IN THIS ISSUE...

• Corn Conundrum

• Just 5 Questions

• Western Cowman
  Retrospective

• Strauss Brands
  Announces Plan...

• Tests For BVD

• World According To Hooter

EDITORIALS

• TRAILS
• GAP

Much of these price surges are attributed to increased grain exports due to a weak U.S. dollar, as well as domestic competition from the growing ethanol industry for corn.
While grain growers are benefiting from these golden prices, livestock producers and feeders are left in the lurch of higher costs – and there is no denying it is changing the fundamentals of agriculture.

How to React?
While your first thought might be to bury your head in the sand and wish for the “good ‘ole days of cattle feeding,” industry experts say there is no looking back.

“Ethanol production will not go away,” says Barry Dunn, executive director of the King Ranch Institute for Ranch Management. He points out that over 200 plants will be in operation around the country by the end of 2008, and says, “That’s going to have a big impact on all segments of the cattle business.”

For perspective, consider that in 2007, 6 billion gallons of ethanol was produced. Predictions call for ethanol to exceed 12 billion gallons by 2010 – meaning more than one-third of the corn crop will be used to produce ethanol.

In addition to the ethanol industry’s demand for corn, University of Idaho Extension beef specialist Jason Ahola reports that U.S. corn exports are also on the rise – now at about 2.5 billion bushels due to a weak dollar.

To add insult to injury, during 2008 – despite the growing demand for corn – fewer acres will actually be planted to the crop than in 2007. This is because soybeans and wheat are commanding even higher prices/bushel; thus many growers are going after those profits instead.

Because of these trends, Ahola says, “I hate to say it, but the current outrageous costs of all feedstuffs, at least in relation to historical averages, are here to stay.”

He adds, “Continued high corn prices will result, and pose a large risk to cow/calf producers. For instance, a $1/bu increase in corn decreases a feeder calf’s value by at least $10/cwt.”
How should beef producers respond? Ahola says, “Looking to the future, it will be crucial for cow/calf producers to focus on being low cost with their cowherd. This may be done by reducing feed and overhead costs, including equipment and capital outlay.”

Ahola also anticipates that grazing land costs (both purchase and lease) will continue to increase, since some grazing lands will be transitioned into grain production. He says, “Ultimately, beef cows will be forced onto more marginal grazing lands – those which are unlikely to be farmed – requiring more intense management of supplementation programs to meet cow nutrient needs.

Dunn agrees that lowering costs will be essential to the success and survival of beef entities in the future. “Cutting unit cost of production (UCOP) is logical in times of high volatility,” he says.

He also recommends managing risk by using futures contracts, lowering investment costs, building in flexibility, and, where possible, diversifying sources of income.

Make Your Product Unique
In these times of change, Ahola also stresses the importance for cow/calf operations to differentiate their product (calves, yearlings, or fed cattle). He says, “To overcome elevated costs, extra effort must be made to produce more than a commodity product.”

For example, Ahola says that while other major beef producing countries like China and Brazil are increasing their production of low cost beef, the U.S. must focus on producing high quality grain-fed beef. Specifically, he says, “The U.S. cannot compete globally on cost, but could cash-in on robust global demand for high-quality beef driven by wealth being generated in several Asian countries.”

Domestically, beef product differentiation is also becoming essential. Both Dunn and Ahola say that high transportation costs are prompting some regionalization within the beef industry to occur. Dunn anticipates that the regional trend will continue.

Ahola says, “Regions of the country are being forced to differentiate their calves in order to overcome the growing gap between local calf price and calf price in the Cornbelt, where most cattle are fed. Historically, this price difference was equal to the cost of cattle transportation. However, the difference now exceeds freight particularly in the Southeastern and Northwestern U.S.”

Fortunately, Ahola and Dunn say there are ample opportunities to add value to feeder cattle. For instance, Ahola cites Cattle-Fax data that shows cattle marketed along with historical performance data for feedlot and carcass traits can return an additional $2-5/cwt.

Furthermore, Cattle-Fax reports that cattle with an inherent ability to marble returned about $80/head more than Select, and, if cattle graded Prime, they returned over $200/head more than cattle that graded Choice.

Similarly, Ahola says research indicates marketing healthy calves that were preconditioned can return $4-8/cwt and calves eligible for “natural” or premium branded beef programs and alliances can return $3-7/cwt.

Of course age and source verification are also beginning to add value. Ahola says currently age and source verification can add $10-25/head to a fed steer’s value in today’s marketplace. And, he cites recent Cattle-Fax data that projects when the Japanese and Korean markets become more accessible to U.S. beef, it is possible that $100-175/head in additional value may be added to every fed steer.

Ahola says the bottomline for cow-calf producers in this time of high input costs is to reduce feed costs where possible while adding value to meet the demands of the marketplace for grain-fed, highly-marbled, differentiated beef.

Likewise, Dunn agrees that beef producers need to have a strategy for how they will fit into the emerging beef industry. He says, “The landscape of ag today is different, and it will be different again a few years from now.”

Dunn anticipates that some in the industry will go out of business. “Cattlemen are competing for corn, pasture and profits. Capitalism never is – and never can be – stationary. It is at a cost to some and a benefit to others. I believe there is opportunity, but producers will need to adapt to find it, ” he concludes.

Market Opportunities For A New Kind of Calf
The days of profitably selling conventional “weaned calves” may be coming to an end, according to Jason Ahola, Extension beef specialist with the University of Idaho.
Ahola says with current high corn and feed prices in the industry, backgrounding calves or running stockers (adding weight via low-cost grass pasture or forages) is becoming more common, particularly by cow/calf operations after weaning.

It’s an alternative that has merit. Ahola reports that incorporating a period of post-weaning calf gain onto a cow/calf operation can add gain for as little as $0.35-0.40/lb vs. $0.80-0.85/lb in a feedyard. He says, “It is becoming increasingly important for calves to be as heavy as possible prior to entering the feedyard, in an effort to reduce total cost of gain while on feed.”
But Ahola cautions, “This does not mean that calves should be heavier when weaned from the cow (by using high growth bulls), but rather that more weight should be added after weaning and prior to marketing.”

The only downside on this scenario will be availability of grass and forages for backgrounding. Ahola says, “It is possible that the supply of grass available for stocker operators may become more limited if grazing lands are turned into grain production.”
But, if you’ve got the forages available to your operation, backgrounding/stockers may be worth considering. In addition to adding weight, there are some other benefits Ahola sees in backgrounding calves. He points out that keeping calves around longer can allow time for preconditioning of calves, including vaccinations and bunk/waterer training.

“Since feedyards are usually short on labor to manage newly-weaned calves, you will receive more for your calves if they are healthy, heavy, and ready to gain when they reach the feedyard,” he says.