[MUSIC]
Good evening. My name is David Kenyon.
This evening on market update,
we're going to have three speakers.
First, I'm going to discuss
the hog and pig report that was released
last week and some of
the marketing implications based on that report.
Second, Dr. Wayne Purcell is going to
discuss the cattle report that was released
last week and some of
the marketing opportunities resulting
based on that information.
The third speaker is going to be Dr. Bruce Bainbridge,
who is going to talk about
some alternative marketing strategies for cattle.
After these three presentations,
there will be a period of questions and answers.
We would ask you as we go
through that you'd be thinking of questions
and when we get toward the end of the program that
you phone those questions in.
I'm going to discuss
the hog and pig report that was released on
June 30th and what potential that has
in terms of affecting the price of
hogs for the next six months.
I'm basically going to do that in two segments.
First, I'm going to try to set
a little perspective in terms of the long run,
in terms of where we have been in
hog prices over the last 15 years and specifically,
I'm going to discuss the hog cycle to give
a little idea about where we are
at this point in time in that cycle.
After I do that,
then I'm going to talk about
the price of hogs based on the numbers that
show up in the latest report
and break that into two segments.
One, in terms of
the third quarter of this year, July, August,
and September, and then talk about October,
November, and December, what
implications that it might have.
Then I will conclude with a few summary remarks.
First, let's look at the first slide that
shows the hog cycle over the last 15 years.
On this chart, on the horizontal axis are listed
the years and on the vertical axis is the price of hogs.
Now the one point that I want you all to
remember from looking at this chart is that historically,
anytime the price of hogs has been above $60,
and I'm going to draw a line across here at $60.
Anytime the price of hogs has been above $60,
shortly thereafter, the price of
hogs has dropped 15 to $20.
As you can see in each of
these years that once the price
of hogs reached the level of $60,
the price immediately dropped and sometimes as much
as $30 within a year's period of time.
Just let me mark a couple of
these so you can see what I'm talking about.
The first one back here in '73,
you see that we reach
$60 and notice that we stay there a very short
period of time and within a matter
of a year the price had dropped $30.
That happened again in 1975.
We reach that price level and within a year,
again, the price had dropped $30.
You can see several of the others
as we come up to our current situation.
Now this chart does not have the last six months on it.
But last summer, after
a considerable period of rather poor prices,
hog prices reached $65 last summer,
subsequently dropped below 50 in a six month period,
but then have returned to that level.
Just recently, they are back up.
The futures have been back up to the $64 area.
At this point in time,
we are right back up here.
In terms of the futures at the $64 area,
we've dropped off a few dollars in the last week,
but we are back up at this $60 level,
which you can see looking across
the years that anytime
hog prices have reached that level,
that they cannot sustain that level
for a very long length of time.
The result is that
prices dropped precipitously after reaching that level.
This sets a little perspective in the sense to
realize that the price levels that we've
been experiencing this last year and
especially the $60 hogs last summer and
the $60 hogs this summer are
a very unusual phenomenon in
hogs and does not happen very often.
When it does happen,
it does not last very long.
We need to remember that the $60 hogs that we
have now are extremely high relative to cost.
As a result, hog production is very
profitable at the moment and has been for over a year.
You can expect that producers
are going to respond to that.
In fact, in the June hog and pig report,
we do see that producers have responded
to that higher price of the last year.
In terms of long-term perspective,
we just need to remember
that we're at the top of a cycle,
that we're up in the $60 area
which we normally cannot sustain.
The implication of that
is the probabilities are very high,
that prices are going to be moving down.
That's the long run perspective.
Now let me move to the short run analysis.
I'm going to do this in two parts.
First, I'm going to analyze the next three months,
July, August, and September,
and then October, November,
and December using the data
that is in the hog and pig report.
On the next slide,
we have the numbers
for the 10 States that came out of the June report.
Now I would like you to notice that
these are 10 State numbers.
If you read numbers out of some farm magazine,
you may find the percentages to be slightly
different because they are US numbers.
I'm using 10 State numbers
because that way we can compare across all quarters.
We don't always get US numbers,
but we always get the 10 State numbers
so I'm using these numbers.
Now, the increase in
numbers was as expected before the report.
If anything, they were a little on the low side.
Some people had been expecting rather large increases,
especially in breeding and market hogs.
The actual numbers that came out in the report were as
expected or slightly under
some people's worst expectations.
As a result, the initial response to
the report was for hog prices to increase.
All hogs and pigs were up nine percent.
Kept for breeding was up 10 percent
and the number of market hogs was up eight percent.
Now it is good to remember that all of
these numbers are as June 1,
even though we did not get the report until June 30,
the numbers reflect conditions on June 1.
Now, given these numbers,
what are the implications for
the next three months in terms of the price of hogs?
The hogs that will make up the slaughter for
the next three months are basically in
the weight category 60-119 pounds and 120-179 pounds.
It is those hogs that will make up
the slaughter during the next three months.
As you can see,
the number in the lighter category were up nine percent,
the number in the heavier category were up nine percent.
I'm going to average these and use eight percent.
Now, what I'm going to do is take
that eight percent number and use
some historical relationships to try to
determine what impact that
is going to have on the price of hogs.
I'm going to do that on this next slide.
Let me walk you through this slide.
What I'm doing here before I
get caught up in the individual numbers
is I am taking the increase in quantity in hogs,
assuming the demand for hogs does not change initially,
and then trying to figure out given that there
is an eight percent increase in the quantity of hogs,
what impact that is likely to have on price
comparing it to the price that we
had in the third quarter last year.
From that, then I can get
a ballpark estimate of what the price is
likely to be in the next three months.
Once I've done that, then I'm going to talk
about other factors that affect demand
and look at the charts to come up with
my recommendations in terms of
potential Marketing Strategies for the next three months.
Let us go back and go through this step-by-step.
First step is to realize that
the numbers are up eight percent compared to last year.
There are eight percent more hogs
in the weight categories that make up
the slaughter for the next three months than they
were last year at this time.
The next number I'm going to use
is this number minus 1.77.
This is called the flexibility of demand,
a fancy term all it means is this,
from historical analysis of
hog prices and hog quantities,
we know that when
the quantity of hogs goes up one percent,
it reduces the farm level price by 1.77 percent,
assuming the price of other things that
affect hog prices has not changed.
What it says is every time
hog numbers increase one percent,
that the price will
go in the opposite direction by 1.77 percent.
What I've done in this case is
take the eight percent increase in
hog numbers compared to
last year and multiplied it times the 1.77 coefficient,
which says the price should decline 14.2
percent compared to the third quarter last year.
Okay. Assuming price of cattle,
price of broilers and other things that affect
the price of hogs has not changed.
Now last year, during the third quarter,
the average price of hogs was $61.13.
It was actually as high as 65 at certain points,
and it was below 60 also during the quarter,
but the average for the whole quarter was 61.13.
If you take the 14.2 percent drop in
price and multiply it
times the price last summer of 61.13,
that says the price should decline by
$8.68 this year compared to last year.
If you subtract this $8.68,
your first ballpark estimate of what the price
of hogs in the third quarter of this year should be,
comes out to be $52.45.
Assuming the price of
beef and broilers and other things has not changed,
which obviously they have,
which I will discuss in a minute.
The important thing to remember here is
that we are now beginning
to get according to this report,
a substantial increase in the quantity of
hogs that will be available during the third quarter,
and the impact of
these hogs should be to reduce the price
of hogs somewhere in the neighborhood of
14 percent compared to last year.
That assumes that other things that
affect the price of hogs has not changed.
Other things have changed.
On the next slide,
we will see some of
the other factors that affect the price of
hogs and their level this year compared to last year.
One of the things that affects the price of
hogs greatly is the price of cattle.
This year, the price of cattle is about $10 a 100 weight
higher than it was last year at this time.
This helps support the demand for pork.
As a result, we find that pork prices are running a
little higher than we would
anticipate just based on pork numbers alone.
