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News and views on stocker segment issues from BEEF magazine.
October 24, 2006 A Prism Business Media Publication
ISSUE CONTENTS
Doug Rogers Named Stocker Award Finalist

Smithfield & Conti To Build New Packing Plant

Corn Production Pegged Lower

The Power Of Gross Margin

Other Upcoming Events

Sign Up Now For BEEF Quality Summit, Nov. 14-15

Cattle Prices Weathering The Storm...Sort Of

Doug Rogers Profile...conclusion

Questions & Comments


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News
Doug Rogers Named Stocker Award Finalist
"People aren't getting into the cattle business because they don't think you can make a living at it, and that's not true," says Doug Rogers, who owns and operates D&H Cattle Company, LLC at Collins, MS.

In fact, Rogers -- a West Point graduate and the holder of an MBA degree -- chose the stocker business because of the potential economic returns it offers.

"I don't compare my business to other stocker operations. I compare it to other industries in terms of rate of return and profitability," explains Rogers. "We shoot for about 20% return on investment. Sometimes it's higher, sometimes it's lower."

Though Rogers modestly explains it has as much to do with luck as skill, he's made money for the last 12 years (ever since he started). He's made at least $50/head for the past 10 years.

For perspective, Rogers basically buys three-weight heifers year-round to straighten out. Key advantages to the operation are the availability and price of these lightweight calves, as well as typically plentiful and affordable ryegrass. This part of central Mississippi averages about 65 in. of rainfall. Add that to cheap fertilizer in the form of poultry litter and there are usually plenty of groceries worth the money.

Risk Or Opportunity?
Lots of folks consider flyweight, put-together calves one of the riskiest investments in the cattle business; Rogers sees them as a strategic business hedge.

"I buy light, small cattle, which is in itself a hedge against the market. I have more opportunity to choose when to market... Buy them small and light enough and you can ride out a lot of things," Rogers says. "I buy the mismanaged cattle, those born at the wrong time of year, sired by the wrong bull, born on the wrong place."

Besides, Rogers says there are as many health problems with 400- and 500-lb. cattle as there are with the lighter calves, meaning he's gambling fewer dollars on the same level of risk.

Similarly, Rogers runs only heifers. Besides the fact Rogers likens the shelf life of steers to that of ripe bananas, he says simply, "Heifers give you more options." In his case, Rogers sorts off a jag of the heifers that will work as replacement heifers and markets them at an added premium to the stocker profit he already has in them. As well, he's found a way to moonlight by providing heifer calves to cutting-horse competitions in the area.

Rogers has a different view on risk and health management than some, too. Unlike those who shy from using modified-live vaccines for lighter calves when they're under the most stress, he prefers them.

"If I'm going to lose a calf, I want to lose her during the first two weeks of ownership rather than the last two weeks," Rogers says. This is also the period of time when calves are watched the closest anyway. "It always seems like death loss is the one thing no one wants to talk about," he says. But, it's a fact of life that must be managed.

For perspective, Rogers receives 100-200 head/week. Calves rest for 24 hours before being evaluated, turned out to small grass traps and given access to hay, water and grass (pelleted soybean hulls if grass is short). Cattle are wormed, branded, tagged and vaccinated. Over the next two weeks, calves will rotate through a series of traps on their way to another weaning and booster vaccinations; then they go out to pasture.

Risk is also why Rogers prefers to forego feeding cattle, though he does retain ownership in a portion of his calves. "There always comes a reckoning in the cattle feeding business," he says.
Read the conclusion at the end of this issue of Stocker Trends.


Smithfield & Conti To Build New Packing Plant
When Smithfield Beef Group (SBG) and ContiGroup Companies (CGC) joined forces last year to create the world's largest cattle-feeding company -- Five Rivers Ranch Cattle Feeding -- both logic and simmering rumors suggested it would be just a matter of time before the partnership evolved into vertical coordination with packing. That time has come.

Last week, the two companies announced plans to construct, in partnership, a $200 million -- 5,000-head/day-capacity -- packing plant in Texas County, OK, near the town of Hooker.

"We selected Texas County because of its proximity to nearby feed yards, the availability of water supply, the area's outstanding labor pool and well-developed utility and transportation infrastructures," explains Richard V. Vesta, SBG president and CEO.

"We expect to source cattle for the plant from the plentiful nearby supply of livestock, including the surrounding Five Rivers feed yards, which we believe will save considerable transportation expense," says Vesta. "Access to these cattle also will be valuable in terms of traceability, an increasingly important issue in the U.S. and in export markets..."

