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News and views on stocker segment issues from BEEF magazine.
March 20, 2007 A Penton Media Publication
ISSUE CONTENTS
Deadline For $10,000 Stocker Award Is April 1

Fed-Cattle Prices Hold Recent Strength

$4.5-Million Study Looks At Captive Supply

Most CRP Acres Will Re-enroll, USDA Says

Calf-Yearling Prices Advance

Questions & Comments


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Stocker Award
Deadline For $10,000 Stocker Award Is April 1
If you plan to apply for this year's National Stocker Award, sharpen your pencil. The deadline is April 1.

The BEEF magazine award is open to any stocker or backgrounding operation that derives the majority of its cattle-based income from the stocker and backgrounding businesses. You can nominate yourself, or someone else.

The overall winner wins $10,000 in cash, and two other divisional winners receive $2,500 in cash. For more info or an application, go to www.nationalstockeraward.com. For a hard-copy application, contact Marilyn Anderson at 800-722-5334 ext. 14710.



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News
Fed-Cattle Prices Hold Recent Strength
Whew! Fed-cattle prices last week retained most of the $7-9/cwt. increase gained the previous two weeks. Southern Plains fed cattle traded for mostly $98. In the North, the market bottom was $98, with some early-week trades bringing a smooth $100.

Calf and feeder prices followed suit last week with yearlings bringing steady money to $3 more, and calves $2-6 more (see "Calf-Yearling Prices Advance").

You could see the upswing in prices coming, but the degree to which supply fundamentals can push the market is always amazing to witness. The full effects of continuing year-to-year declines in carcass weights due to blizzard losses and high grain prices are finally coming to the fore. In turn, retailers fearing tighter supplies later this spring have been pushing boxed-beef prices -- $8 more last week.

Though the recent run in prices brings some relief, analysts with the Livestock Marketing Information Center (LMIC) point out cash- market prices on a daily basis haven't approached the record highs achieved in the last quarter of 2003.

In October of that year, steers reached $113.83, based on the five-market average used by the National Ag Statistics Service; $116.94 for steers grading better than 65-80% Choice. The fourth-quarter average that year was $97.57. That was back when BSE pulled Canadian cattle from the international export market, and before U.S. cattle suffered the same fate.

"On an annual basis, record-high, fed-steer prices occurred in 2006; the five-market average for steers was $85.94," says LMIC. "This year, current forecasts call for new, record-high, annual average slaughter-steer prices. For the year, steers could average about $90, up about 5% from last year. But setting new record-high, daily cash levels won't occur without some additional spark. Setting a new, record-high, quarterly average fed-cattle price might happen in 2007 and is even more likely in 2008."


$4.5-Million Study Looks At Captive Supply
Cattle prices go down as consumer beef demand declines due to decreasing beef quality, and risk increases. That's what happens when you try to legislate the market.

Specifically, that's what would happen if alternative marketing agreements (AMAs) -- basically anything that isn't a cash trade in the spot market -- were restricted, according to the recently concluded $4.5-million "GIPSA Livestock and Meat Marketing Study." It was conducted by RTI International for USDA at the behest of the industry, including the National Cattlemen's Beef Association (NCBA).

"During debate of the 2002 farm bill, concerns from producers about packer concentration led NCBA members to ask Congress to study the livestock and meat-marketing complex," explains John Queen, NCBA president. In 2003, Congress authorized $4.5 million to conduct such an independent study and provide a report that would be the definitive answer on this issue.

In sum, the cattle portion of the study concludes that if AMAs --including packer-owned fed cattle, formula pricing and forward contracting -- were reduced or eliminated, feeder-cattle producers, feedlots and packers would all make less money, while the consumer would pay more for a product of less quality.

"The cost savings and quality improvements associated with the use of AMAs outweigh the effect of potential oligopsony market power," the report says. "In model simulations, even if the complete elimination of AMAs would eliminate market power that might currently exist, the net effect would be reductions in prices, quantities, and producer and consumer surplus in almost all sectors of the industry because of additional processing costs and reductions in beef quality. Collectively, this suggests that reducing the use of AMAs would result in economic losses for beef consumers and for the beef industry."

Try this on for size: researchers -- some of the nations' top ag economists -- simulated both a 25% reduction in AMAs and the complete elimination of them.

When AMAs were reduced by 25%, what is termed producer surplus -- basically what would be compared to what could have been -- decreases by an estimated $1.9 billion, while consumer surplus decreases by an estimated $0.4 billion in the short run. Consumer surplus decreases because consumers would have to pay more, yet no one in the production chain would be making any more. By year 10, producer surplus declines by an estimated $0.7 billion and consumer surplus declines by an estimated $0.2 billion.