The next thing that is an important factor in affecting
the price of hogs is the price of broilers,
and they are down 18 cents a pound
at retail this year compared to what they were last year.
Now that should have an impact of
decreasing the demand for
pork because broilers are
considerably cheaper this year than they were last year.
If you look at what's happened
the first half of this year,
what you find is that the consumer demand for pork
looks good compared to what's
happened over the last few years.
Over the last few years,
the price has been declining,
giving a relatively constant quantity,
we've had to move that quantity
at lower and lower prices,
meaning that the demand for pork is declining.
But this year, during the first six months of the year,
we find that the quantity was only
down 3 percent yet at retail,
we were able to move that pork
at 10-15 percent higher prices.
That bodes good for the demand for pork,
indicating that we were able to
sell a slightly smaller product
at a substantially higher price
indicating that the demand for pork at
this point in time appears to be in
relatively good shape compared to what
it's been for the last several years.
Now, based on that information,
we have some idea of what the supply and demand numbers
indicate the price of
pork should be in the third quarter.
These numbers indicate in the area of $52-$53.
Pork is considerably higher than
that right now, it's about 60.
So the general indication would be
that the trend is going to be down.
Now, need to look and
see what the market is saying about the price of
hogs so the next slide that I have here is
the August hog futures and this chart,
I think really helps us because it has
a consistent upward trend and we can draw
a nice trend line on it and based off of this chart,
I think it's relatively easy to make
a marketing recommendation that we
can have a considerable degree of confidence in.
If you look at this chart,
over the last three months,
if you connect the low prices,
tried to do this carefully,
you find a well-established
marketing upward trending line
that indicates that the price of
hogs has been continuing to go up.
Now notice this is August hogs,
which is in the middle of the third quarter and
that the futures market is currently indicating that
the price of hogs is going to be a little
higher than the numbers I just analyzed indicated.
Think what producers need to do at this point,
given that they have this well established trend in
place and given that
the price of hogs right now is that very good level.
To draw this trend line here,
keep it in place,
watch this on a daily basis and note price hogs in
the near future and
the next several months until this trend line is broken.
Until this trend line is broken,
there's really no reason to be involved in
forward pricing and establishing
the price of hogs for the next several months.
Even though the price may be trending down slightly until
the futures market picks that up and
indicates that prices are going to be moving down,
there is no reason to be
involved in selling in this market at the current time,
at these price levels,
hogs are very profitable.
Next, I'm going to move to
the last three months of this year, October, November,
December, and analyze the implication of the numbers and
the hog and pig report
for the last three months of this year.
Slaughter in the fourth quarter of this year
basically comes from the pig crop
in March, April, and May.
The pigs born in those three months will basically
make up the slaughter in October, November, and December.
From the report, again using the 10 State numbers,
not US numbers, the 10 State numbers,
the 10 major producing hog states.
The pig crop was up 10 percent.
That indicates a substantial increase
in the quantity of hogs that are going to be
available this fall in
the fourth quarter based on this report.
Now using that number and
using the same procedure that I used before,
you can use that number
compared to the price as last year to get
an idea of what the price level this fall maybe for hogs.
Using the same procedure,
you find that the quantity is up 10 percent.
Historically,
that 10 percent increase
would result in a 17.7 percent change in price.
A reduction in price since
the quantity it is has increased.
This means, or confirms again,
that we would expect the cash price a hogs over
the next six months to be trending in
a downward direction compared to
last year and absolutely.
Last year, in the fourth quarter,
the average price was $53.
This 17.7 percent drop in the price
multiplied times the price last year
indicates a price decline of $9.40,
and so the first estimate of
the price level for this fall,
the fourth quarter is $43.68.
Now that price level,
like the price level in the third quarter is
about four dollars less
than what the futures market currently says,
the price is going to be in the fourth quarter.
Let me show you what the futures market is
indicating for the fourth quarter and again,
let me draw a trend line on here.
This one is not near as neat.
Connecting the lows in
early April and the low just before the report.
And you will see again that there's
a strong uptrend report.
If we can zoom in on just the last few days here,
we see several interesting things.
One, we see that just before the report,
the market was very uncertain as to what direction to go.
We see that there was a lot of price volatility.
Prices were going up,
they were going down two days just before the report,
they broke down hard.
Then after the report,
we can see that we have two days
where the market moved up extremely strong.
What that means is that
the numbers as they were analyzed by the industry,
are not as bearish for
the future months as they had previously anticipated.
So what that means is the industry
was expecting even larger numbers
in terms of the pig crop
and farrowing intentions for
this fall so that these numbers were not as
bearish as they were expected to be by some.
Now the implication of that in
terms of the market is that
the fundamental analysis of the supply and demand factors
indicates that the price should be in the area $43.
But if you go back and look at
the demand side and see that
the market has basically been trading $3-$4 above that.
What that says for the fall
is that the price should basically
be in the range of $43-$46, $47.
And currently, the future's market is indicating $47.
So I would indicate again here,
there is a trend line in
place and that you would not necessarily
need to price until we get a close below that trend line.
But I want to issue a little more caution
for the fourth quarter then for the third quarter.
If you look at the future's market for cattle,
you will see that they are estimating
a considerably lower price for cattle
in the fourth quarter then we are currently enjoying.
And that is one of the things that is
propping hog prices up right now.
So if cattle prices
should return to the levels
indicated by the futures market,
which are considerably lower in the fall,
then we may see a larger drop in hog numbers.
It's also good to remind you then in 1985,
we had very similar numbers in
the hog and pig report that we have this year.
Hog prices dip down from
about 55 in June to 38 in October.
So they moved almost $20 in four months.
So there is the potential in
the fourth quarter for substantially lower prices.
To close up my section of the program,
let me put this overhead on here,
which kind of summarizes
the price estimates that I have developed,
indicating that for the third quarter this year,
I've put a nice range here so that I hopefully will fall
inside of it for the quarter in the 50-56 area.
Remembering that right now,
we're at the 60 level.
Last week was the first week and
a long time where he had an increase in hog slaughter.
So they increase the numbers that we see in
the June report is apparently beginning to
come to market and
that prices are going to begin to soften.
If you draw your trend line in on
the August hog chart and use that as a pricing signal,
you should be in good shape in the third quarter.
It's the fourth quarter that I'm worried about.
This price level is $12-$18 below where we are right now.
That seems like an awful large move
at this point in time.
But let me remind you of
the chart that I had on at the very beginning and I
have another one and I'm going to put it up
here again to make
this point that anytime
hog prices have been up in the $60 area,
and again, that's where we are right now.
That they do not stay there long,
and when they break,
the break is hard and they come down fast.
Historically, you get expansion in hog numbers when
the ratio of hog prices to
corn prices is greater than 18 to 1.
For the last year,
that ratio has been running at greater than 30 to 1,
highest levels we have ever seen.
Up to this point,
the financial stress of many farmers in the Midwest has
probably curtail them from
expanding as rapidly as they would like.
But at this price level,
with corn below $2,
the hog corn ratio is extremely favorable.
Hog production is very
profitable at the current price of corn and hogs,
and we can be sure that
hog numbers will continue to increase.
So I would strongly encourage farmers to take
advantage of pricing opportunities that now
exists for the months of October,
December, February, April, even out into next summer,
all of them are trading at $42-$45 at this point in time.
Which means forward pricing opportunities
gives you the opportunity to lock in
a profit margin of $15-$20 ahead over the next 12 months.
I am relatively confident that
sometime in the next few months,
and most likely, if not before
the September hog pig report
which will come out on the 30th.
Shortly thereafter, there will be
a substantial break in this market.
So I strongly encourage you to evaluate closely
the price and opportunities
for the fourth quarter of this year.
At this time, Dr. Wayne Purcell is
going to come up and discuss with you
the cattle report that was released last week and the
implications of that for
various marketing alternatives for cattle.
