Price discovery in the premium era

by Miranda Reiman

Cattle just aren’t traded the same today as they were decades ago.

Chances are, the beef business isn’t going to reverse its ways, said Iowa cattleman Ed Greiman, during the Feeding Quality Forum in August.

“We know that we are never going back to 70% or 80% of the cattle negotiated on the cash market,” said Greiman. “Why? You are paying extra premiums for calves.”

Feeders trying to fill a yard with repeat suppliers, following special protocols or participating in verification program need a return on the investment. Cow-calf producers need to get extra for their calves if they’ve spent more on improved genetics and management compared to the average.

“We are trying to market the value of our cattle,” the feeder said. They are no longer all commodities.

The partner in Greiman Brothers farm near Garner, Iowa, drew on his work as chair of the National Cattlemen’s Beef Association (NCBA) cattle marketing committee to talk about price discovery with the feeders, allied industry and academia gathered in Omaha, Neb., and Garden City, Kan.

“Retailers or customers want something specific, and in doing that, we form these alliances and partnerships,” he said, “but we also change the dynamics of our market. I’m not saying that’s bad; it’s where the market is going.”

It does cause challenges in establishing base price.

USDA’s Mandatory Price Reporting came about in the late 1990s as a way to introduce more transparency in the market.

“When it first started, its purpose was to report to us what cattle were trading somewhere else. It was to give us an idea of what people were doing with their cattle in different regions,” Greiman said. “No one ever thought that we would end up pricing cattle off of it.”

But that’s where most grids and formulas draw their starting points.

“When you see the average price in Iowa on 1,000 head traded for $1.04, what does that mean? What were those cattle?” he asks. They could be overfat heiferettes or a group with above-average, uniform genetics. “None of us really knows what those cattle are because we can’t see them. We don’t have a picture of them and we weren’t there, so we don’t know what the conditions of those trades are about.

“Another concern I have,” he said, “is what happens when you get to where that last 25% of the cattle are actually below average?” That’s not generally the case yet according to the data, he added.

While Greiman used to enter into packer negotiations by asking about premiums, now he first asks, “What am I based off of?”

When fall 2015 brought an all-time low in the number of cattle traded live, down to 15% one week, this issue came to the forefront.

“I believe that was the week Texas was less than 500 head,” Greiman said. Price volatility was also high at that time, and packer margins have climbed since then. “There was this bright light shined on the cattle business two years ago.” Since then, elected officials, the Commodity Futures Trading Commission (CFTC), producers and industry stakeholders have been working together to come up with solutions, such as the Fed Cattle Exchange.

“We have a tendency to trade cattle once a week…on Fridays. We were doing a lot of Friday, 4-o’clock and 5-o’clock trades,” he said. The futures corrections come on Mondays. “You see a market kind of has a tendency to do what it wants to do during the week, because we weren’t telling it anything.”

Cattlemen need to drive changes, Greiman said, because grid marketing works, rewarding the better cattle with better prices, so it’s likely not going away.

A recent conversation with a retailer cemented his thoughts on that. “He’s saying this is what I want. He’s telling the feedlot what we want, and then the feedlot’s going to tell the cow-calf man. The cow-calf man’s going to go to the seedstock producer, and we’re pulling through.

“Well, if you’re going to build a program like that it’s kind of hard to put them on the open cash market,” Greiman said.

For more information on the meetings, co-sponsored by Roto-Mix, IMI Global, Micronutrients, Zoetix, Feed-Lot Magazine and Certified Angus Beef LLC, visit www.feedingqualityforum.com.

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Ag prospects looking up

Slow but sure improvement in rural economy

by Miranda Reiman

It might not feel like a quick ascent, but agriculture will climb out of the slump affecting nearly all sectors in recent years.

That ray of hope comes from AgResource Company. President Dan Basse spoke as part of the Feeding Quality Forum in Omaha, Neb., last month, while colleague Ben Buckner addressed the crowd in Garden City, Kan.

“Dairy is the only industry this year that will make more gross than the year before,” Basse said, noting it’s up $40 billion, compared to the beef sector, which will drop $7 or $8 billion.

