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News and views on stocker segment issues from BEEF magazine.
February 6, 2007 A Prism Business Media Publication
ISSUE CONTENTS
Corn Prices Shifting Cattle Feeding Geography

Drought & Tough Winter Define Current Challenges

Corn & Cattle Outlook

National Stocker Award Competition Begins

The Mid-South Stocker Conference
& The 2007 National Stocker Award

Fed Prices Finally Gain Ground

Questions & Comments


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News
Corn Prices Shifting Cattle Feeding Geography
Call it a coincidence if you must, but according to the latest monthly Cattle On Feed reports (COF) -- feedlots with capacities of 1,000 head or greater -- there are more cattle being fed in northern lots and fewer in the south.

More specifically, Nebraska reports COF in that state is 5% more than Jan. 1 of last year at 2.54 million head, and 10% more than Jan. 1, 2005. That's the largest state inventory since the report series began in 1994. Likewise, South Dakota reports a record-large number of cattle on feed for harvest at 225,000 head -- 9.3% more than last year.

Conversely, Texas reports COF down 2% from last year at 2.87 million head. Oklahoma numbers are down 5%.

For nationwide perspective, Jan. 1 COF was 12 million head, 1% above the same time last year, and 6% more than 2005. It's the largest on-feed inventory since USDA's National Ag Statistics Service began the series in 1996.

"On a weight basis, the largest placement declines were reported in the lightweight categories, with placements 600 lbs. and under being down 18%, while calves placed in the 600- to 699-lb. group were 9% smaller than 2005," say analysts at the Livestock Marketing Info Center. "In contrast, the heavyweight category (800 lbs. and heavier) had placements only 1.5% below a year earlier. That trend in placement weights is expected to continue in 2007, given the impacts on costs of gain with further increases in feedstuff prices."

There's nothing industry changing about the state numbers, and few would make an argument for some sort of wholesale migration if corn prices continue to escalate over the long haul. But the COF numbers do underscore how the market is beginning to find its way within an ethanol-based economy.



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Weather And Crops
Drought & Tough Winter Define Current Challenges
Not withstanding the monkey wrench of an emerging ethanol market artificially supported by government subsidies, cattle producers are living through one of the business's crueler ironies. Specifically, increased feed needs following decreased feed production is a tough puzzle to sort out.

"Last summer's drought resulted in limited hay production and many producers have already cleaned out the windbreaks and fencerows of stockpiles," explain USDA Ag Marketing Service (AMS) reporters. "Hay prices are more than double last year's but, in many areas, price is irrelevant as available supplies are simply nonexistent and long-distance freight isn't feasible. Herd culling has been deep this season and many Plains cattlemen are being forced into partial or, in some cases, complete dispersals, like those in South Texas last summer.

"Normally backgrounders would be getting ready for spring with some early purchases of stocker cattle. But cows have first dibs on hay, commodity feed is very expensive, and graze-out wheat will be rare with Hard Red Winter Wheat near $5/bu.... It costs nearly as much to put a pound of weight on a head of cattle as a pound of cattle is worth," they say.

Furthermore, Creighton University meteorologist Art Douglas reported at the Cattle-Fax Outlook Seminar last week that model forecasts indicate the El Nino --responsible for above normal winter precipitation in the Southern Plains -- is quickly fading. That means odds are for this summer to be drier, rather than wetter, across much of the nation. In other words, the forecast models call for the same temperature pattern to exist this summer, which has been prominent since 1998 and responsible for the widespread U.S. drought.



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Stocker Perspective
Corn & Cattle Outlook
Not surprisingly, grain and ethanol were the main topics of conversation at last week's annual meeting of the National Cattlemen's Beef Association (NCBA), both in the formal sessions and in the hallway chatter. Also unsurprising, when it comes to the long-term, there were lots more questions than answers. For instance:
  • The current market -- buoyed by a 51¢/gal. government subsidy (tax credit) -- is predicated upon the notion that crude oil prices will remain at least as high as the past couple of years, but will they? And what happens if the current subsidy isn't renewed before it expires in 2010?
  • Will the new Congress and new farm bill opt to support cheap food or cheap fuel, or both?
  • Even if ethanol continues to gain ground, how will transportation infrastructure -- already a limiting factor -- expand, or can it grow?
What is known is that high grain prices, courtesy of ethanol demand, are a force to be reckoned with for at least the next several years.

For economic perspective, Cattle-Fax expects crude oil to trade mostly at $50-$60/barrel this year. With the 51¢ tax credit, the breakeven purchase price of corn for ethanol production would be worth $3.36-$4.05/bu., according to research by Iowa State University's Dermot Hayes. Take that tax credit away and the breakeven purchase price of corn would be $1.83 to $2.52/bu., based on the same level of crude oil price.

From a production perspective, Cattle-Fax says:
  • A modern dry-mill ethanol plant will produce about 2.8 gals. of ethanol and 17-18 lbs. of distiller's grains from 1 bu. of corn (56 lbs.).
  • As ethanol production continues to increase, co-product feeding is forecast to displace about 25-30% of corn used for livestock feeding.
  • In 2006-2007, corn used for ethanol production -- as a percentage of corn demand -- was 18%, three times more than when the decade began. In 2007-2008, ethanol production is expected to account for about one-third of corn demand.
  • The 2006-2007 U.S. corn crop production estimate of 10.535 billion bu. will be third largest in history.
  • U.S. total corn usage is currently projected at 11.760 billion bu. for 2006-2007, setting a new all-time high. Corn-to-use stocks are expected to decline more than 60% in 2006-2007.
Though some folks like to relate the current run-up in corn prices to the mid 1990s, Randy Blach, Cattle-Fax executive vice president, points out, "In the 1990s, we had a supply bull market in corn. This is a demand bull market. Bull demand markets have a longer tail. We will not fix this in one or two years. We'll be in this situation for some period of time."