Thank you, David. I'm going to talk about cattle,
but I'd like to reiterate a point that he
made once or twice during his presentation.
There's a lot of relationship between where
the cattle markets are going to go
and where the hog market is going to go.
If he's right and I think he is,
that across the next 6-9 months to a year,
we're going to see downward moves in hog prices.
We need to keep that in mind
as we think about the cattle market.
I'm going to talk about two dimensions
of the cattle market here this evening.
It's a complex area to present and a brief time period,
but I think many of you are
concerned about what to do about
your pricing problems and
pricing issues across the next few months.
Should you be forward pricing?
You feed the cattle for this fall now,
if you've got a pen, a fed cattle on feed,
should you get them priced?
But I think a lot of you also have some concerns
about what to do in the cattle business in the long run.
In other words,
the better prices that we're
seeing this year going to be sustained?
Have we really turned back to the point that we're in
a hard building phase and will we
be able to support that over time?
I'm going to try to shed a little bit of light on
what's going on and a longer-term context.
Perhaps, help you develop
some ideas about what you should
do in terms of long-term investments
in the cattle business.
This first slide gives us a little bit of
background and I'll walk you through it piece by piece.
Having seen in all,
just let me focus your attention
that back in the mid 1970s,
we came in with
about a 132 million head of total cattle and calves.
We had demand problems that started develop,
I think in the late 1970s and
really got accentuated in the 1980s.
And I can't over stress folks,
the importance of you understanding that the reason we
liquidate it from a 132 million head
down to a 102 million head,
is because demand for beef was in bad shape.
Some analyst around the country would contest that point,
but I'm going to build
that point a little bit as we go through this evening.
We just didn't have the demand and move
the product at a price that would
be profitable down into cattle,
calf level, and we ran people out of business.
I think that's the straight
and simple of it and that's going to be
very important then in terms of
looking at whether or not that situation is improving.
We've got a smaller herd than we've had since about 1962.
With that 102 million head,
we're trying to put everything we can
get to walk in a feedlot on feed.
Cattle on feed are up 6 percent right now as of June 1,
inspired at a much smaller herd than we
had last year and had a few years ago.
This year we're seeing reduced cow and non-fed slaughter.
That certainly would be expected.
We've got the bulk of the dairy about
program and the slaughter related there too behind us.
So far this year,
slaughter for cattle is down about five percent.
That will not last.
We'll see a seasonal increase in
cow and non-fed slaughter this fall.
And all you have to do is look up at about two lines and
recognize that we're 6 percent more cattle on feed.
The number of cattle coming out
of feedlots are going to increase
fairly sharply as we move
out toward the latter part of the year.
Mid-year inventory down about two percent.
Now, I'll stop and talk
just a moment with you about that particular figure.
Lot of expectation that we may have
turned back to a herd building phase and yet
we get this median number that shows
us two percent below 1986 levels.
Folks, what I think we've seen is contained with
relatively strong liquidation during
the second half of 1986.
And we've probably been
holding back some heifers and doing
a little bit of herd building during
the first half of 1987.
So in net, we come out
with a two percent lower inventory.
That didn't surprise me much.
I have a feeling that if the price is hold
anywhere like they are now,
we'll probably see this herd liquidation stop.
When we compare January 1,
'88 figures to January 1,
'87 figures of about a 102 million head.
I think we needn't be alarmed that
we don't see any tendency
to stopping this herd liquidation.
I think it's there. I just don't
think the numbers have quite caught up yet.
Now, I'm going to turn next just a moment to
look in at the demand side in a little bit more detail.
I, for years, have
been trying to stress the various audiences,
the importance of understanding
what's going on on the demand side for beef.
There is no doubt in my mind that
the massive liquidation and the losses we
sustained across the past 10 years
have been related to
that deterioration on the demand side.
Let me take a look at this slide and I'll
start working with you just a little bit on this.
Try to keep from given you
too many and numbers in the presentation,
but I think we have to use a few to make the point.
From 1979 through about 1985,
it took a 30 percent decrease,
and the inflation adjusted price of retail beef to
move a largely constant per capita supply
into the consumer's basket.
We'll come back to the bottom part of
that sheet in just a moment.
Now that I've let you look at it,
let's cover it for just a moment.
If it takes a substantial decrease in
price to move the same quantity
of anything anything into consumption,
don't think you have to have an advanced degree in
economics to figure out you've got
something wrong on the demand side.
In our profession, we've still
got some of the elaborate models are saying,
"We haven't seen anything happen yet," but
I think the numbers speak for themselves.
A 30 percent decrease
in inflation adjusted price required
from '79-'85 to move essentially
the same per capita supply of beef into consumption.
That's why it hasn't been profitable back
down at the cow-calf level, folks.
That's why we have not
been able to pay any price increase up through
the retail level so that we can generate
better prices for the cow-calf operator.
It's all very important I think,
to think about whether or not the situation has improved.
I must spend some time on that because if I were in
the cattle business and
contemplating some expanded investment,
I would really want to know what in
the heck is going on with the demand side,
and whether that scenario that has been bad
there for some several years is starting to turn around.
Is demand improving? In 1986,
and I'll show you this in just a moment,
just an illustrative way,
we saw a small increase in quantity per capita move into
consumption at a lower inflation adjusted price.
Now, that looks a little bit of encouraging to me.
I'll come back and explain to you why.
I think that looks better than a scenario
that we've seen from '79-'85. I'll show in just a moment.
Quarter 1 of '87 bothers me,
and I'll show you that too.
We saw a smaller per capita supply
of beef move into consumption
only at a lower inflation adjusted price
compared to quarter 1 of '86.
A day Kenyon was talking about the first part of 1987,
looking a little bit better on pork demand.
I want to talk to you a little bit about
the possibilities in quarter 2,
but more we haven't seen it in
my opinion yet in quarter 1.
You don't bring up improvement when you still got
a smaller quantity of product moving
into consumption all at lower prices.
Now, I grant you that
could improve as we move on to the year.
But it's very important, I think,
in terms of whether not it does in fact improve.
I'm going to pursue that issue with this next slide.
I'll spend some time on this one.
I constructed this one and just built it
without using actual numbers to illustrate a point.
What I've got here is a scenario
that shows quantity down here and price on this axis.
These would be prices after
we've taken out the influence of inflation,
because that's the only way you
can legitimately compare years.
We had a price and a quantity here, say for '79.
I just came down the year and saw
a little bit of variation.
But basically '79, '80, '81, '82, '83,
'84, '85 was constant
in terms of quantity. You see what I mean?
You could draw a straight line right down through there,
and you would essentially have
very little change around that in terms of quantity.
Look what happened to price.
That's that 30 percent decline from
here down to here that I'm talking about.
Now folks, a demand function
is a negatively sloping thing.
In another way, it comes like this.
We call that a demand surface or demand curve.
It says consumers will take more only at a lower price.
That's the reason it's negatively sloping.
Well, if you take these points we've got here,
you can't make those lie on any demand curve
unless you shift the thing every year. You see my point.
You move in down, down,
and that constitute a decrease in demand for the product.
It doesn't matter what product you're talking about.
If you see this type of scatter plot,
you don't know why demand is decreased, I grant you.
It could be related to prices of competing products.
It could be a change in taste.
It could be lots of things,
but it has decreased.
Now. 1986 looks a little bit better,
let's focus attention on it.
Here's '85, '86 price was down again making
a new record low for beef prices at retail,
but we at least moved
some increase in quantity at the lower price.
You don't have to stretch your imagination
a great deal to think maybe
that '86 could lie on the same demand surface as '85.
Now, if it turns out and confirms
that's the case, that's very important.
Because that would mean for the first time since 1979,
instead of the whole surface shifting down,
maybe we're just moving along
the surface as the quantity changes a little bit.
That would suggest that maybe
demand is stabilized and you've got to
stop the decline and
stabilize it before you can get it increased again.
That gives all due benefit
to the promotion programs that we're going through,
but we've got to stop the decline before we can
turn it around and start to get it growing a little bit.