In the scenario where AMAs are eliminated, producer surplus decreases by an estimated $10.5 billion and consumer surplus decreases by an estimated $2 billion in the short run. By year 10, producer surplus declines by an estimated $4 billion and consumer surplus declines by an estimated $0.8 billion.

According to these simulations, salt in the wound comes with the fact that any market power such restrictions would take away from packers would be overwhelmed by other economic losses.

"The positive effect of reduced potential oligopsony market power that might result from restricting AMAs is unable to offset the negative effects of increased processing costs and reduced quality associated with restricting AMAs. In describing these results, it's important to note that the economic incentives associated with using individual types of AMAs by individual industry participants may differ from the results for the industry as a whole," the researchers say. Oligopsony is basically the condition that exists when there are a relatively small number of participants who control a relatively large proportion of market share.

"The direct cost savings from AMAs is approximately 0.9% of average total costs, or approximately $1.22/head," the study says. "Packers also experience additional cost savings from reduced variability in cattle supplies ($1.70/head) and increased slaughter volumes ($3.56/head) at packing plants. The total cost savings associated with AMAs is approximately $6.50/animal. For an industry with an average loss of $2.40/head during the 30-month sample, this is a substantial benefit."

In fact, the report states: "Beef producers said that cattle quality would suffer in an all-cash market environment because it's more difficult to control quality when using the cash market than using long-term or forward contract arrangements. Although many believe it is possible to purchase quality cattle in the cash market, they also believe the quality of cattle procured in the cash market is more variable... Some producers stated they need formula sales under a marketing agreement to obtain premiums for producing cattle for customized buying programs. Packers said the ability to obtain quality cattle under AMAs was a much stronger incentive than issues related to procurement costs. Because beef-product buyers are demanding higher-quality products, packers use AMAs to ensure that cattle purchased meet the quality standards needed to meet buyer requirements for beef products..."

In other words, decrease quality and consistency, and you decrease beef demand.

Spin this around: AMAs provide both producers and the industry a sturdy, reliable risk-management tool, in more ways than many usually consider.

Looking at packer ownership specifically, the study concludes: "One implication of restricting AMAs that was noted by several respondents was the impact on risk-bearing ability and capacity utilization. Full or partial packer ownership of a pen of cattle reduces the equity the feeder (or other cattle owners) must provide to feed cattle. Packer ownership also allows the feeders to secure better terms from lenders.

"Feeders may be able to own more of the cattle that are currently owned by packers, but they would face a capital constraint preventing them from owning all the cattle. The individual feedlots would have underutilized capacity or would have to find new investors to replace the capital packers once provided.

"To attract capital that is not in cattle feeding would require a higher rate of return than cattle feeding currently offers; otherwise, that capital would already have been invested in cattle feeding. Given that the supply and demand of beef is relatively fixed in the short run, fed-cattle prices are not expected to change substantially. Thus, higher rates of return would have to come from downward pressure on feeder-cattle price. Likewise, if feeders have more debt and/or more risk, the higher cost of borrowing will result in lower bids for feeder cattle."

The study results comprise a massive volume (you can find it at www.gipsa.usda.gov.) But it's one every producer should give a gander. Aside from accomplishing its purpose of quantifying the impact of arbitrarily deciding cattle businesses can't do business with one another how they choose, the study serves as a short course for what drives industry economics beyond the cow-calf pasture.

"Buyers of livestock and meat may choose to use specific marketing arrangements because they reduce the cost of procurement, improve the quality of animals and products purchased, aid in risk management, and generate efficiencies in procurement and marketing. Likewise, sellers of livestock and meat may choose to use specific marketing arrangements because they facilitate market access, reduce the cost of selling, increase the price received, and reduce risk," the report says.



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Weather And Crops
Most CRP Acres Will Re-enroll, USDA Says
If results of a recent survey by USDA are correct, 84.4% of the acres currently enrolled in CRP -- with contracts set to expire between 2007 and 2010 -- will be re-enrolled. These contracts account for about 27.8 million acres.

More specifically, participants indicate they'll pull about 4.6 million acres out of CRP. Of these, approximately 1.4 million acres are located in major corn-producing states, USDA says.

"The percentage of landowners choosing to remain in CRP is consistent with what we've seen in the past, despite speculation that re-enrollment would drop significantly due to high corn prices," says USDA Secretary Mike Johanns. "We're closely monitoring interest in CRP re-enrollment, planting projections and demand for commodities to determine the most appropriate actions in administering the Conservation Reserve Program."

In the meantime, according to the National Agricultural Statistics Service, for the week ending March 11:
  • Warm, dry weather throughout most of the Great Plains promoted small-grain growth and development in the southern half of the region.

  • Milder weather across the Corn Belt eased stress on livestock, but melting snow contributed to lowland flooding in portions of Illinois, Indiana and Ohio.

  • In California, warm dry weather was beneficial for growth of grasses, small grains and forage crops.

