Retained Ownership an Attractive Opportunity this Fall

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1 Louisiana Cattle Market Update Friday, October 18 th, 2013 Ross Pruitt, Department of Agricultural Economics and Agribusiness LSU AgCenter Retained Ownership an Attractive Opportunity this Fall This year appears to be another strong year for winter stocker returns. While returns are estimated to be greater than last year, there are some significant differences compared to last year. The first difference is that the number of cattle available is smaller than last year. Although there is no Cattle on Feed report being issued by USDA this month, analysts estimate that the total number of cattle on feed is 7.3% smaller than last year. The number of cattle placed in September is also thought to be 1% higher compared to last year which was the lowest number of cattle placed for September since The second primary difference is the substantially lower cost of grain compared to last year. Corn futures are 39% lower than a year ago. Cash prices were showing approximately the same decline prior to the government shutdown ending the flow of USDA information on cash grain prices throughout the country. DTN is reporting cash corn prices that are ranging from the mid $3/bu to $4.50/bu early in this week (DTN corn index was $4.23/bu tues). The decline in corn prices have provided feedlots the ability to bid up feeder cattle prices. With feedlots facing lower input costs and higher purchase prices for cattle, they may have already bid the potential profit our of feeder cattle barring an increase in the price of fed cattle. With the above factors considered, procuring the right type of cattle to excel in a stocker program this winter may be difficult. The benefit of a stocker program is that there is flexibility present in what is purchased and marketed. Tight supplies of cattle will provide producers who retain calves an easy option to procure cattle than those who purchase calves and may not be able to do so as uniformly and at a price they want as in the past. Even if calves are retained to stocker, the cost of production should be known as it serves as a proxy for the purchase price of calves. The table below indicates the potential returns available for those interested in a stocker program, but doesn t include any risk management strategies. Forecasts from the Livestock Marketing Information Center are projecting $157/cwt to $163/cwt for feeder cattle in the second quarter 2014, lower than what feeder cattle futures for that quarter are currently suggesting. Adjusting some of the assumptions below with regards to how long the cattle are retained, death loss, and average daily gain can result in higher returns as the expected cost of gain decreases. With the May feeder cattle futures contract at a slight premium to the April contract, it may make sense to consider extending the grazing period to take advantage of heavier cattle sold for a higher price. Adding thirty additional pounds to the cattle in the scenario would drop the cost of gain ten cents per pound and result in a program that on a cost basis would be very competitive to winter wheat grazing in the Southern Plains.

2 Week Ending Friday, October 18, 2013 Ryegrass grazing (Cash Costs) Ryegrass grazing (All Costs) Beginning Weight 512 lbs COG 1 $1.00/lb $1.13/lb Days in Program 132 days ADG 1.92 lbs Death Loss 2.00% Transportation $38.78/head Marketing $15/head Ending Weight lbs Selling Price 3 $167.28/cwt Estimated Revenue $1,254.56/head Total Cost $295.15/head $326.56/head Returns to Stocker Phase $959.42/head $928.00/head Cow/Calf Production Costs 4 $446.04/head $670.90/head Returns above Cow/Calf Costs $513.38/head $257.10/head 1 Operating note of 4.50%, cash costs of $241.37/head 2 Includes 2% shrink 3 Closing price for April feeder cattle contract on Friday plus historical Oklahoma City April basis of $1.92/cwt above futures 4 $577.21/hd cash costs ($787.10/hd total) minus $ in non-calf revenue adjustments from LSU AgCenter enterprise budgets Cargill announced closure of one its Texas feedlots earlier this week. The feedlot helped supply the Cargill slaughter plant in in Plainview, Texas that was closed in February. Capacity of this feedlot was 62,000 head at one time and will wrap up operations next summer. With the government shutdown ended, it remains to be seen how much production, pricing, and slaughter data is released from the duration of the shutdown. Some of this information was collected during the shutdown due to Mandatory Price Reporting and efforts of the Food Safety Inspection Service who collect data while overseeing slaughter in all Federally Inspected U.S. slaughter facilities. Although a monthly Cattle on Feed report has been postponed by USDA NASS until the end of the month, trade analysts still released their expectations of feeder cattle placements, marketing and total number of cattle on feed earlier this week. Analysts expectations would indicate placements may have been the second smallest and marketings the third smallest for September since 1996, and total on feed the fourth smallest for October. There was one additional slaughter day in September 2013 compared to a year ago. One piece of information not included below is an estimate for the number of heifers on feed as of October 1 st. Pre-Report Expectations Actual 2012 Implied for 2013 Average Range Placed in September ,004 2,024 Marketed in September ,598 1,665 On Feed October ,989 10,186 An additional impact of the shutdown is a delay in estimates of cattle inventories in other countries. North American cattle inventories continue to decline as a result of two years of drought. Cattle inventories in South America and Oceania are thought to be expanding. This may put the success that