I'm going to just cover that
over and stay right with you,
with a slide that
shows the demand scenario for quarter 1 of '87.
I've just got through talking about a scenario that
makes me feel a little bit bad about the year '86,
and along comes '87.
I don't like the 1st quarter at all,
perhaps it'll get better.
But what happened is that we moved a smaller quantity per
capita into consumption at
a lower inflation adjusted price.
Smaller quantity at a lower price
to move it, not good news.
Unless that pattern improves later this year,
we have not seen any improvement in the demand for beef.
What we had, folks,
is quarter 1 say of '86.
Don't let that confuse you here,
as we get ready to come into quarter 2 of '87.
I'd only have final data for
quarter 1, we were way back here.
Quarter 1 of '87 down on
a smaller quantity relative to quarter 1 of '86.
That doesn't prove anything yet.
I would make a great big deal
about one-quarter's performance.
David Kenyon talked about the fact that pork prices had
been considerably strong in the first half of this year.
Here we've got the quarter's results for beef looking bad
in the face of our 10 percent
or so increase in pork prices,
what should boost beef demand?
These two products are competition,
yes, they are substitutes, yes.
Well, when the price of one is up,
it should boost the demand for the other.
If you look at it in that context,
I really don't like what we've seen so far
in the demand for beef in 1987.
Now, it could get better.
The price increases that
we've seen and many of you are aware
out there at the live animal level
and the carcass beef level,
really didn't get passed up through
the retail until the 2nd quarter this year.
It appears that in spite of
these sharply higher prices at
retail once they started to increase,
that the movement continued to hold up reasonably well.
When we get the 2nd quarter results in for this year,
what I hope they will show is some decline in quantity,
but coming at a rather sharp increase in price.
The same scenario that Dave Kenyon talked about,
having seen so far this year in pork.
If we can get a fairly sharp increase in price and still
move that product into consumption,
that's going to look better.
If it starts to backup,
historically what has happened
is that every time we've tried to
raise the retail price of beef across to pay 67 years,
the consumer said, "No," and it's backed up.
I'll come back to this point a little
bit latter to presentation.
But the retail price of beef has not been
outside of a range on average for the year,
$2.30- $2.50 since 1979.
Was only about $2.31 on average for 1986.
If you start talking about much of
an increase at retail and start
wondering whether you'll make that happen so you can get
a better price passed back down to the producer,
we start running up against
that barrier up around the 260 level,
265 level that we've
never been able to penetrate and hold before.
We have to be realistic about the scenario.
I don't know whether or not,
we can pass price increases through at retail
yet and have the consumers still
take this product and walk away with it.
It's going to be very important,
I think in the short-term price outlook,
and immensely important, I think,
in terms of the long-term strategies
that we're going to talk about in just a little bit.
I come back and walk through on this slide,
an analysis similar to what Dave just went through.
I use a little bit different approach,
he used the price flexibility
approach, it doesn't matter.
I want to take a look with you,
at what would happen if we are in
fact on at least the same demand surface,
the same strength of demand,
the same level of demand,
if you will folks, in 1987 as in 1986.
Then if we get, for example,
a five percent decrease in per capita supplies,
I'm not sure we'll get that much,
but to illustrate, that should increase
retail prices by about 10 percent.
That's a little framework here and again,
I don't want to get you bogged down in numbers,
but this thing over here,
instead of a flexibility that they worked with,
is an elasticity coefficient.
If the name bothers you,
don't worry a great deal about it.
What it is, is a historical relationship
that tells us how changes in
quantity tend to relate one to
the other and they tend to go in opposite directions.
Now we know that historically that's about minus 0.5.
In other words, a one percent increase in quantity would
drive price down two percent, or vice versa.
A one percent decrease in
quantity would drive price up two percent.
If we take this possibly five percent decrease
in per capita consumption I'm talking about,
set that equal to that minus
0.5 and solve for the price change,
it's here, a 10 percent increase in price.
Now, I'm going to stay with you just a moment on
this one because this is interesting.
If we are on the same demand plane
in '87 as we were in '86,
we got a retail price of beef
of 70.2 cents on average for 1986.
If we inflate that by 10 percent,
we're up to 77.22 cents per pound.
Now that's one of those numbers
that's in inflation-adjusted terms,
so we got to take that and multiply it by
the consumer price index that I expect for '87.
Don't let me lose you here.
All I'm doing is putting this number
back up in the terms that you will recognize during '87,
and boy, I think that's important.
That says if we do in fact
get a five percent reduction in per capita
consumption during 1987 and if in fact,
this historical relationship holds,
we should see a retail price of 264 on average for 1987.
We have not seen
the retail beef price average above 250 ever.
It has been totally constrained in
that 230-250 range that I mentioned since 1979.
We've got to break out to the top side,
we've got to have a consumer that's
willing to take a product at
a higher price than they've been willing to take it
in the past if we're going to make this thing work,
and we're going to be able to improve
the profitability down at the producer level.
It's not at all clear to me
yet that it's going to happen.
It's not at all clear to me yet that we
really have seen any appreciable,
substantial turnaround in the demand side for beef.
It's going to take more time, hopefully,
the situation will become
clear as we go on through the year,
but I bring this point up because I do think it has
to be brought into our decisions on pricing,
our decisions on investment strategies,
and so forth as we look down the road.
Come back and talk to you a little bit about
short-run price strategies now in this particular slide.
I told you when I started that I tried to do some things
with you in both the short-run
and the long-range context.
I'll just let you read this with me,
I think that the feeder cattle is going to be
the strongest market as we
move into the fall and winter months.
I would get the fall feeder cattle priced
on a break of the trend line on the charts.
I'm going to show you that in just a moment.
But let me go on through and look at
fed cattle and we'll look at the charts for both.
Fed cattle is going to be hurt by
expansion in hogs and poultry.
We're going to get a 20 percent
increase in turkey this year.
Close to 10 percent increase in broilers,
other types of poultry.
Dave has documented
the expansion that's going on in hogs.
Somewhere out toward the end of the year,
and in the early 1988,
we could be looking at something
approaching record total meat supplies.
That's not the type of
scenario in which you get very strong prices.
I think price surges to the mid-'60s in the fall and
winter contracts ought to be
viewed as pricing opportunities.
Let me do this with you,
and I've got a chart here that
I want to show you and we'll
come in on this a little bit
and get us a little bit more detail,
a little bit more scale as I put it in the middle.
This is October feeder cattle that I've got for you.
Talking about a nice uptrend,
we saw it on the hog charts a few minutes ago and boy,
we really have it on this particular chart.
I would suggest that we come in
here on this particular chart.
This is the October feeder cattle,
hook up this low from way back in
March with this low from late May,
draw that trend line,
sit back and relax.
Notice what the market's doing the
last few days. It's up here.
Here's 72, here's 70.
The market is up here in the 71-plus arena.
It would be hard to go wrong in this market.
If it continues to rally,
one approach you could take is just the forward price,
these forward feeder cattle on what I
call a scale-up basis.
In other words, if you got some numbers,
forward price products, if
your price goes up, price them more.
Another alternative and this
would probably be more appropriate for
the smaller producers and we've got a lot
of those in the state and around;
just watch this market.
It's either got to continue to trade
up or it's going to trade sideways and come
over here someday and give
us something like this where we
get a trading lines like that
and then a close below the trend line.
Don't be on a fishing trip,
because right there you need to get
your cattle priced in a major way.
That's a sell signal as long
as this trend line has gone on,
that's going to be, in my opinion,
a major proportions once we get it.
I can't tell you exactly when it's coming,
but I would expect it in the next 6-8 weeks.
I think it's important that we
get our hands on some charts
and monitor that situation and keep it in mind.
Just slide that one off and come right in with
the August live cattle futures.
Again, we've got a good uptrend on the chart.
Won't necessarily spend a lot of
time drawing the trend line on there with you.