“Our revenues have fallen in half—name me another industry where net revenues have declined by 50% in a period of five years. That’s our story,” he said.

Cyclical trends and export prospects provide a glimmer.

“The world economies are improving at a pace faster than the U.S., but it is improving,” Buckner said. A surprising boon? “The best that’s happened in the last six months or so is the political chaos in Washington, D.C.”

Cyclical trends and export prospects provide a glimmer.

“The world economies are improving at a pace faster than the U.S., but it is improving,” Buckner said. A surprising boon? “The best that’s happened in the last six months or so is the political chaos in Washington, D.C.”

Government instability has caused a decrease in the value of the U.S. dollar, a positive to agriculture since it relies heavily on exports, he said.

“That is putting pressure on producers overseas,” Basse said.

All commodities have a bit of good news in store.

“The United States will be a net exporter of crude oil by 2019,” Basse said. “This is a really big deal, the first time we’ve had a net export of energy going back to the 1940s.”

The ethanol industry is starting to ramp up production, adding about a billion gallons of capacity to meet export demand.

“It’s part of the reason I think you all in the cattle business need to be looking in the next few weeks of taking some feed-need coverage over the next nine months,” he said.

Both analysts said it’s unlikely corn markets will go more bearish coming into harvest. They suggested USDA’s corn yield estimate of 169.5 bushels per acre (bu./acre) is high, because the equation overestimates corn ear weight, given the dry conditions in much of the upper Midwest.

“We don’t think there’ll be a disaster; we just don’t think ear weight’s going to be this high,” Buckner said, noting a change from 169.5 bu/acre to 167 or 165 can cut 2.4 to 8 billion bushels off the total harvest.     

“It doesn’t get you exceedingly bullish on corn, but it does tell me that if corn makes it down to $3.45 to $3.35, I would definitely want to be a buyer down in that area,” Basse said.   

Longer-term, they expect a price increase. World stocks will decline over the next few years, but the U.S. will face increasing global competition as other countries make bigger improvements in yields.

“The U.S. farmer is the very best. It’s hard to really add yield nationwide when you’re yielding 168, 175 [bu/acre],” Buckner said. Countries like Ukraine could increase 30% and Brazil by 50%, while the U.S. might reach a 4% improvement.

Competition is still a factor in the beef sector, but it relies less heavily on global markets, they said.

“Quarterly domestic use is really good, and this is the demand pull that I see in the beef market,” Basse said. “The quarterly per-capita disappearance is now the largest it’s been since 2008.”

If trade with China really ramps up, Basse said, “I could get really bullish on the demand side of cattle sometime during the first quarter of next year.”

He doesn’t expect China to lift any requirements on U.S. beef.

“They like to have a lever on trade,” he said, but it probably also represents an over-arching trend in food production. “I think that’s the way agriculture is going, in terms of producing what the market is demanding. I don’t think that’s all bad because it gives consumers choice.”

But before that trade can bolster the market, the larger beef harvest numbers in recent months and earlier-than-usual placements due to drought will continue to pressure prices in the fourth quarter.

AgResource predicts a bottom of $100 to $104 per hundredweight (cwt.) for fed cattle prices.

“I do believe we’ll see good exports again going forward,” Basse said. “The price structure of cattle has done its job in terms of building the demand down the road.”

Other hurdles remain. Ag lending is down, and competing proteins continue to expand. Pork production will increase by 2% to 3% in 2018, Basse said:       “Look over your shoulder, because there’s going to be plenty of pork on the doorstep of the United States.”

Things are looking up, but it may take a few years to feel across-the-board recovery.

“The markets are an ocean freighter, slow to move,” Buckner said. “We’re starting to steer them in the right direction and perhaps we are through the trough of this bear.”

The meetings, co-sponsored by Zoetis, Roto-Mix, IMI Global, Micronutrients, Feed-Lot Magazine and Certified Angus Beef LLC, drew cattle feeders and allied industry from Nebraska, Kansas and several surrounding states.