As the first beef-packing plant of its size constructed in the past 20 years, newer technology should also serve up lower-cost opportunities. Construction on the facility is supposed to begin in January 2007, with completion scheduled for mid 2008. Vesta says the plant will provide 2,500-3,000 jobs.

The plant is being built smack in the middle of the densest regional population of fed cattle. If you assume the majority of cattle fed by Five Rivers will flow through the new plant, Five Rivers' fed-cattle production capacity would go a long ways toward meeting the new plant's needs for cattle -- about 1 million head/year.



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Weather And Crops
Corn Production Pegged Lower
Though 10.9 billion bu. would still be the second-largest corn crop on record, that figure represents a 2% decline in USDA's October estimate compared to the month prior.

According to the Livestock Marketing Information Center (LMIC), based on weekly data, for the first three quarters of this year, Omaha corn prices averaged $2.04/bu. compared to $1.81 last year; about 3% less than the 2000-2004 average. In early October, Omaha corn prices were over $2.40/bu.

In fact, the LMIC folks explain that in their calf and yearling price forecasts for 2007 and 2008, most of the forecasted declines in prices are due to higher corn prices.

For the week ending Oct. 15, according to National Ag Statistics Service (NASS).
  • Corn -- 41% is harvested , which is 7% behind last year and 2% behind the five-year average. 61% is rated Good or better , compared to 57% last year.
  • Soybeans -- Growers have harvested 69% of the crop, compared to 74% at this time last year and 65% for the average.
  • Winter Wheat -- 79% of the crop is sown, 1% more than the same time last year but 1% less than average. 52% of the crop has emerged, 1% ahead of last year, but 4% behind the normal pace. Development was behind normal in the Corn Belt and in the Great Plains.
  • Sorghum -- 95% was at or beyond turning color, 4% behind last year and 2% behind the normal pace. 76% is mature, compared to 71% last year and 70% for average. 48% has been harvested, compared to 50% last year and 53% for average. 31% is rated Good or better, compared to 50% last year.
  • Pasture -- 27% is rated Good or Excellent, compared to 31% last year. 23% is rated Poor and 19% is ranked Very Poor, compared to 21% and 14% respectively at the same time last year.
States with the worst pasture conditions -- at least 40% of the acreage rated poor or worse -- include: Alabama (62%); Arkansas (40%); California (83%); Georgia (50%); Kansas (46%); Louisiana (44%); Mississippi (65%); Missouri (63%); Nebraska (45%); Nevada (60%); North Dakota (57%); Oklahoma (68%); Oregon (65%); Texas (62%); and Wyoming (62%).

States with the lushest pasture conditions -- at least 40% rated good or better -- include: Idaho (43%); Illinois (50%); Indiana (64%); Iowa (52%); Kentucky (74%); Maine (70%); Maryland (51%); Michigan (52%); Minnesota (42%); New Mexico (57%); New York (55%); North Carolina (68%); Ohio (71%); Pennsylvania (47%); South Carolina (43%); Utah (48%); Virginia (56%); Washington (62%); West Virginia (60%); and Wisconsin (52%).


Stocker Economics
The Power Of Gross Margin
We've all heard the age-old wisdom of buying a profit. Bryan McMurry, PhD and a beef economist with Cargill Animal Nutrition, explains the specifics of accomplishing that by purchasing a wider margin up front.

He uses the example of buying four-weight calves vs. those 100 lbs. heavier, and putting 200 lbs. of gain on them. At the outset, there is $50 more margin to work with -- buy price vs. expected sell price.

In this case, a 400-lb. calf at $1.50 costs $600. Figuring $1.20 at 600 lbs. that's $720, or a gross margin of $120. Compare that to a five-weight steer calf purchased at $1.40 or $700; and a selling price of $1.10 on a seven-weight, or $770. So, there's an additional $50 margin advantage in favor of buying and selling lighter in this scenario.

Spun another way, McMurry points in this example the breakeven cost of gain on the lighter weight calf is 60¢ vs. 35¢ for the heavier one.

Using the margin above and applying the costs in Table 1, McMurry calculates the profit advantage of the lighter animal to be $49.54. So, the profit was purchased in the form of gross margin -- the cost of gain for both the 4-weight and 5-weight was identical at 43¢.

"That's just too much margin to ignore," McMurry says.

Obviously, he's not suggesting this is the profit or cost one can expect in any given situation. The point is comparing gross margins at the outset can reveal opportunities tougher to see when focusing only on price and cost of gain.

Table 1:
Profit Loss Comparison
500-lb. Steer* 400-lb. Steer*
Grazing $50.00 $50.00
Processing $12.00 $12.00
Vet/Med $2.00 $4.00
Mineral $6.00 $6.00
Hay $5.60 $5.60
Interest (cattle)
$10.79
$9.25
Total Cost
$86.39
$86.85
Net Profit/Loss** -$16.39 +$33.15


*200 lb. of gain on 100 days
**Calculated using the purchase and sell prices described in the above article.