Here's the $64 level,
$66 level up here.
We are seeing a situation in which in August,
the futures market is discovering a price
of around $64 in here for a cattle,
and we had tops today as high as 70.5 with
most of these dairy cattle in
their feeding areas going at 66-69.
What's that mean? It means we're going to have more of
those cattle that have been backing up
in a feedlot in just a little bit,
they're not overfed, but
the numbers are starting to pile up a little bit.
We'll have more of those come in in August,
we'll have more of the hogs coming.
the poultry is going to be coming,
so the market I think is correct,
and discovering a price
that's a bit lower than our current cash price.
Those August cattle across those highs that
we just saw there ought to be forward priced.
I'm going to put up a December '87 live cattle contract
also because many of you who might
have a pen of cattle on feed,
might be interested in what the situation
is for fall and for winter.
This one again, $64 level here and notice,
it has spent considerable amount of time across
the past several weeks between 64 and 62.
I would certainly think
that any rally back up toward this
$64 high this year ought to
be construed as a forward pricing opportunity.
If I had pins of cattle coming out early in the November,
early December period, I
would be inclined to forward pricing.
I'd remind you, you can do it directly in
the futures or you can do it in the options.
If you really have some strong feelings
that this market is going to go on up,
buying a put option of course,
will set a forward price for you,
and you don't have to worry about
margin calls, etc., etc.
I think the point is that we need to get
some forward pricing done when we get
the price strength on
these cattle heading out into the winter months.
Their poultry situation, the hog
situation that's been well-documented here.
The increased number of cattle on feed,
the continued uncertainty about
what's going on on the demand side.
I think in that type of uncertain arena is
the time to get some pricing established and
not be a cash market speculator.
Let me come back to this last slide and I'll finish with
this one in terms of looking at
some long-run strategies with you.
I think it's important that we
understand that expansion tends to be
self-supporting in the sense that it
pulls heifers out of the slaughter mix,
cuts the tonnage of beef, and boost prices.
It's very very important that you
think with me about the fact that
expansion cannot last and cannot be
sustained unless the demand is there to support it.
I'm not at all sure that we have
that type of strength on the demand side yet.
What I'm suggesting here,
if we're going to expand,
I would do it by using bred cows or bred heifers.
What I'm talking about here is something
that's going to turn a sellable inventory
around more quickly than
a two or three year wait period
where you hold back a heifer calf,
carry on through the breeding age,
breed and get a calf on the ground and then you've got
another 12-15 months to have something to sell.
If you go and expand,
do it some way that'll give you
a fairly quick turn around is what I'm suggesting here.
I would be ready to forward price all the profits.
The market is going to give you
periodically an opportunity to forward price at a profit.
Be prepared and take it.
I would watch the big long-term investments.
What I'm saying here is that I'm concerned about getting
heavily in debt to expand in the cattle business,
assuming that we're going to go back through
a boom period of six to eight years of herd building.
I don't think it's in the cards.
Unless the demand side improves.
I know it's not in the cards, so be careful.
I'm suggesting that we increasingly,
as we change things,
that we move toward cattle in demand.
The point there is that let's
produce the type of cattle that somebody
wants and the stock of
programs and feedlot complexes around the country.
We are not necessarily doing that in the state.
If we go through a period of a little bit of
change and adjustment transition, by all means,
let's come out of it with a type of cattle that
somebody wants and wants to pay as a premium for.
I'd glad to answer your questions a little bit later,
so keep them in mind.
We're going to bring Bruce up and talk
a little bit more about cattle marketing strategies.
[NOISE]
Thank you, Dr. Purcell.
It's quite an honor
to follow Dr. Kenyon and Dr. Purcell into this program.
We're going to talk
about more applied livestock marketing,
something more in the line of what
many of our Virginia producers are facing.
As an economist, I'm forced
to make some assumptions and I'm going to make
one assumption tonight that is going to carry through.
The assumption, I think is pretty simple,
is that you as a producer want to
sell your animal for the most money possible.
You want to sell them all for as much money as possible.
With that assumption in mind,
which I think is fairly safe, I'll continue on.
The producer needs to
know what he's doing and what he's selling.
You need to be as informed as the man you're selling to.
You have to be as informed as the man you're selling to,
or you won't be able to get a good job done of marketing.
You're available to be
taken if you're really not aware of what's going on.
The first thing you need to do
to get that job done to get
the most money possible is selling good competitive bids.
A lot of producers aren't getting competitive bids.
You're selling to an individual,
it comes in the gate and offers you a decent price,
for what you think is a decent price.
It may be $2 higher than last year,
and the rest of the world may be
trading at $5- $10 higher.
You need competitive bids.
That's a primary and fundamental important thing
to get that job done.
You need to be able to get competitive bids.
You have to sell something
that the buyers are looking for.
What are the buyers looking for?
On this slide, we're going to show you,
the buyers are looking for
load lots, looking for uniformity.
The majority of the feeder cattle in
Virginia move out of state.
They move out of state in surmise.
Those surmise offer 45,000-48,000 pounds of cattle.
Those feedlots that those cattle are going
to want uniformity because
they want to get those cattle in the lot,
get them fed, and get them sold one time.
They don't want to fool around selling them over
three or four weeks or two or three months.
They want feeder cattle that are going to meet
the demands of the slaughter cattle
market they're working with.
For Dr. Purcell was alluding to is we
need to produce something
that the buyer is going to want.
The buyer is going to want something that will
meet the slaughter cattle market demands.
What drives the slaughter market?
The consumer market. What the consumer is
after drives that market that he's working on.
We, as a cow-calf producer or as a stock operator,
have to function and produce something
to satisfy the slaughter cattle feeder.
But he has to satisfy the consumer.
The consumer wants USDA choice beef.
But there's been a lot of discussions about
the demands for lean beef and that's all right,
but they still want choice beef.
They don't want the outside fat.
They don't want intramuscular seen fat,
the fat that's in between the muscle fibers.
They want a 600 to 800 pound carcass.
The reason we're looking for
600 to 800 pound carcass is that gives us
a steak that's a reasonable size
that a housewife would want to buy,
the consumer would want to buy.
Keep that in mind that 600 to 800 pounds
situation that we're looking for,
that that slaughter market is after.
They want USDA yield two or three carcass,
one that's as trim as possible,
one that will give us something to do.
As a producer in Virginia,
we have several marketing alternatives.
You can sell your cattle direct as I've said.
That requires that you be on top of
the market as much as the man you're dealing with,
you need to know what's going on.
To sell direct, you need a load lot of cattle.
That man wants to buy a bunch of cattle,
put them on a truck and ship them home,
get them on feed as quickly as
possible so that they're as healthy as possible.
He's got his little money tied up and
getting those cattle acquired as you can get done.
You can sell to order buyers.
Order buyers work for the buyer,
they draw commissioner fee.
You have to be as on your toes or more
so when you deal with order buyer
than you do when you're dealing directly.
The things that come in dealing directly,
you're dealing with order buyers is you've got
to make sure you're getting competitive bids.
Another alternative is to sell at a local auction market.
Virginia has over 40 local auction markets.
It's a lot of markets. Everybody's got one
near his backyard if it's not in the backyard.
The thing that you can't get in some
of the markets is a good competitive bid
because they don't have sufficient numbers of
cattle to really draw good buying power.
Quite a few of our markets do a good job
in their regular weekly sales,
particularly in the peak seasons,
of moving a fair amount of cattle
and getting competitive bids on those cattle.
The last situation we've got and one I'm going to spend
some time talking about tonight are cooperative sales.
Virginia has been selling
cattle cooperatively for 50 years.
We've sold over 3 million herd of cattle for
nearly a billion dollars
in that time span and it's worked.
Cooperative sales work because we sell uniformity.
We try to sell and sort cattle in
load lots to make that situation work.
Cooperative sales work because
they satisfy a producer needs.
We're going into this next slide.
One of the big reasons for the history of
success is reputation of the graded sales.