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Finding Profit

by Miranda Reiman

Opportunity. It’s there, but you may have to look a little harder for it.

That’s what this year’s Feeding Quality Forum attendees learned during the daylong meetings on Aug. 29 in Omaha, Neb., and repeated in Garden City, Kan., Aug. 31.

AgResource Company kicked off the forum with market predictions.

Its president, Dan Basse, told Omaha attendees, “Ag is not at its bottom yet, but I think the worst is over.”

In the next few months, the analyst predicted fed cattle prices will hit bottom at $100 to $104 per hundredweight (cwt.), but improve into the first quarter of 2018.

USDA’s corn yield prediction at 169.5 bushels per acre (bu./acre) is more optimistic than Basse’s estimate of 165 bu./acre. Feeders might want to lock in feed costs now before there’s an incentive for a price increase, he said, noting $3.45 to $3.35 as an opportunity.

“The strategy is to find grain now, extend coverage. Perhaps don’t sell your cattle just yet if we’re looking forward into 2018,” said Ben Buckner, the AgResource analyst who carried the company message to Garden City.

Being proactive was a theme, as Doug Stanton, vice president of Where Food Comes From, talked about value-added opportunities.

U.S. beef going into Chinese markets is a hot topic that the third-party verification provider—IMI Global is a subsidiary—has been fielding questions on lately.

Traceable source of origin is the first step, Stanton said, along with no implants or beta agonists. Ranchers and cattle feeders wanting to target that market were advised to compare notes with potential buyers in advance.

“If you want to get involved in China, you better be talking with your packer you’ll be marketing to and see what their requirements will be,” he said.

Sharing information usually works for the good of all.

That was the intention behind USDA’s Mandatory Price Reporting, first introduced in the late 1990s, said Iowa cattleman Ed Greiman. The feeder was drawing on his experience as chairman of the cattle marketing committee for the National Cattlemen’s Beef Association (NCBA).

istering those shots.

Today the 20% to 30% of cattle traded live and represented in the report sets the base price for the remaining 70% to 80% sold on grids and formulas. It’s not always an accurate reflection of all fed cattle offered for sale in a week’s time, Greiman said.

“When you see that information, you don’t know what was being bought or how that trade was made,” he noted. 

Yet, increasing the number of cash trades isn’t feasible when feeders have invested in premium calves and need to market them as such.

“CAB (the Certified Angus Beef ^® brand) has done all this work to make sure the consumer wants the product, so we’ve got to produce more of them,” he said, suggesting cattlemen get involved in determining a new way to set base prices.

But long before marketing, feeders have decisions to make that will affect profitability.

It all starts with sourcing the right ones, said Justin Sexten, CAB’s director of supply development.

“There are cattle you want to own, and probably some you want to buy at a discount,” he said, noting all the variation in feeder calf supplies.

“There’s a lot of emphasis on flesh, precondition, where cattle come from—you name it—those each may account for $2 to $4 per hundredweight of the variation in cattle price,” he said.

But genetics make up a bigger difference in final profit.

“From a genetic perspective, there’s a $4 to $14 [/cwt.] difference out there from average genetics to exceptional,” he said, using an Angus example.

Once those cattle are in the feedyard, performance becomes a big driver of profitability.

Richard Zinn, University of California-Davis ruminant nutritionist, talked about how to increase that, predictably.

“The single most important factor affecting animal performance is energy intake,” he said. “And the link between intake and growth is perhaps the most reliable concept in cattle feeding.”

That allows for predicting accurate daily gains given gender, frame, weight and diet, Zinn said, adding these concepts are “nested in what we expect and how much results can vary before triggering alarm.”

During lunch, Lee Borck accepted the FQF Industry Achievement Award. With the help of Tyson and Performance Food Group, the meal featured Certified Angus Beef ^® brand strip loin roast from cattle fed at one of Borck’s Beef Marketing Group partner yards.

More than 200 people attended the meetings, which were co-sponsored by Zoetis, Roto-Mix, IMI Global, Micronutrients, Feed-Lot Magazine and CAB

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