Source: Bryan McMurry, PhD, Cargill Animal Nutrition



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Events
Other Upcoming Events
Feb. 13-14 -- Mid-South Stocker Conference, Cave City, KY, presented by the University of Kentucky and the University of Tennessee. For more info, visit www.midsouthstocker.org. You can also contact Jim Neel at 865-974-7294 or jneel@utk.edu; John Bartee at 931-648-5725 or jbartee1@utk.edu; or John T. Johns at 859-257-2853 or jtjohns@uky.edu.

Sign Up Now For BEEF Quality Summit, Nov. 14-15
Sign up now at www.beef-mag.com for BEEF magazine's 2006 BEEF Quality Summit. The Nov. 14-15 workshop in Oklahoma City's Clarion Hotel aims to provide attendees with the background, tools and the environment to make the connections for involvement, and the potential rewards offered, in the new beef-value chain.

The first day's program is devoted to outlining the opportunity available in the new beef-value chain, the second to how to link your production into that chain. Among the topics to be discussed are:
  • How U.S. beef consumers define quality.

  • Quality, profit and the cattle cycle.

  • International competition and opportunities for U.S. quality beef.

  • Current international beef trade opportunities.

  • Producers will discuss how they're paid for quality.

  • Selecting a marketing partner.

  • Evaluating costs, trade-offs and risks of various markets.

  • Linking up with a marketing partner -- an opportunity to meet with participating marketing channel reps.
For more detail, visit www.beef-mag.com and click on the "BEEF Quality Summit" box in the top right corner of the opening page.


Markets
Cattle Prices Weathering The Storm...Sort Of
"We're producing about 25-million lbs. of beef/week more than last year," says Randy Blach, executive vice-president of Cattle-Fax. That's the equivalent of the 5-6% increased production expected and seen through September of this year. "Normally that kind of increased production would equate to about a $5 change (decrease) in fed-cattle prices. We're down about $2. I think that underscores the importance of trade," he adds.

Blach is alluding to the fact that while exports are yet to retrieve all the market share lost in the wake of BSE, the net import/export picture is brighter than a year ago.

In offering perspective to participants at the annual meeting of the Texas Cattle Feeders Association, Blach explained, "Herd expansion has slowed, not stopped." He expects the Jan. 1 numbers to show a 1% increase in cow numbers, compared to the 2-3% increase most market analysts expected at the beginning of 2006. While it's true cow slaughter through September was 17% more than the previous year, Blach emphasizes the cow-slaughter level is the third-smallest in the past three decades.

Also, while domestic consumer demand has been down for the previous six quarters, Blach notes demand for Choice and higher-grading beef continues to increase.

The primary wild card for cattle prices is corn.

According to Blach, the Corn Stocks to Use Ratio for the year is expected to be 8.3%, marking only the fifth time since 1960 that the ratio dipped below 10%. That's a key reason corn prices rocketed ahead during the past month rather than taking a typical seasonal dip. Of course, the Oct. 1 USDA corn estimate added fuel to the fire -- down 2% from the September estimate at 10.9 billion bu.

"The market will be on pins and needles," Blach says. "This isn't a short-term spike (corn prices). There won't be a correction overnight." He explains increasing the cost of corn about 50¢/bu., typically decreases the price of feeders about $6/cwt. and the price of calves about $7/cwt.

Expanding ethanol production obviously plays into the short and longer trends in corn prices. For perspective, Blach says the percentage of corn used for ethanol production this year will be about 14%; it ran about 11% the previous three years. Corn usage for ethanol is projected at 19% next year. If all the proposed ethanol currently being considered are built, that rate could multiply exponentially.

Shorter term, corn's weight on calf and feeder prices is becoming more pronounced.

"Calf prices have been steadily losing ground for a full six weeks, basically since the spring calf crop started hitting the midwestern auctions early this fall," say analysts for USDA's Ag Marketing Service (AMS). "Losses have been most severe on the fleshy unweaned calves that lack their vaccinations, while the market for pre-conditioned calves and yearlings was able to stave off the bulk of the pressure.

"However, the last three weeks of sharply higher CBOT grain prices have taken their toll on yearling feeders; even the fanciest longtime-weaned calves with multiple series of shots are not immune to the market pressure that $3/bu. corn has brought. The sudden surge in the corn market was not expected (especially right during harvest) and has caused cattle feeders to refigure their cost-of-gains," AMS reporters write.

