?

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1 April 17, 1996 Ames, Iowa Econ. Info WHAT IS THE IMPACT ON CATTLE PRICES OF THE MONFORT SUSPENSION? Monfort officials announced April 11 that the Des Moines beef processing plant would suspend operations until further notice. The facility slaughtered approximately 675,000 cattle a year or about one-third of all the cattle slaughtered in Iowa last year. It employed 1,320 workers when it suspended operations. The future of the plant is uncertain at this time. Labor laws require that workers be given at least 60 days notice before a plant is closed, so for now, work has been suspended. Talks are currently underway between city, state, and company officials to consider the options for the facility. The Des Moines facility had a reputation of buying high quality cattle targeted toward the upper-end restaurant and retail market. It was thought that the plant averaged percent Choice cattle compared to the 1995 industry average of 62 percent. It bought cattle throughout the region and worked with company buyers and with order buyers to buy throughout the region and, in particular, it bought small lots of high grading cattle through auction markets. The Des Moines facility also operated a kosher kill UNTIL a couple of months ago. There were reports in recent weeks that Monfort was attempting to set the plant up as a stand-alone plant because it was quite different than its other plants operating in Nebraska, Kansas, Texas, and Colorado. Impact on Cattle Prices... The cattle market is under a great deal of price pressure and prices had declined prior to Monfort's announcement. Recognize that not all of this price decline is due to the plant closing. Although individual bids may differ between packers and feeders, the expected impact on fed cattle prices due to the plant closing should not be dramatic and any negative effects should lessen over time. However, the impact will be greater and last longer if sellers are not well informed. Based on the recently released USDA Packers and Stockyards study and change in concentration, the expected decline in the bid price with one less buyer in the Corn Belt market is less than $.25/cwt live weight or about $3/head. Previous research on closing of hog packing plants showed that the negative price impact from the loss of a buyer diminished in 3-4 weeks or less. Trucking is the equalizer between regional markets; trucking costs to access more distant markets can differ, and do favor truckload lots (50,000 lb. live weight). However, a recent example of a central Iowa feedlot trucking cost was $.65/cwt to haul the cattle approximately 90 miles, and $.90/cwt to haul the cattle 160 miles. Thus, the cost of additional miles is less expensive than initial miles. The combined effect on prices of the plant closing should be approximately $1.00/cwt live weight or less, with a larger decline in eastern Iowa and less in western Iowa. Playing Offense... Taking the Monfort plant out of central Iowa does leave a substantial cattle buying hole in the state (Figure 1). However, the impact will not likely be the same across the state. Western Iowa cattle feeders still have several other bids to the west and north. Central and particularly eastern Iowa feeders will feel more pressure on prices. In properly functioning markets, we would expect that prices between two regions to differ by no

2 more than the transportation cost to move cattle between the regions. The recently released Packers and Stockyards report on packer concentration indicated that there was one national market, as cattle were readily bought and transported between geographical regions. However, competitive markets depend upon well informed buyers and sellers. It is important that cattle feeders do their homework ahead of time to know what plants are buying in their region and the cost of transporting cattle to the more distant plants. Figure 1 (see the insert) and the accompanying list identify beef packing plants, their phone numbers, and their preferred type of cattle. Cattle feeders will need to take the offensive and contact other buyers rather than wait for the buyers to find them. Instead of selling directly to the packer, producers may want to use the services of professional marketing agencies, independent order buyers, or auction markets that have had cattle sales. Sellers will want to discuss the services offered and commission charged by these professionals ahead of time and be sure to know who the individual representsþthe buyer or the seller. Producers may also have to sell cattle on a carcass weight or grade and yield basis rather than on live weight. Weighing conditions and shrink are less of a factor on carcass sales. However, the seller stands condemnations and trimming that occurs before the carcass is weighed. If sold grade and yield, the seller also stands the grading risk. A USDA grader calls the quality and yield grade, and the carcass is priced accordingly. Thus, it is important that you know your cattle and how they will grade on the USDA system when you accept the bid and associated grade and weight discounts. Don't Panic... Suspension of operations at Monfort in Des Moines is a blow to the Iowa cattle industry. However, several other buyers serve the state. Producers who do their home work can still receive competitive bids for their cattle. It is important that cattle feeders do not panic. Feeders who accept a bid without evaluating other logical alternatives may miss opportunities. Postponing the sale of cattle in hopes of another buyer magically entering the market will lead to increasing cost of gain, particularly with $4.00 corn, and potential grade discounts for overfinished cattle. The Louis Rich turkey processing facility at West Liberty, Iowa announced that it will stop processing birds at the end of the year. Louis Rich is doubling the size of its plant in South Carolina and will not need the Iowa capacity as the turkey industryþand its share of the marketþis not growing fast enough to warrant both plants. With the exception of the current corn prices, the turkey industry has been generally profitable in recent years. According to USDA estimates, annual returns to turkey producers have been positive since From reports, it appears that the West Liberty plant is of a commercially competitive size, in decent shape, and has been profitable. Given these attributes, it may find a new buyer in the not-too-distant future....john Lawrence

