Allen’s Update: May 24, 2013

Market Update:

5 Area Weighted Fed Cattle Price – Last week’s 5-Area Weighted Fed Cattle live price was $125.37, with Dressed cattle at $198 to $202.

Wholesale (Boxed Beef) prices were up once more, setting yet another new record high for boxed beef. USDA Choice beef closed at $209.51, up $4.53 from the week prior. USDA Select closed at $192.31, up $1.11 from the week prior. The Choice-Select spread continues to widen and now stands at $17.19.

The average retail price for USDA Choice beef for April 2013 was $5.264 per pound. This was down $0.36 from March 2013, but still $0.278 higher than April 2012. Since 2011, the retail price for USDA Choice beef has increased 9.2% and the overall average increase for all beef increased 9.2% as well, indicating that Choice beef demand is holding steady compared to Select and ground beef.

The recent Cattle-On-Feed (COF) report showed 10.7 million head of cattle in the feedlots which is 3% lower than this time last year. However, placements were 15% above last year’s average at 1.75 million. Feedlot marketings were 2% higher at 1.86 million head.

Feeder cattle traded mostly steady to last week with stockers trading steady to $3 lower. Calf demand has decreased somewhat as field activity has increased (haying and planting). Slaughter cows were steady to $2 higher with bulls mostly steady. The USDA Cutter Cow carcass cut-out value was $160.37, up slightly from last week.

Oklahoma City feeder cattle prices were $2 lower to $2 higher this week with prices for medium and large frame #1 steers: 400-450# $168-$171, 450-500# $162-$169, 500-550# $150-$169, 550-600# $141-$156, 600-650# $139.25-$151.50, 650-700# $135.50-$143.50, 700-750# $130-$137, 750-800# $131-$135, 800-900# $119-$132.75, and 900-1000# $116-$123.25/cwt.

Cattle feeding margins improved by about $9 this week, with feedlot losses averaging $94.29 per head. A year ago fed cattle sold for $122.72 with losses of $17.40 per head.
Average Packer margin have improved once again, primarily due to the sharply higher wholesale boxed beef prices. Packers averaged $69.50 per head profit which amounts to a $50 per head improvement in margin.

Industry Updates:

