High calf prices this fall?

[ASRG]

The futures for feeder cattle are about $1.41/lb in August. The futures description is for a 650 lb-800lb steer.
I suspect by October that 650 lb steer will be less than $1.40/lb....but then what do I know!....I hope I'm wrong.
My local sale barn owner is on the radio every day saying "record prices"...cattlemen are reaping the benifits of hanging in there!
Is that true?
Rummaging around in my desk I found a sales slip from 2001. Sold 630 lb steers in early November for $1.3875 or $874! Gas at the pumps that year was 50 cents/L.
In 1992 I sold 753 lb steers for $1.2750 or $960 (remember because I bought a new 4X4 pickup right after that-$18,000)!
Hopefully this fall I will get $1.40/lb for 650 lb steers? $910.
Now I'll be happy to get $910, after the last 7 or 8 years of poor prices, but in reality I'll be getting less "real dollars" than 2001 (and if I remember right 97,98,99, and 2000)?
Adjusted for weight $910 (2011) compared to $901 (adjusted 650 wt 2000) isn't much money for inflation?
Just a few things: power rates tripled, fuel doubled , fence posts close to double,land taxes close to double....parts and machinery, YIKES!
I wonder how many government workers are working for less than they were in 2000? When I see in the paper some group is ready to go on strike because they aren't going to get a 4.6 % raise this year I think....I sure wouldn't have minded averaging 4% over the last 10 years? Even un compounded...my steer would be worth $1261! i think I could live with that poor return?

[kato]

You've got it exactly right. Which is why cows will continue to go to market.

[smcgrath76]

The other reason is dependent upon land
capacity. Let's say you run cattle on
gently rolling ground with reasonable
soil. Using traditional no seeum
management you can pull around 75 AUM
off the quarter (15 cows for 5 months).
Now let's triple that figure to 45 cows
for 5 months.
If we assume $1000 calves that is
$45000, with 7 months left to figure
out.
Now lets take a conservative 35 bushel
canola at $10 and the same quarter will
yield $56000. In reality many of the
quarters around here yielded around
$75000 last year in canola.
The margins may be the same or better or
worse, but until cattle are competitive
on this type of ground with a
traditional management paradigm, I
believe we will also continue to see
cows getting sold and grass getting
broke.
Also, it is sometimes tough to feed cows
from the beach in Mexico, but you can
darn sure market your grain from there.

[farmers_son]

I agree with your main point which is “until cattle are competitive
on this type of ground with a traditional management paradigm, I
believe we will also continue to see cows getting sold and grass getting
broke.

And if you can grow 35 bushels of canola on a reliable basis then that land should be growing canola and not grass. I know on my land a good improved quarter of pasture will keep 45 cows for 5 months with no inputs but I have never grown a 35 bushel canola crop on even my best land. This years canola is looking kind of thin even with all the rain we have had and all the fertilizer we put on. A combination of problems, frost, cool spring, too wet with water logged soils, not able to spray on time.

As for grain, in our area grain is not all that rich of a crop with normal yields. Inputs are not cheap. If we could get that bumper crop yes life is good. With average grain yields, protected with crop insurance (which is expensive) we still do as good growing hay. We are going to break the older improved pasture, it is not producing enough any more. But we will seed down other cultivated land to grass as we go.

We have had a lot of extreme years, from drought to too much rain and every year the grass land made us some money when grain land was consuming cash. We bought a used combine at an auction sale spring 2008 and have never used it with nothing to harvest the last three falls so that takes some of the shine off of the grain business.

High grain prices only help if you can grow a crop. But we harvested record hay crops two of those three years. And the hay had no inputs, only harvesting costs. Our hay land can generate similar contribution margin to our grain land with average yields. Our pasture land is not able to keep up however and we need to improve our pasture, keep more cows on fewer acres by rotating the improved pasture land before it gets too old and not producing any more.

Actually what has become normal cattle management is not traditional management. We do things a little different that my father did with swath grazing, calving a bit later and so on. We are keeping more cows with less work, less fuel, less machinery and fewer trips to the vet. There will be cows on our place for the foreseeable future. Cattle reliably pay a lot of bills and cattle pay more bills with a $900 calf then they did with a $500 calf. Grain can pay a lot of bills too but only if you can get it in the bin which in the last few years has not been an easy thing to do on large areas of the prairies.

