Despite the devastation wrought by this year's widespread drought — historic in some parts of the nation — it hasn't done much to change the near-term expectations of many market watchers heading into fall.
For one thing, Mike Murphy, Cattle-Fax market analyst, estimates that 80-85% of the cows selling due to dry conditions (by mid-July) found a new address rather than left production. Consequently, the drought's contribution to accelerating cow liquidation will likely be minimal.
Even with the 5% year-to-year decline in cattle-on-feed placements that Cattle-Fax expects in September (following steady year-to-year placements in July and August), inexpensive corn (Cattle-Fax anticipates December corn futures hovering around $2.20) has a way of keeping the pressure on locker-busting tonnage. Whether the drought pushes feeder cattle and calves to the yard earlier or not, Murphy says, “We'll put the weight on them, either way. We've proven that to ourselves time and again the past couple of years.”
Cattle-Fax is calling for 750- to 775-lb. feeders to trade in the upper-$70s (basis Central Plains) this fall, with prices for 500- to 550-lb. calves running about $10/cwt. ahead of that. While these prices should still offer profit to some cow-calf producers, depending on their cost structure, they're a good $15/cwt. down from 2001.
“One thing we'll continue to see more of is that reputation cattle will bring a premium,” says Murphy. “We continue to see a wider spread paid on the quality and reputation of the cattle.”
Holding Out For More
Still, with the opportunity offered in such a market to buy spring cattle feeding breakevens in the low- to mid-$60s, Murphy says, “We'll probably see an increase in retained ownership this fall.” For perspective, 20% of Cattle-Fax's members retained ownership in their calves all the way through the feedlot last year; 26% retained ownership through the stocker phase.
Credit shouldn't be a problem, either, or at least the availability of it. Rod Alt, senior vice president and manager of the Agribusiness and Commodity Division at Wells Fargo-Lubbock in Texas, says banks like his will still be eager to loan money for cattle feeding this fall. However, some producers' equity may be stretched thin enough from market vagaries this past year to make the opportunity harder to come by.
“I don't think we'll deviate a lot from our normal practices,” says Alt.
While requirements differ among banks and individual customers at those banks in general terms, Alt explains that means feeding cattle requires a minimum of 20% equity up front. No matter how sturdy a producer's equity is, though, Alt says that at least from his bank's perspective, “We're going to look at more risk management on the part of the customer.”
That doesn't mean risk management will necessarily be a loan contingency. But Alt says it does underscore the fact that producers can't pay more for feeder calves and cattle than can be protected with the futures market.
Incidentally, Alt says documentation of expected cattle performance on feed and in the carcass, as an added risk-reduction tool, won't necessarily change the rules of lending. But it sure won't hurt in securing the loan.
As well, banks' keener focus on risk management indicates growing concern to help customers protect their downside in light of the massive, multi-billion dollar equity drain in cattle feeding the past five years.
“If you're not using some form of risk management, you need to re-evaluate your program,” says Alt. “One thing everyone has learned since Sept. 11 is that things we once thought impossible can really happen.”
After all, one producer's balance sheet can withstand a loss of $150/head, while that of another might start squealing with $20 worth of red ink.
“We really need to analyze how much loss you can take and how much you're willing to risk,” Alt explains.
With that in mind, Alt believes lenders and borrowers need to spend more time defining borrower goals up front. “I think we need to discuss more with ranchers (retained ownership) and cattle feeders about their objectives when they decide to feed cattle,” he says. “Are you after a specific return on investment? Is that kind of return possible with available risk management?”
That's a fair question whether you hold on to cattle through the feedyard or decide to fold them ahead of the gate. As always, an up market will forgive a fair number of sins. On the elevator down, though, the value of starting with the end in mind, rather than adjusting goals to fit current reality, shines even brighter.
August 7-10 — 2002 Colorado Livestock Ass'n Convention & Trade Show, Copper Mountain; 970/378-0500.
August 12-13 — Nebraska Grazing Conference, Kearney; 308/236-1235.
August 12-15 — Food Processors Institute's Better Process Control School, Orange, CA; 714/628-7255.
August 13 — 2002 Arkansas Cattle Grower's Conference, Arkadelphia; 871/246-2281.
August 15-17 — National Meat Ass'n Summer Board Meeting and Conference, Sedona, AZ; 510/763-1533.
August 22-24 — National Ass'n of Animal Breeders Annual Convention & Technical Conference, Milwaukee, WI; 573/445-4406.
August 26-27 — Ohio State University Manure Science Review, Wapakoneta; 330/202-3533.
August 27-29 — Grazing School (beginning) University of Missouri Forage Systems Center, Linneus; 573/499-0886.
August 28 — University of Nebraska-Lincoln Gudmundsen Sandhills Laboratory Open House, Whitman; 308/532-3611, Ext. 150.
August 28 — Cattlemen's Day, California State Fairgrounds, Auburn; 916/263-2948.
August 29-30 — Ohio State University Manure Science Review, Wooster; 330/202-3533.