9/18/2008 8:33:00 AM Energy needs impacting cattle production Predictions for future six months and beyond
By Codi Vallery
Rising energy prices will continue to hurt the beef sector.
That was the overall take home message from the recent cost control and risk planning webinar conducted Sept. 11 by Matt Diersen, Cole Gustafson and Harlan Hughes.
Gustafson of North Dakota State University touched upon why farmers and ranchers will continue to see energy prices rise through the winter of 2008 and into 2009.
According to Gustafson, he says China's use of oil has increased at historical rates, putting a crunch on oil reserves around the world. In 1990, China was consuming 2.5 million barrels of oil a day (mb/d). Today they are quickly advancing on 10 mb/d, which they are forecasted to hit by 2010 and by 2020 they will be at 20 mb/d, the current rate of U.S. oil consumption.
These predicted trends are relevant to consider when predicting U.S. energy prices, because world crude oil production is only at 85 mb/d. Gustafson notes that there has been no significant increase in global oil production since 2005 because of infrastructure problems in Russia, action by environmental groups in the United States and unstable government in the Middle East.
"We are seeing a significant need for energy and the supply is not there," says Gustafson. "Energy prices will stabilize at best, and will probably continue to go up."
With the American public struggling, Gustafson predicts we will see fewer people able to afford to eat beef and fewer people able to produce beef with continued higher input prices.
Marketing Cattle in 2008
Building upon the energy information given during the presentation, Harlan Hughes, professor emeritus of North Dakota State University, gave a forecast for marketing cattle in 2008 and what producers should expect to face in the coming 2009 year.
Currently the buy/sell margins in the cattle sector are predicted to go down and narrow through the end of the decade and Hughes says that is indeed what is happening. What adjusts that margin is based either on the feeder cattle prices going down or the slaughter cattle market going up.
"I think we all indeed, underestimated the strength of the slaughter cattle market," says Hughes. "Most of the adjustment is coming from the slaughter cattle side, which is good news."
Hughes says the slaughter cattle market is being heavily driven by exports to foreign markets and the weak dollar. Right now, the slaughter cattle prices are the positive factor in the beef industry.
Another point he made during the presentation related to feed prices and what could be expected. Cost of corn will be in the $5-$6 area in the near future, according to Hughes and market analysts, making the cost of gain a production scenario the industry has never experienced before.
Hughes sketched out what he believes the total cost of gain (COG) will be with higher corn prices.
• $4 corn = $80 COG
• $5 corn = $90 COG
• $6 corn = $100 COG
• $7 corn = $100 COG
Cost of Finishing 2008 calves could be in the high $90 range, according to Hughes.
Other marketing advice given by Hughes revolves around calf prices and selling weight. "The market signal to ranchers is to add additional weight to their calves before they let them go to market," says Hughes.
Hughes projects the last part of the 2008 fall selling run will see $1.17 for 555 lb. calves. He says if calves are kept and backgrounded through January they could see $1.14 and finished calves in the spring of 2009, $1.10.
"Adding value beyond weaning is risky," says Hughes. "You really need to spend the time doing some of the pencil work to see which forages to use to add weight to the calves before selling."
Stay or Leave
With an increasing need for energy, ethanol production will continue to grow, making both corn and wheat prices excel.
Hughes says the low-cost cattle rancher located in "grass-country" is going to thrive and not be tempted by potential production profits in the farming sector. "Farmers with cows are going to go out of the beef cow business like they did in the 70s," says Hughes. "Decreasing cow numbers will add price strength to those who remain."