3 WEATHER, CHINA, MAD-COW DISEASE AFFECT CORN & SOYBEAN PRICES Corn prices have been setting new all-time records since USDA's late March report showed a much smaller than needed decline in domestic corn feeding. Concern that the U.S. may run out of corn in late July or August unless feeding is cut further is a major factor behind the price strength. Continued drought in the southern plains and deterioration in that area's wheat crop also added strength to corn prices. Corn and wheat prices are linked partly by the fact that USDA data show about 190 million bushels of wheat were fed last summer, and that very little wheat may be available to feed this summer unless generous rains come soon in the southern half of the Wheat Belt. Also, a number of weather forecasters are cautioning that the southwest drought may move into the Corn Belt. Concern over a possible shortage of corn has pushed central Iowa cash corn prices over $4.00 per bushel for the first time ever. Livestock and poultry feeders in some parts of the nation are paying well over $5 per bushel for corn. These developments come at a time when U.S. and world grain stocks-touse ratios are expected to be at record lows. In other words, there will be essentially no U.S. reserve supply to draw on in case of serious weather problems again this year. Once before, in , U.S. corn stocks/use was about as low as it is expected to be this year. In , the corn market set a new high of $2.97/bushel in Chicagoþa price not exceeded until more than a quarter of a century later. U.S. corn feeding from September 1995 through February 1996 was about 12 percent below a year earlier, due to reduced feeding rates per animal. For the last half of the marketing year, it appears that corn feeding will need to drop 16 to 22% below a year ago. The exact level of feeding that can be sustained will depend on whether other users cut back, and on how much we can reduce carryover stocks. The amount of corn feeding possible will be limited by available supply. We project the September 1 carryover at slightly under 400 million bushels, about a 2.5 weeks' supply. Whether we can actually get the carryover that low will depend on the amount of early harvested corn and sorghum from the South, and on the maturity of the Midwest corn crop. Key influences on the amount of corn feeding this summer will include (1) processing and export levels, (2) pasture and range conditions in important cow/calf areas, (3) amount and timing of replantings of failed wheat to sorghum, (4) timing of corn plantings in the South, (5) summer weather, (4) and the amount of 1996-crop wheat, oats and barley fed this summer. Recent developments helping to reduce corn use include cutbacks planned in the broiler industry, recent announced cuts in corn processing by major processors, and recent rains in parts of the southern plains pasture and range areas that will help keep feeder cattle out of feedlots. Some analysts place the reduction in spring and summer corn processing at 80 to 100 million bushels. If these reductions materialize, they may reduce the needed cut in feeding of corn to livestock from a previously expected 22 percent cut to a 16 percent cut from last year. Corn feeding for the first half of the year is indicated to have been down 12 percent, before the announcement of cuts in broiler production. Brazil is believed to have sold some corn for export, for the first

4 time in several years. The 80 to 85 cent premium of old-crop to new-crop corn would allow Brazil to profitably export corn this summer, and then import from the U.S. in the fall or winter if necessary. Other developments affecting summer corn feeding will include the rate at which Southern Hemisphere feed grain exporters move their May-June harvest into world markets. The three usual Southern Hemisphere exporting countries are projected to harvest crops 330 to 350 million bushels (corn equivalent) larger than last spring. Also, in early April, trade sources indicated China appeared to be taking steps that could lead to summer corn exports of up to 1.5 million tons. Recent world corn prices have been above Chinese prices. Exports of 1.5 million tons would be far below the approximately 12 million tons of corn China exported two years ago. Grain traders will watch these various developments closely to see whether record prices are causing further reductions in use of U.S. corn. If reductions in use do not appear to be occuring, additional strength in corn prices will be likely. If drought or other serious weather problems appear to be moving into the Corn Belt, prices also would be almost certain to move higher. With weather concerns, the greatest potential strength would be in new-crop corn prices, which have been running far below oldcrop bids. New-crop corn prices also will be influenced by the amount of Conservation Reserve Program land being returned to production this year. In addition, passage of freedom to farm legislation and resulting acreage adjustments may affect new-crop prices somewhat. Strength in corn and wheat prices also has been accompanied by strength in the soybean market. In the first full week of April, near-by soybean prices moved slightly above the January high, but were more than $4 below records set in Unlike corn, there is no threatened shortage of soybeans this summer. With exports of meal and soybean oil lagging well behind last year for the entire marketing year to date, and with processing below a year earlier since December, bean stocks almost certainly will be modestly above minimum trade needs. Season to date U.S. soybean meal exports and outstanding unshipped sales through March 21 were 20% below a year earlier, while soybean oil was down an extremely sharp 70% and beans were down 3%. Competition from newly harvested South American beans and bean products should increase substantially from late May through at least early fall. Despite seasonally increased competition, several developments have the potential to strengthen soybean demand somewhat. Higher corn prices tend to make soybean meal more attractive in livestock rations. Also, concern over "mad cow" disease may bring restrictions on the use of meat meal and tankage in livestock feeding in the U.S. and Europe. That may increase the demand for soybean meal. Early estimates are that these developments could boost meal demand by the equivalent of about 45 million bushels of soybeans annually. Additionally, the use of vegetable oils in the cosmetic industry may increase as a result of concerns over the disease and reduced use of animal products in cosmetics. Finally, Brazil's spring 1996 harvest is projected to be 70 to 100 million bushels below last year. That should strengthen fall and winter export demand. Other Market Factors...