I think how fast the prairie cow herd is sold down and the grass broke up will depend quite a bit on the weather. If the weather stays like it has been with extremes then cows and grass can be the better management option on marginal land.

[ASRG]

Just a side note on returns:
A member of our landowners group, at Trochu Alberta, negotiated a "loss of use" of $585/acre on a surface lease this past week.This case went to mediation and was based on his proven yields and futures pricing. This was a wheat/canola rotation. This would put gross production on 160 acres at $93,600.
The week before another member negotiated a $500/acre "loss of use" on hayland, east of Innisfail, Alberta.
This would put gross production at $80,000.
The owner at Trochu told me he expects to do better in the future with the end of the CWB monopoly. He does have good dark brown soil and is a very efficient farmer/marketer.
These are actual and true numbers. I have seen both contracts.
The farmer who negotiated the hayland also has cattle (he owns some land not suitable for cropping) and with the rise in cattle prices....hay and pasture are becoming more productive, from a gross return value as well?
I think, at the present time, good land will make more money by cropping than in cattle production, but agree marginal land should probably be used for pasture.
Sean points out very well "the other seven months" in cattle production....which is a major expense? There is also a "major expense" for the grain farmer for the necessary large equipment, fuel, fertilizer, spray, storage, etc. in cropping.
At the end of the day the price of the land should be considered as well? I'm not sure what would be a suitable cost for pasture land or for that matter crop land? At $3000/acre (fair market value evaluation-by O&G companies east of Red Deer) a 7% return would require $210/acre NET? "Fair market value" needs to be raised as land is now selling in this area for $4000/acre plus.....which would dictate a NET return of $280/acre? Cropping might do that.....I don't think cows can?

[smcgrath76]

I think a fairer value for comparison is
equivalent rent. Accounting principle
would say you should value land at what
you paid for it, and economics that you
should look at market value if you are
making a decision what to do with it.
Some of these rents are getting
borderline as well. If you look at that
$3000/ac stuff, from that perspective
and you have the cash to buy it, and
will probably resell it, it has also
seen a pretty good return just in real
estate value. I am not sure that can go
on forever.
Grain folks do have a lot of expenses,
but for most mixed farms that already
have a line of equipment, adding acres
drops the cost per acre (assuming no new
equipment is needed). For older farmers
who want to retire, selling cows and
getting $50 cash rent before the growing
season starts is also a pretty logical
reason to do the same thing.

[grassfarmer]

I think this is a topic where short term versus long term thinking and sustainability really come into play. On the face of it logic would dictate breaking up every croppable acre and growing an annual crop. The problems I see with that in my area are RISK, RISK, RISK.
This is very marginal grain land but good grass country. We had some grass plants 8 inches high this spring before anyone had seeded an acre. No fertiliser, no seeding cost, no machinery, no fuel. Contrast that to growing grain - $400/bu canola seed to grow a $10-12?/bu crop, the germination risk, flooding risk, drought risk,hail risk, early frost risk, disease risk on top of huge input costs for fertiliser, machinery, fuel, labor and all these risks are borne by the farmer. To top it all the cropping system is entirely reliant on fossil fuel - without affordable, available fuel the whole stack of cards comes crashing down.
At the end of the day we are all in the solar conversion business - converting sunlight, heat units and water into saleable, useable products. I much prefer the 4 legged combine to the steel and plastic one. Cropping may win out short term but long term the current system is insane and is unsustainable.

[farmers_son]

There is land that has always been in grain because of the good returns. There is land that will always be in grass because it is not suited for grain. The question for the industry is those “flex” acres that can produce either grain with some climatic and/or soil limitations or alternatively grass. A lot of those marginal acres were seeded to grass when the Crow rate ended and freight rates changed causing a dramatic reduction in returns from grain farming. Now due to ethanol derived higher grain prices will those grass acres be broke and returned to grain production or will those acres remain in forage/grass due to higher cattle prices?