When an animal is graded by
a Virginia Department of Agriculture grader,
he puts a grade on that animal,
the buyer is assured when that animal walks off
the truck that that's in fact
what sort of animal he's going to see.
I'm going to discuss the grades in a minute.
Our reputation's on the line and we've
maintained our reputation in this situation.
The buyers are satisfied in co-operative sales efforts.
The sales have worked because buyers keep coming back.
If the buyers didn't come back,
we wouldn't get the prices we get,
we wouldn't get the $3 to $8 over what
the local markets bring or
what some of the country bids are.
The other thing is these cooperatives sales really
serve the needs of the typical producer in Virginia.
The typical cow-calf herd in the state is about 28 cows.
It's real hard to get a load lot of
steers and heifers out of 28 cows,
it just doesn't happen.
Especially when you're trying to get them all in
the five weight are all in a six-week category.
It won't work.
When we go through the co-operative graded sales effort,
your 12 steers will co-mingle with
somebody else's 12 and somebody else's 15
and we wind up with 60 to 100 herd of
500 pound black baldy steer calves or
50 herd of semi tall steer calves.
We've got some uniformity,
we've got some selling cloud,
and the graded sales work to that benefit.
That serves the typical Virginia producer,
the producer that's not large enough to
use a futures market layoffs and price risk.
At least he can maximize what he can sell
an animal for by dealing cooperatively.
Let's presume that you want to
consider selling an animal integrated sale.
What is that process?
Even though we'd been doing it for 50 years,
still a lot of people don't know about it.
It's still a secret to some.
First, you have to consign your animals
to a specific graded sale.
We have 21 feeder cattle sales associations in the state,
those associations have a secretary.
Oftentimes that Secretary is
somebody that works for
the Cooperative Extension Service.
You let that person know you want to
consign some cattle with health sale,
and they'll let you know what
the health program is that that animal needs to be on.
There are sets set of vaccinations,
immunizations that each sale association has.
That health program is one that
again helps build
our reputation, it's worked in the past.
Once those cattle are consigned,
you deliver them the day of the sale,
or maybe the day before to
that local sale barn is cooperating in that graded sale.
When those cattle are delivered,
if you go onto this slide,
on arrival are tagged.
Each animal is individually
tagged when they get off the truck.
He's graded, I'm going to go through the grades in
a couple of minutes on what
is done in that grading process.
He's graded for frame score and muscle score,
tells us how much he's going to weigh
we think when he's slaughtered.
The animal is individually weighed,
and then he is penned.
He is penned with other steers
of the same weight or heifers,
the same breed, same muscle score,
same thickness, same frame size.
Then he is sold either that day or the next day,
and the check is drawn directly to you from the market.
You may have 10 steers and they
wind up in 10 different sale lots.
The idea being is that each animal is bought the
maximum possible when he was sold.
I'm going to go over on these next series of slides,
some of the grading that goes on.
The Department of Agriculture graze these cattle.
They put large, medium,
or small frame or extra small frame scores on
the cattle and they put
a muscle score on the animals one, two, or three.
These grades are accepted by
the USDA as pretty much as standard.
They give us a means of communication.
When somebody says, what kind of steer is it?
Well, if you say they're pretty good,
that doesn't say much.
If we say is a large frame,
number one muscle steer,
people have an idea of what's there.
This drawing is pretty much
illustrative of the thickness,
the frame score of a number of a large frame steer,
large frame steer is one that is expected to
grade choice when he weighs something over 1,200 pounds.
When we say choice, that means we
expect him to have a half-inch,
a back fat at the 12th rib
under normal feeding conditions.
It's just a general idea.
Quite a few of our exotic cattle, Simmental,
Maine Anjou, Limousin, and so
forth fit into this large frame category.
Large frame Heifers are expected to
grade choice when they weigh 1,000
pounds or more, they're a little different.
The market, remember I said we are looking for
cattle that weigh 6 to 800 pounds in a carcass,
which means we need a live animal weighing
somewhere between 1,000 and 1,300 pounds.
The upper end of most large frame cattle don't fit.
We need them under 1,300 pounds.
They don't fit necessarily what
the packer's really looking for,
you need to keep that in mind,
in your buying or breeding program.
What you're buying and what's going to kill.
Medium frame cattle, this a drawing of the typical,
this is the minimum standards for medium frame steer.
He's a little smaller, you
can see he's a little chaffier,
he's a little thicker steer,
maybe than a large frame steer.
Medium frame steers are
expected to grade choice when they weigh
something between a 1,000 and 1,200 pounds.
Right in the middle of what the market's really looking
for and the slaughter cattle carcass.
A medium frame heifer on other hand
is a heifer that's expected to grade choice,
somewhere between 850 and a 1,000 pounds,
she's a little smaller than the Steer.
The market really is looking for
large frame heifers, medium frame steers.
We haven't found a way to put
a breeding program together to get that done just yet.
But there are people working on it.
This next drawing is a typical small frame steer.
He's a little squattier,
a little chaffey, a little more old-style.
He looks like some of those grand
champions in the late 50s.
It's not necessarily what we're looking for.
A small frame steer going to grade choice,
it's something under a 1,000 pounds.
He's got a carcass that's smaller
than what we're really looking for.
Small frame cattle aren't necessarily
the most economical cattle to feed,
because they just don't go as
fast. They don't gain as quickly.
They're easy to get into the kosher crate trade market
with a lot of fat but we don't
have a major demand for that except up in some
of the parts of Pennsylvania that we
sell cattle to out of Virginia.
A small frame steer
I said will weigh something under a 1,000 pounds.
Small frame heifers will weigh
something under 850 pounds.
The graders also put a double S grade on cattle.
Super small are used to be
called very early maturing cattle.
These cattle finish at extremely lightweight.
Steer's something under 900 pounds.
Heifer, something under 800 pounds.
Very small cattle, they're done growing.
They're dwarfy, they're cattle we really aren't proud of,
really aren't wanting to work with.
The next set of drawings we'll look
at are muscle thickness.
When a grader's put a grade on an animal,
they're telling you what they see visually.
They're not telling you what
the animal's worth, necessarily.
That's still up to buyers to decide.
The buyers know how these cattle perform and grades work.
This is a typical number one muscle steer
is a good thick steer.
If you'll look, he's rounded over
the top. He's thick in the front.
He's thick behind. He's got some
muscling over those ribs and then at loin.
He's going to carry a meatier carcass,
just a correlation that does exist.
He's very typical of most of
our beef cattle that are sold in this country.
He's thicker down in the arm and
the gaskin and in just a little better doing steer.
This next steer that we're going to look at,
is what's called a number two muscled steer.
He's a little thinner, a little frailer,
a little thrifty steer he's narrower in appearance.
He's narrow up front and behind.
He just doesn't have the muscling.
A lot of our holstein type cattle fit in this number to
muscle category just for
an idea of what we're looking at.
Number 2, muscled cattle happen two ways,
either genetically or through management.
Last year, when we were pretty drowsy and dry,
we sold a fair amount of number 2 muscle cattle.
Buyers actually paid as much as $280,
108 more for number two muscles,
the number one muscles to put on grass.
These thinner cattle had something
that buyers looked for and its compensatory gain.
There were a management problem.
Even though he's graded at
something less than what's ideal,
doesn't mean he brought less than
an ideal price. Keep that in mind.
The next grade that we look at in
muscle thickness or the number three muscles.
We don't sell in our graded
sales Number three muscle calves or yearlings.
We do sell number three, muscle
Holsteins, and our holstein sales.
He's pretty thin, he's pretty frail.
You look at how painful these calves,
you wonder what's wrong.
They've suffered from stress
or they've got some pretty poor genetics in them.
They're not anything that you
think you might make a lot of money on.
They tend to be red flags.
We don't sell these number three
muscled cattle in graded sales.
It's a red flag, it's something
that we don't think we should promote.