3 $/Cwt Week Ending Friday, October 18, 2013 U.S. exporters have made in the Asian markets more difficult to sustain as higher prices work their way through the North American beef markets. The price of lean ground beef likely will also stay strong due to the demand to expand the herd in the U.S. combined with tighter supplies from Oceania. Corn futures were higher on the week even though they were under pressure from the currently occurring harvest. Due to the shutdown, USDA has not released estimates on the completion of harvest, but it s thought to be somewhere around 30% when the week started. With a large crop on the way, commercials are thought to be waiting for harvest to be complete and not ready to buy, providing support for the market currently to entice farmers to sell. Live cattle futures were mixed with only the nearby October contract showing gains. Technical trading and strong cash sales provided strength only to result in traders booking profits as the week finished. There is some concern that the strength in prices this early in the quarter may result in the lack of additional rise in prices as the year ends as production is forecasted to drop 5% in the final quarter of 2013 compared to last year. Feeder cattle futures were pressured lower on higher corn prices combined with the decline in lives cattle futures. Cash fed cattle trade reported on Thursday by USDA ranged from $128 to $131/cwt in Colorado, Iowa, and Nebraska. Dressed prices ranged from $202 to $204/cwt. Feeder Steer Prices* $200 $150 $100 $50 $ lbs lbs lbs OKC $ $ $ $ $ $ *Prices are for Medium and Large 1-2 Steers **Mississippi prices are for midpoint of and steers Note zero values in table represent no reported sales for that weight group. Source: USDA AMS

4 $/Cwt Week Ending Friday, October 18, 2013 Mississippi Cull Cow Prices $80 $75 $70 $65 $60 Breaking Boning Lean This Week $73.50 $78.00 $66.00 Last Week $69.50 $77.00 $65.50 This Week Last Week Source: USDA AMS Table 1. Futures Prices Live Feeder Month Cattle Change* Cattle Change* Corn Change* October $ $ November $ December $ /2 8 1/4 January $ February $ March $ /4 April $ $ May $ /4 7 3/4 June $ July 469 1/2 7 1/2 August $ $ September $ /4 7 Source: DTN * Change is from the previous Friday s close

5 Week Ending Friday, October 18, 2013 Table 2. State and National Market Information Commodity This Week Last Week Last Year 5 Area Fed Steer Price Live N/A N/A $ Dressed N/A N/A $ Oklahoma City Feeder Cattle Prices cwt Med and Large #1 N/A N/A $ cwt Med and Large #1 N/A N/A $ Boxed Beef Cutout Values (weekly average) lb Choice cutout $ N/A $ lb Select cutout $ N/A $ U.S. Pork Cutout Value $ Georgia Dock Broilers $ N/A $ Georgia B/S Breasts $ N/A $ Georgia Leg Quarters $ N/A $ Meat production (million lbs) Beef N/A Pork 467 N/A Slaughter (1,000 head) Cattle N/A Hogs 2,297 N/A 2,382 Broilers/Fryers N/A N/A 155,110 Average Dressed Weight Cattle 798 N/A 800 Hogs 203 N/A /11/ /4/ /13/2012 Poultry Placements (in thousands) 1 LA Broiler Egg Sets N/A N/A 3,304 US Broiler Egg Sets N/A N/A 181,903 LA Broiler Chick Placements N/A N/A 2,845 US Broiler Chick Placements N/A N/A 156,027 Source: USDA Agricultural Marketing Service, USDA National Agricultural Statistics Service and Livestock Marketing Information Center 1 Note the placements numbers are lagged by one week prior to publishing.