  • In Texas, Oklahoma and Kansas, warm weather promoted growth of winter wheat and other small grains. Winter wheat was in mostly fair to good condition across the three states as the crop was developing at a near normal rate in Texas and Kansas, and somewhat ahead of normal in Oklahoma.



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Markets
Calf-Yearling Prices Advance
Sooner was better than later for folks selling feeder cattle last week, as the steady-to-$3 price increase began to turn south on Thursday. That resistance came as the board dropped and packers were able to hold off further fed-cattle price increases, though $100 was reached in northern trade earlier in the week. Fed-cattle trade ended the week at $98-100 in the North; mostly $98 in the South (a $1 decrease from the previous week). Yearling feeder prices were steady to $3 more.

Calf prices shrugged all of that off though, finishing the week $2-6 higher in the Midwest and Plains; as much as $10 more in some areas. Prices were steady to $3 higher in the Southeast.

"Spring-like weather and the tint of green on the horizon was all that calves and thin-fleshed, lightweight yearlings needed to increase in value," explain Ag Marketing Service (AMS) analysts. "Backgrounders have grass fever and many fear the availability of stockers will be very tight this spring.

"The best demand was for long-weaned and hard-wintered five-weight calves; more so for the steers than the heifers. These buyers are looking for something that can maximize the cheap gain that grass provides, as grains and commodity feed are twice as expensive as last year. But just as everyone has gotten used to the sound of $4 corn, the price has been slowly slipping and May Chicago Board of Trade corn futures actually fell below $4/bu. this week," AMS analysts say.

The summary below reflects the week ended March 16 for Medium and Large 1 -- 500- to 550-lb., 600- to 650-lb. (calves), and 700- to 750-lb. feeder heifers and steers (unless otherwise noted). The list is arranged in descending order by auction volume and represents sales reported in the weekly USDA National Feeder and Stocker Cattle Summary:
Summary Table
State Volume Steers Heifers
Calf Weight 500-550 lbs. 600-650 lbs. 700-750 lbs. 500-550 lbs. 600-650 lbs. 700-750 lbs.
MO 47,900 $129.19 $113.21 $107.86 $112.47 $104.94 $98.12
OK 43,900 $124.60 $116.02 $107.27 $111.25 $104.36 $97.08
Dakotas 39,500 $124.23
$126.08
$121.62
$115.03
$110.88
$110.59
$111.68
$112.56
$106.38
$104.37
$99.30
$97.86
KY* 30,500 $107-117 $97-107 $88-985 $90-100 $84-943 $78-885
TX 21,500 $118.68 $112.24 $106.38 $111.14 $103.48 $99.14
KS 15,200 $138.96 $117.44 $107.69 $113.40 $104.71 $98.73
NE 14,800 $132.30 $120.37 $110.80 $117.43 $109.05 $100.87
IA 13,600 $125.21 $120.922 $107.53 $116.33 $110.852 $98.74
TN* 11,800 $115.95 $104.54 $94.16 $100.04 $91.67 $85.32
AL 11,100 $115-125 $104-112 $97-100 $104-111 $93-100 $86-91
CO 10,700 $134.14 $115.99 $105.11 $113.16 $104.62 $95.83
GA*(***) 9,600 $100-124 $90-113.50 $78-101 $91-109 $82-101 $74-93
AR 8,700 $121.87 $109.29 $101.05 $105.04 $99.04 $91.36
Carolinas* 7,300 $98-124.20 $82-101 $85-98 $81-107 $82-100 $74-87
NM 7,000 $122.27 $112.42 106.03 $107.31 $100.37 98.994
FL* 5,200 $93-116 $88-101 $81-854 $81-101 $80.50-91 **
VA 5,100 $117.63 $109.23 $96.97 $97.14 $90.90 $93.81
WY 5,000 $127.392 $120.84 $104.71 $115.67 $105.46 $100.85
MS* 5,000 $110-120 $95-1053 $90-955 $100-1051 $90-1003 $85-905
LA(ND) 3,400 $109-125 $106-1202 ** $98-116 $96-1122 **
MT 3,400 $132.89 $117.77 $103.44 $112.31 $104.67 $95.18
WA* 1,600 ** ** $98.86 ** ** **

* Plus 2
** None reported at this weight or near weight
(***) Steers and bulls
(?) As reported, but questionable
NDNo Description
1500-600 lbs.
2550-600 lbs.
3600-700 lbs.
4650-700 lbs.
5700-800 lbs.
6750-800 lbs.
7800-850 lbs.



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Contact
Questions & Comments
Please send questions to:

Wes Ishmael, Contributing Editor, BEEF Stocker Trends, at wesleysink@aol.com

Joe Roybal, Editor, BEEF magazine, at jroybal@beef-mag.com



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