As it is, Cattle-Fax estimates cash corn prices of $3.50-$4/bu. this year. At $3.50/bu., and assuming a fed-cattle market of $85.50, Cattle-Fax says the breakeven purchase price of a 550-lb. steer would be $103.50; breakeven purchase price of a 750-lb. steer would be $95.50.

With that in mind, Cattle-Fax predicts summer stocker programs will be profitable again in 2007 at around $40-$50/head, less than half of what it was in 2005.

"Those of you looking for stocker cattle don't want to wait too long into the spring," Blach advises.

His point is that demand is increasing for heavier-weight cattle to place in the feed yard, as escalating grain prices propel the breakeven costs for calf-feds. As such, Blach expects robust demand for grazing this spring.

So, feed yards should represent less competition for calves than in recent years. On the other hand, cattle-feeding organizations with a bent for stockering their own cattle will likely represent increased competition for range and forage.

Given higher feed costs and narrowing margins for stocker operators, compared to the past couple of years, Blach cautions stocker operators to focus even harder on the buy side of the equation through this turn of calves.


Stocker Competition
National Stocker Award Competition Begins
Mark April 1 on your calendar. That's the deadline for submitting an application for this year's National Stocker Award (NSA) competition.

If you're unfamiliar with the NSA, it's sponsored by BEEF and Elanco Animal Health and 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.


Events
The Mid-South Stocker Conference
& The 2007 National Stocker Award

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 859-257-2853or jtjohns@uky.edu.

April 1 -- Applications due for the 2007 National Stocker Award -- for more details and an application, see www.nationalstockeraward.com; for a hard copy of the application, contact Marilyn Anderson at BEEF, 800-722-5334.



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Markets
Fed Prices Finally Gain Ground
Whether it was packers being too short-bought for too long, more determination by cattle feeders to stand their ground, or a combination of the two, fed-cattle prices moved ahead $2 late last week at mostly $88-$89 in the Southern Plains. Carcass prices in Nebraska picked up $1, too, at $138.

It didn't hurt that Friday's USDA semi-annual Cattle Inventory Report was in line with most pre-release expectations. Specifically, herd expansion has been next to nothing with 96.7 million on Jan. 1 of last year, compared to 97 million head this year.

Though auction receipts for feeder calves and feeder cattle continue to be disrupted by winter weather, especially in the Midwest last week, the overall market was steady, ($1-$3 higher in the Southeast), according to the Ag Marketing Service (AMS).

"Steers weighing from 550-850 lbs. in most major Midwestern markets literally sold within a $10/cwt. price spread this week, but the emergence of new forage will most likely widen the gap," say AMS analysts.

The summary below reflects the week ended Feb. 2 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.
MO 47,800 $112.60 $101.52 $94.04 $97.50 $91.22 $87.74
NE 30,600 $116.40 $110.572 ** $102.35 $94.562 **
Dakotas 26,700
South Dakota
North Dakota

$116.06
$114.05

$106.43
$104.35

$95.36
$96.29

$101.98
$108.06

$94.91
$92.51

$89.46
$88.09
OK 25,600 $111.10 $100.46 $95.02 $95.43 $90.30 $90.28
KY* 19,800 $95-105 $83-93 $79-895 $80-90 $75-853 $73-835
TX 19,800 $103.77 $94.06 $90.07 $94.35 $89.44 $87.52
IA 16,700 $115.51 $105.90 $95.14 $103.67 $93.54 $88.82
KS 9,200 $119.74 $102.10 $94.43 $106.86 $91.28 $90.76
CO 9,000 $116.89 $108.292 $93.47 $99.97 $93.932 $91.48
AL 7,700 $103-110 $92-100 $84-884 $90-100 $84-90 $80-884
GA*(***) 6,800 $90-108 $80-99 $72-91 $80-104 $71-89 $75-77
AR 6,400 $105.42 $98.34 $92.39 $85.60 $81.04 $80.194
TN* 6,400 $100.59 $90.80 $86.01 $88.27 $83.82 $79.67
WY 5,400 $117.69 $113.432 ** $102.50 $96.512 **
MT 4,600 $112.70 $110.292 $90.587 $99.66 $96.762 $85.23
FL* 4,300 $87-100 $80-95 $74-854 $79-90 $72-83 $79-804
NM 4,000 $100.42 $91.30 ** $94.89 $87.21 **
Carolinas* 3,700 $88-109 $80-95 $76-85 $75-91 $69-81 $70-74.50
MS* 3,500 $95-105 $90-952 $80-903 $85-951 $75-853 $65-705
LA(ND) 2,800 $96-109 $90-1092 ** $91-104 $87-1032 **
VA 1,700 $106.382 $93.34 $84.10 $86.35 $79.00 $82.924
WA* 1,700 $101.372 $98.06 ** ** ** **

* 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.


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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