That's part of our reputation is,
we don't sell those cattle,
we don't sell stags in the graded sales.
We don't sell bulls in the graded sales.
Animals that don't fit our quality,
don't get sold and that keeps the buyers coming back.
They don't wind up with two or three bad-legged cattle
or poor cattle,
and that load lot of cattle that they bring in.
We have several alternatives for
cooperatives sales in the State of Virginia.
First, I've been talking about is
the foundation has been graded in barn sale.
This sale started 1938
and they've been going since then, doing quite well.
They serve the typical small producer or
the producer that doesn't have
many cattle that are consistent or uniform.
We also have board sales.
A board sale is the sale that the cattle stayed at home,
on a farm, but
they were graded by the Department of Agriculture.
Those grades were reported and
those cattle are sold, site unseen,
just on a verbal description,
during a regular graded in barn sale.
We've had board sales for some years
now and they work quite well.
Buyers that are sitting in its sale barn
were by site unseen
based on that verbal description
and pay a good price for them.
One of the reasons they pay a good price for
them is they get quality.
They get farm fresh cattle
and that's worth something to them.
The next type of sale we have is a field sale.
We sell every week or every two weeks.
The same as the board sale,
the cattle are sold on the telephone
with just verbal descriptions.
That works quite well, we have those going.
If you want to sell in a field sale or graded sale,
get a hold of your county agent or
somebody that works with the Department of Agriculture.
All of the sales are done with a telephone hookup.
We've had from seven to
as many as 50 buyers on the telephone on onetime.
Those telephone buyers give us some the buying power.
You're pretty sure that you've got a competitive bid,
you're getting the highest price possible when you're
selling cattle and you've got 50-75 people,
counting the ones in the barn,
bidding on those animals.
Last thing I want to mention about
these alternatives are the satellites sales.
This fall, we're going to try
a couple of satellite sales.
These sales will be held in September and October.
The first will be September 14th.
It'll be in the evening at 7:30.
We'll have a preview that shows these cattle
the evening of September 12th at 8:30 PM.
You'll be able to see
every lot of cattle that you can sign.
These satellite sales will be just
exactly the same as our field sales.
The only difference will be that we'll
have a video or picture,
so people can see what's going on,
they can see the animal as well
as get the verbal description.
It's a first because
we haven't done this in the country anywhere with
cooperative commingled type sales or satellite sales
through a non-profit organizations such as
the Feeder Cattle Associations running it.
The first sale will be a yearling sale,
a second sale will be a calf and yearling sale.
They'll function the same way.
I'm going to wrap up as well we get
Doctors Kenyon and Purcell up
here to answer some questions.
If you have questions,
please get on the phone call them in,
we'll have time to address those.
If you have any questions about
the graded cooperatives sales efforts,
give me a call, in proper English.
Give your county agent a call, they can work with you,
or one of the local Feeder Cattle Sales Associations,
they can help you answer any questions
that you may have about this cooperative selling.
I would encourage you to think about it.
We have sales in the summer.
If you're trying to figure out when to sell,
you can't sell the futures, you're not large enough.
We have sales in the summer,
we'd have whole scene sales in August,
we got calf and yearling sales in early August,
yearling sales in July and August.
You can do some market planning and
some timing and still do it in a cooperative sale.
We do board sales or Tel-O-Auction sales every two weeks.
There's opportunity for you to move some cattle,
gets bigger cattle that gain
most of the weight to go in the game,
you have opportunity to sell them
early before the price break,
if in fact and when in fact it does come.
You can plan your marketing
around these graded sales
and still do a good job for that.
You want to step up on the platform and we can proceed
on with any questions you may have?
Let me emcee this while Bruce catches his breath.
While we are waiting on the phone ring to
come in and we've got a call, we're going to take it.
Go ahead. Didn't make it through.
One of the things that occurred to us as we
were thinking about anticipating your calls,
some of you may be aware that we've changed
the delivery mechanism on feeder cattle,
and that is changed the cash futures basis.
David Kenyon is in good shape on that.
Why don't we let him spend 30 seconds to a minute,
burn quickly, and then
we'll come back and take phone calls.
Just telling us a little bit about how
we think it's changed that basis because it
is important as you anticipate for pricing your cattle.
In September of '86,
the futures contract for feeder cattle was
changed to the average price of
cattle going into feedlots across
the whole US instead of being based on Oklahoma City.
The net impact of that is that the futures price
that you now see for feeder cattle, not fed cattle,
just feeder cattle is about four dollars lower
than what it used to be based on
the information that we've gathered for about one year.
Practically, what that means is normally,
if heavy cattle, say, 700-800 pound yearlings,
historically had been trading at
about six dollars under futures, this year,
they'll be trading only $2-$3 under futures,
which makes that $71,
$72 price even look better than it's looked in the past.
Do we have a phone question?
Call. Bring in it. I'll make
somebody else answer it but come on with it.
[LAUGHTER] As it say on radio and TV,
folks, we're having technical problems.
Hang with us. [NOISE] Here we go.
Sir, I have a question.
Go a head.
This is Randy Shank in King William County.
Yes.
The question to David Kenyon.
The question I'm getting this summer from
small pig producers or potential small pig producers,
I hear you saying that the bottom
is going to fall out of the hog market.
Should these people wait before
they get back into
the pig business if they're not in it right now?
Are they a year away from producing pigs for profit?
I basically have two answers to that question.
One, if they have the facilities to feed feeder pigs,
and they can purchase feeder pigs and
forward price at current levels
which are reasonably good,
if they can find
those feeder pigs at a price and then forward price,
then they can go ahead and be in
the market now without a great deal of risk.
There are opportunities to get
forward prices not using futures or options that is
available through the Virginia Farm Bureau to get
forward prices for smaller lots of hogs.
That would be one opportunity
for those who do have the facilities to feed feeder pigs.
I would say if a person is looking at
holding back gilts and breeding them,
and then having those hogs to sell which will be
basically 10-11 months at the least,
then I would say that you're
looking at selling into an environment that you
may find that is
very close to the cost of production by the time
those hogs are ready to sell because that's going to
put you into the next summer or next fall.
I would anticipate that hog prices,
if we follow the hog cycle at all,
are going to be at
considerably less profitable levels than they are now.
I would not encourage
strong expansion right now in the hog industry.
If you look at the hog cycle, historically,
if things develop as we expect,
the best time to expand is going
to be sometime next spring,
next summer, next fall next year, not right now.
Thank you.
In other words, it's better to expand
with $40 gilts than $60 gilts.
Okay, I hear you. Thank you.
Do we have other calls? Bring him on in.
Will this visit a little bit here about the hog scenario?
It does look as if we've got
an old faithful type tendency coming back, Dave.
When the hogs get to $60 and stay there for long time,
everybody get itch in the feet
and wants to get in hog business.
You should try to resist that itch if you possibly can.
It is not the time to get into the hog business right
now unless you can forward
price them at a profit which is what he says.
Got another call coming through so if we
can handle the technicalities
to bring him on in.
Calling from Warsaw.
What is the current status of efforts to expand
coordinated marketing by small herd cattle producers?
An example, polling to be eligible for cattle auctioning?
Do you want to repeat that?
Repeat the question.
Producer in Warsaw would like to know what
the current status of efforts to expand
coordinated marketing by small herd cattle producers
is at the current time?
An example of that, for instance,
would be polling to be eligible
for cattle auctioning with all the producers in the area.
That can be done. We've done it.
The question is, can three or four producers get
together in seller cattle in a field auction?
That can be done if you've got similar cattle,
maybe two or three of you have
a-half a load or a-third a load a piece.
[NOISE] You can do that get with
your county agent or the Cattle Association.
Those cattle can be
graded and then sold as a single unit,
and each of you take the amount of
money that your cattle would be worth.
It is being done now and we'd like to
expand it to accommodate those smaller producers
that would like to take advantage of
the ability to sell farm
fresh cattle on a Tel-O-Auction system
to a good set of buyers.