5 Figure 1 shows the maximum allowable spring and summer use of corn for feed with current processing and export projections. Already low and deteriorating prospects for the wheat crop from Nebraska southward will further complicate the problem of cutting corn feeding. Reduced summer wheat feeding could be offset by replanting failed wheat to sorghum. However, in the most severely affected areas, soil moisture has been inadequate to plant sorghum. Also, in the southeastern states, corn planting is later because of cool weather. Low subsoil moisture in the southern half of Iowa and Illinois, as well as Missouri and non-irrigated areas of Nebraska will cause grain traders to be uneasy in the weeks ahead. Central and northern Iowa soils will hold 10 to 12 inches of moisture in the root zone at full capacity. Some areas are at only one-third to one-fourth of capacity. Normal last half April through June rainfall would push soil moisture up near capacity. A dry spring would encourage early plantings, but could cause problems later from lack of subsoil moisture. In the world picture, grain crop prospects look considerably better than last year in most major producing areas. Grain acreage likely will increase this year in Canada, Europe, Australia, and Argentina, as well as in the U.S. The multi-year drought in southern Europe has ended. Grain crops in the former Soviet Union had good snow cover this winter, providing protection and spring moisture. China has some areas of regional drought, but it is too early to determine how serious these are. The world feed grain production is estimated to have declined about nine percent from the previous year. That is an extremely large percentage drop at the global level. World soybean production, including South America's spring 1996 harvest, is estimated to have declined by over 10 percent. The U.N. Food and Agricultural Organization, the International Grain Commission, and the OECD are anticipating a moderate increase in world production of both wheat and feed grains. For the longer run, a key question is whether record high grain prices will boost world grain production. Figure 2 shows the trends in world grain production since After major changes in U.S. farm policy including sharply lower loan rates, the uptrend in both U.S. and foreign grain production slowed dramatically. U.S. corn loan rate dropped from a previous high of $2.60 to $1.72 in 1976, thus lowering the support under world corn prices. Similar declines occurred in loan rates for other grains....robert Wisner USDA Corn Supply, Use, Stocks and Prices 1993/ / /96 Projections March April Area/Million acres Planted Harvested Yield-harv., Bu/Ac Beg. stks., mil. bu Production Imports Supply, total Feed and residual Food, seed & indust Domestic, total

6 Exports Use, total Ending stocks, total Farmer-owned res CCC inventory Free stocks Outstanding loans Avg. farm pr. ($/bu.) USDA Soybeans Supply, Use, Stocks, and Prices 1993/ / /96 Projections March April Area/Million Acres Planted Harvested Yield-harv., Bu/Ac Beg. stks., mil. bu Production 1,871 2,517 2,152 2,152 Imports Supply, total 2,170 2,731 2,492 2,492 Crushings 1,276 1,405 1,370 1,360 Exports Seed Residual Use, total 1,961 2,396 2,292 2,302 Ending stocks Avg. price ($/bu) The Iowa Farm Outlook newsletter is now available on two electronic sources. Look for the livestock outlook by John Lawrence and the grain outlook by Robert Wisner under the first two pages of the "Local Information" section of the main menu on DTN. The newsletter is also available on the World Wide Web by accessing Iowa State University Extension's home page at Look for the section called Extension Information and click your mouse on "Newsletters."... and justice for all The Iowa Cooperative Extension Service's programs and policies are consistent with pertinent federal and state laws and regulations on nondiscrimination. Many materials can be made available in alternative formats for ADA clients. Issued in furtherance of Cooperative Extension work, Acts of May 8 and June 30, 1914, in cooperation with the U.S. Department of Agriculture. Nolan R. Hartwig, interim director, Cooperative Extension Service, Iowa State University of Science and Technology, Ames, Iowa.