Some of the factors that might see those “flex” acres remain in grass are:
• Record high input costs for fertilizer and fuel with probabilities for even higher prices in years ahead
• High machinery costs, difficult to buy new or close to new unless you can cover a lot of acres
• Weather uncertainties favour forage and grass production which does not require high input costs meaning less risk in growing forage or grass
• Ethanol subsidies could end in the near future and what impact would that have on grain prices
• Fusarium, clubroot and other crop diseases may dictate something other grain on infected land

I look at what is called contribution margin or simply contribution.

See
http://en.wikipedia.org/wiki/Contribution_margin

Contribution is a simple calculation. Contribution margin has limitations comparing grass to grain because it does not include risk which is higher for grain and grain would be expected to have a higher machinery cost which is generally regarded as a fixed cost.

I know on a year in year out basis my hay acres can generate as much or more contribution than my grain acres. I was somewhat surprised when I worked out the numbers but with the high input costs for grain an “average” yield (whatever that is anymore since it has been a while since we have had an average year) did not return enough contribution to beat the hay acres for which the only cash cost is harvesting (assuming the cost to seed the grass is a sunk cost).

My pasture acres cannot generate the same contribution margin per acre and really I would be better off to rent pasture from someone else and break up my pasture, possibly grow one or two crops of grain then seed it back to a productive hay crop.

On an industry basis where will this lead? Are cows going to go the way of the grain elevator? I don’t know but producers would be well advised to consider the risk and high costs associated with grain production on marginal lands plus future grain prices not just this years grain prices. As well are you doing the best job you can with your present grass and forage acres. I know I have older grass acres that I could double or triple the production without any major expenditure on machinery or changing my risk just by renovating; that is breaking and reseeding to grass.

I have never had a calf crop never come up or get hailed out, dryed out, rained out, flooded out, froze out, shelled out, blown away or rotted in the bin. And that is something to keep in mind.

[Mufferaw]

Interesting discussion.

One of the biggest decisions one needs to weigh is your risk aversion. In my own case I have consistently added to may forage/pasture acres over the past ten years. The first acres converted in the late 90's was the highly marginal land, however as input prices keep rising the amount of marginal land I own also increases due to the greater risk I face on those acres. The type of land I am talking about would yield at, or slightly below Saskatchewan provincial averages for grain yield.

I would also agree with non-traditional management, things like swath grazing and rotational grazing all have very positive returns to may bottom line as well are very sustainable in the long run.

It's not that I think cattle returns will ever compete with grain returns. When your average canola yield is 26bpa and your breakeven is 23 bpa, without using new equipment, not much margin for error.

Cattle, in my situation, always generate a positive return/acre, I can't say that about grain - I just need to look back a year. With that being said I do fully utilize programs like the farm stewardship program to get my fixed costs like new fence, watering systems, and new established pasture as low as possible. The bottom line changes a lot depending on what your fixed cost are.

Every boils down to how you analyze risk on every acre on your farm whether you use a combine or a cow to harvest it.

[wilagro]

ASRG: If you get less than $1.50 per lb. for your calves then you'd might as well pack 'er in. Otherwise, you are just spinning your wheels.

Inflation alone dictates that prices have to be more than they were ten years ago.

The 'auction barns' are not working for your interests and never have. They will CON you every chance they get as they can't lose.

[ASRG]

I guess I look at it in a different way than someone in it for the long haul. I'm approaching the end of my farming days, not beginning or planning to continue. I enjoyed a long and mostly positive time owning cattle.
I quit grain farming shortly after the end of the CROW rate. Poor grain prices and high cattle prices made that decision for me!
All in all I have enjoyed farming and have done pretty good.
I think prior to BSE the cattle market was a bit more stable? 2002 was a bad drought year and that was a challenge. 2003 was BSE and that was a wreck for several years! 2009 was another bad drought year.
By 2006 I had made up my mind to start a 5 year plan to phase out of cattle and I have generally stuck to it. I think I might get lucky and sell my cows for a decent price.....at least compared to the last few years!
BSE did not make up my mind to exit the cattle business, but it sure "helped me along"? I guess it changed my whole attitude. I don't think anything could pull the rug out from under a business so fast as that did? It was particularily disturbing that the government refused to take any blame for their bungling of the whole situation. I think that was the first time I realized we really don't have much of a government. They really couldn't care less if we sink or swim.

[kato]

Which is why we're taking them to court.

[ALLFARMER]

farmers_son
good post I agree completely