It's just another way of getting
some numbers together and making
that a little bit more attracted
to buyers, regrading the question.
Give us the benefit of the graded sales.
If Wayne had 15 or 20 head
of black baldy steers that
were pretty good and I had 20 head, Dr. Kenyon had 20,
we could put them together into a load lot and sell them,
and that's an acceptable means of going
about selling some cattle and keeping them in the field,
keeping them farm fresh.
Quite a few of our buyers like that.
We do have buyers that won't buy out of the market,
they want them right off the farm.
We're not going to code in the numbers
here on this because inevitably,
somebody would say, well, I know of
a scenario in which we are wrong.
But we would agree that
when you can put together that low lots of cattle,
they're going to bring a premium price.
There's just no question about that.
Assuming again that the right type of cattle.
We have another call coming in. Come on, we're ready.
I'm calling from Illinois.
Good. Welcome. [OVERLAPPING]
I have a question concerning the hog market.
I missed the first part of your program.
I was wondering what you think the low will be this fall,
and when the next major low will occur, and how low.
I assume you probably want a specific number,
which is dangerous to
ask an [NOISE] economist to do that.
[NOISE] I would say that I
would expect hog prices to get in the low 40s this fall.
I would say the low is going to depend,
to a large extent,
in terms of what happens to cattle.
If cattle prices drop off,
especially when we get
the increased broiler numbers this fall,
then I'd say it's not inconceivable to see
some cattle prices slightly below $40.
I would say in the high 30s,
low 40s would be the bottom this fall.
I would say the bottom, longer-term,
would probably be in April of '88.
If not then, I would be quite confident that
the bottom in this cycle would be in by the fall of '88.
Because the bottoms in hog cycles usually
come when the seasonal lows occur,
and that's normally April and in the fall.
I would expect that to be at that point in time.
I think one of the things we have to
be aware of now is that,
with extremely low corn prices
in the major hog-producing states,
cost of production by very efficient producers,
the cash cost for
some farrow to finish operations is
actually down to $25 per 100 weight.
To cover all costs,
there is low as $35.
To really turn off the increase in hog numbers somewhere
in the next year to
18 months if corn prices stay at their current level,
it's going to take some really low hog prices
to slow people down,
which, to go back and make the point I
made earlier, and that is that,
basically, right now, at current price levels,
anywhere from $15-$20 ahead can be locked in
on every hog you produce for the next 12 months.
Given that we're looking at the downside of a hog cycle,
I think that's a pretty good opportunity
and shouldn't be passed up.
One of the things that makes that outlook
this fall tough is that the corn is going to be cheap,
and it is, we're going to have some demand for
those gilts for breeding purposes.
That makes that outlook a little bit iffy in the fall
because it's hard to expand
those numbers right out and
assume they're going to market.
Some of them are going to get held back.
Eventually, that 30-1 in
better hog-corn ratio is going to pull
some more people in, without any doubt.
Sounds like we do not have any more calls right now.
You two gentlemen got anything you want to
say to close this session?
We're getting close to our allotted time.
Any last words?
I think what you've said this evening,
David Kenyon, is that get your hogs priced.
I believe that's what I've heard,
and I totally concur with that.
Bruce has certainly said that we've got,
in this state, some
attractive and alternative ways to sell cattle.
We would all agree that if you can get them packaged
in uniform lots with some volume there,
however you do that,
whatever commingling approach you take,
you're going to do a better job with them.
My primary concern,
as we get ready to close this session,
is still on the demand side for beef.
I think, honestly, on the demand side
for red meats in general,
we're not out of the woods yet.
I would urge a little bit of
caution and get the cattle priced
when the market offers you good profits
and be careful with those very big long-term investments.
We've got another phone message coming through.
If you'll bring it on in, we'll try to deal with it.
Not sure which one of the
phone companies has these lines.
[LAUGHTER]
Okay.
There we go. Go ahead. We hear you.
To any member of the panel,
what is the realistic profit potential
for the 85-cent steers that we've seen sold today?
From this member of the panel,
probably not very good.
You can cover your out-of-pocket cost
if you forward price those cattle
at that $71-$72 level we're talking about.
Remember, again, you've got to pull a basis of that.
Here in this state, we would be forward pricing at 68-69.
That's probably going to be a little bit better
than covering your variable cost,
but it's not lucrative.
One of the reasons we're seeing the
85-cent cause is because we've got
102 million head of
total cattle land instead of 132 million 10 years ago.
A lot of people want them to eat grass.
I tried last spring to buy something cheap and couldn't,
and finally enough having to pay up for them.
So I understand your question [LAUGHTER].
There's not a whole lot there.
One of the things that's happening to producers in
Virginia [NOISE] is the cattle are
being bid away from us to go into
the corn belt because corn is extremely cheap,
roughage is extremely cheap.
The farm program is required that
a lot of corn ground be put into set-aside.
They could grow forage crops on that set-aside land.
There's a lot of oat leaves,
a lot of haylage that's out there.
With that cheap forage,
$5-$10, sometimes $15 a ton,
along with cheap corn that you
can't seem to sell out of the country any other way,
their only alternative is to buy
cattle and feed it because they're looking at
a different set of cost components
and values than we might be looking at here.
They're bidding those cattle away from us.
We can't make 85-cent cattle work,
they might be able to.
They've got a little more optimism
because their costs, again,
are roughly 20-25 percent cheaper than ours.
That pays some of the freight and that
helps get those prices where they're at.
Good point, Bruce. Do we have
more calls or are we closing up the session?
Any questions from the audience?
We've got an audience here.
We'll take a question from there and repeat it so that
our audience out there
could hear it. Anybody got anything?
Yes.
Yes. Go ahead and ask one.
If you had about 80 850-pound steers,
when would you price them?
[LAUGHTER] Now we're getting down to the brass tacks.
He's got 80-100. What weight did you use?
Right now they weigh about 850.
We've got someone in the audience here that's got
a bunch of 850 pounds steers
and wants to know when to price them.
Soon [LAUGHTER].
In particular, if not before,
then when you see that trend line on that chart violated.
I can't over stress the importance of having some type of
road map to price action and something
to know where you've been and where you might go.
If you're not charting the market, you should be.
We tried to say that in
almost every presentation tonight.
As long as the market's trending up, you might say,
well, I'm going to be
a cash market speculator and let it go.
But when it shows you some signs it's turning down,
when it closes below that trend line,
you need to get them prized then, that day.
What about feeder calves?
When do you price them?
The same point. His question
is about when to price feeder calves.
There's never anything wrong with
locking up a substantial profit per head.
Go on and do it, if a market
goes on up and you've priced them,
and some margin call, don't worry about it.
But again, in that market,
we've got strong up trends.
You can logically say we'll let
the market trend as high as long as it wants to,
and when it shows some signs of turning down,
I want to be there, be ready,
be prepared mentally, financially,
every other way, and get them priced.
I think we're going to get good opportunities.
We've already had some.
Let me make just one more comment about the hogs.
The hog futures contracts
that we all looked at this evening,
you see that the trend is up.
That scares people in terms of
forward pricing when the trend is up,
but for several years now we have had options available.
Options for $46 October hogs,
and for $46 December hogs,
respectively, right now cost about $1.60 or $2.30.
For that price, you can lock in a price of about 44 net,
which if costs are 35,
that's still almost $10,
100 weight or $20 a hog.
You have the bottom locked in,
you've got $20 locked in.
If prices, for some reason,
which I don't anticipate, but for some reason,
if the price should go back up five or six dollars,
all you will lose is the premium and you
can enjoy those higher prices.
Now is an ideal time to use
those options when you can lock in a good return
if you're concerned that maybe the price is going to be
a little higher than we discussed this evening.
Folks, we're going to close the session.
From Bruce Bainbridge, and David Kenyon,
and Wayne Purcell, thank you so much.
We hope we've done you a little bit of good,
and good markets to all of you.
Good night. [MUSIC]