According to AMS, "Steer and heifer calves sold $1-$5 lower last week, with instances as much as $8 lower on unweaned offerings weighing over 500 lbs. "

The summary below reflects the week ended Oct. 20 for Medium and Large 1 -- 500- to 550-lb., 600- to 650-lb., 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.
Dakotas 47,400
South Dakota
North Dakota

$126.22
$121.41

$118.73
$116.422

$115.35
$111.35

$117.26
$113.55

$116.47
$109.182

$113.24
$102.087
OK 37,400 $122.10 $111.50 $108.07 $108.45 $104.76 $101.46
NE 31,700 $126.32 $112.514 $108.76 $115.48 $108.2954 $102.35
MO 25,600 $121.08 $113.09 $108.01 $109.05 $104.93 $104.744
TX 25,100 $114.93 $108.80 $105.85 $108.81 $102.02 $95.15
KY* 22,500 $104-114 $95-105 $92-1025 $93-103 $89-993 $82-925
CO 18,000 $119.36 $113.972 $106.72 $110.56 $101.984 $98.46
WY 14,700 $117.98 $114.792 $108.23 $110.42 $106.152 $106.376
AL 13,100 $110-120 $100-108 $96-1054 $102-108 $93-101 $87-974
KS 11,000 $124.18 $111.94 $108.236 $112.40 $107.18 $1101.74
TN* 9,900 $107.82 $99.78 $92.63 $97.22 $89.55 $83.90
FL* 9,700 $89-102.50 $84-98 $80-87 $985-100 $80-96 $73-88
GA*(***) 8,900 $93-113 $86-101 $85-100 $84-110 $80-103 $75-1034
NM 7,300 $118.74 $106.372 $99.00 $107.90 $100.672 **
Carolinas* 6,900 $89-1107 $84-973 $75-90.505 $80-95 $72-883 $66-795
MT 6,700 $120.26 $118.002 ** $109.85 $106.322 $101.457
AR 6,200 $113.26 $104.38 $101.46 $101.97 $96.33 $90.73
MS* 5,200 $100-1101 $90-100 $85-904 $90-1001 $88-903 **
LA(ND heifers) 4,800 $105-119 $96-1093 ** $100-1161 $98-1033 **
VA 4,700 $119.73 $102.17 $95.42 $94.94 $92.98 $91.644
WA* 3,500 $106.90 $103.732 ** $100.80 $98.862 **

* Plus 2
** None reported at this weight or near weight
(***) Steers and bulls
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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Continued
Doug Rogers Profile...conclusion
Growing to Expand
Rogers has grown his stocker business substantially during the past few years to his current level of about 6,000 head. Primarily, he says he grew the operation to generate the added income to purchase more property.

Rather than the proverbial tail of cash flow wagging the operation dog, property expansion in this case has plenty to do with adding predictability to his business over the long haul. As in other parts of the world, he explains leases are tougher and more costly to come by these days.

The potential to increase beef production per acre with the same number of acres also drew Rogers to the stocker business. In his operation he can turn is inventory at least twice each year. In other words, he explains, "There's lots of opportunity to turn money faster in this business."

That notion of turning money faster as both leverage and a hedge came as something of an epiphany to Rogers when he was in business school. But it was nothing compared to discovering what it is that he's really selling.

A buddy from West Point who went to work for one of the world's leading business consulting firms got to quizzing Rogers: why the cattle business, why the stocker business, why this and why that? Drill down deep enough and Rogers understood that his knowledge and experience in the stocker business was the true asset he was trading upon.

Rogers grew up in the family's seedstock and cow-calf operations. By high school, he was learning his way through identifying and doctoring stocker cattle running on some new ground his folks purchased. By the time he graduated from college and had to choose between the cattle business and some tempting corporate offers, his stocker knowledge was broad and deep enough that he saw the promise of the stocker business as just that, a profitable business opportunity.

"I just do what works for me," says Rogers. "The name of the game is making money. If I can make a dollar I move on and hope my customer can make two dollars...If I make it or break it, it's all on me."

The National Stocker Award (NSA) competition was divided into three categories: Backgrounding/drylot Stocker (feed-based); Fall/winter stockering (forage-based); and Summer stockering (forage-based). A single winner was chosen in each category, and then the overall NSA winner was selected from these.

Doug Rogers of Collins, MS was named winner of the fall/winter category. Triple Heart of Wanette, OK was named winner of the backgrounding/drylot category.

Each operation received a $2,500 cash prize from NSA sponsor, Elanco Animal Health. Overall NSA winner, Hughes Cattle Company of Bartlesville, OK (winner of the summer stockering category) received a $10,000 cash prize.

Profiles of each winner appears in the October issue of BEEF magazine.


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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