Beef demand this year is stronger than most analysts predicted and domestic beef demand has actually grown. The All Fresh Beef Demand Index (AFBDI) was 5.57% higher in 2012 compared to 2011, with the Choice Beef Demand Index (CBDI) being 4.05% higher. These indices are maintained by Dr. Glynn Tonsor at Kansas State University. In the first quarter of 2013, the AFBDI was 1.57% higher than the same period last year. However, the CBDI was down slightly at 0.14% lower than last year. According to Dr. Tonsor, total beef demand is defined as a schedule of quantities that consumers purchase over a range of prices. Quantity demanded represents the quantity of beef consumers purchase at a given price. Therefore, the quantity demand can decrease, while the demand curve stays constant or increases. However, Tonsor states that the current concern of the beef industry is the beef-to-substitute meat-price ratio. As the relative price of beef climbs in relation to other proteins or meat substitutes, consumers back off somewhat on beef purchases. Beef has always been among the highest priced proteins and will continue as such. The compelling factor about beef is simply that it tastes better than many other proteins and is a favorite for consumers wanting to celebrate. As long as consumers perceive they are getting increased value for higher priced beef, they will continue to purchase. One thing to remember is that as retail beef prices climb, consumers will only purchase if they believe they are getting real value. The higher the price, the heightened their expectations. If they pay more, they expect taste to be not just good, but awesome. In addition, they expect high quality, tender, safe product. They want to get up from the table satisfied. One item to note is that a survey of consumer attitudes towards beef conducted in 2012, revealed that consumers with very positive attitudes about beef was down from 2011. If we are in the beef industry, we must take note of this and work harder and smarter to make sure consumers are getting high quality eating experiences with beef on a consistent basis. Another study showed that consumers are looking for smaller portion sizes and that appears to be a motivator for increased beef usage as consumers feel they can stretch beef purchases further, so they are actually buying slightly more beef overall. With 62% of all U.S. households now comprised of 1-2 persons, the beef industry has to figure out how to market to those demographics. Major barriers to consumers purchasing more beef include consumer concerns about factory farming (20% say they limit beef purchases because of this), and lack of convenience items, ethnic variety, preparation education and overall eating quality dependability. These are concerns that the industry must address if we want to move forward and maintain or grow market share in relation to other proteins. We have to ask the question, “Do we want to repeat what happened to the U.S. lamb industry a few decades ago”? According to the Food and Agricultural Policy Institute (FAPRI) at the University of Missouri, per capita beef consumption is estimated at 55 lbs for 2013, but is expected to decline to 52.2 lbs by 2022. The beef industry can certainly influence this, but only if we understand and respond to consumer demands.
In relation to consumer beef demand, what is the attitude of beef producers? A recent survey of beef producers conducted by BEEF showed that producer’s optimism about the industry is waning from a peak in 2010. Producers now have both short term and long term concerns about beef demand and profitability. High input costs are the primary short term concern for more than 82% of all producers and 64% are concerned about government regulations and oversight. In addition, 53% of all producers are concerned about availability of feed and forage. Long term concerns mirror the short term concerns, with 81% stating they are concerned about the continuing increase in input costs, with 71% concerned about government intervention in the industry, and 55% concerned about consumer demand. In response, 87% of all producers state that they will make changes in their management strategy in order to reduce input costs. Causes for optimism among these producers include the supply-demand fundamentals and increasing international demand. More than 88% of producers feel that the basic supply-demand fundamentals are still viable, while 53% state that increasing export demand is a reason for optimism. Changes in management strategies listed by responding producers include altering forage management, reducing cattle numbers, and putting more pounds on their cattle before selling. However, the survey did reveal that 59% of all producers did not use any use any or many risk management tools last year. These same producers also listed industry consolidation and concentration as a major concern, as that movement potentially limits their market options. Bottom line is that beef producers must respond to the current challenges or we will continue to lose market share and real profitability. Producers have to take a hard look at their current genetics and forage & grazing management programs. Do the genetics match available resources and are they efficient at using those resources? Do forage & grazing management strategies allow for year-round cattle performance while improving soil organic matter, water infiltration and retention, and improved soil microbial populations? Are producers truly changing genetics and management practices in a way that will have real results in terms of lowering input costs and increasing overall net margin? These issues will be discussed at length at the upcoming Grass Fed Exchange Conference in Bismarck, ND on August 20-22, 2013.

A recent study conducted by the Leopold Center for Sustainable Agriculture at Iowa State University showed that producers who have made the switch to organic crops are building healthy soil and effectively sequestering carbon. According to the study, these results make organic agriculture a useful strategy for dealing with climate change. The study was recently published in the April 2013 edition of Crop Management and summarized results from the Long-Term Agroecological Research Experiment (LTAR). This project has been ongoing since 1998. The study revealed that with good management, organic yields can be equivalent ot conventional yields with higher returns and gradual building of better quality soil. Since organic food sales have tripled in the U.S. over the past decade, interest in organic farming has increased significantly. Organic agriculture promotes practices such as extended crop rotations that include cocktail cover crop mixtures and livestock impact. Organic practices also promote the use of various soil amendments, including soil microbials. The study revealed that soils in the organic plots had significantly higher quality compared to the conventional two-year corn-soybean rotation plots. Moreover, the organic plots had up to 40% greater biologically-active soil organic matter, lower acidity, and higher amounts of available carbon, nitrogen, potassium, phosphorus, and calcium. The study also showed that the healthier soils had better water infiltration and water holding capacity, thus increasing a farm’s ability to withstand extreme weather events such as drought and floods. The organic plots showed an increase in carbon storage (carbon sequestration) and contributed to better water quality. Moreover, weed control was effective even without the use of chemical herbicides through the use of allelopathic chemicals from rye and alfalfa plantings, timely tillage, longer crop rotations, and cover crop mixtures. The organic plots in the study produced an average of $200 more per acre compared to the conventional plots, primarily due to reduced input costs and increased price premiums.

The article can be found in the peer-reviewed journal Crop Management and is titled, “The Long-Term Agroecological Research (LTAR) Experiment supports organic yields, soil quality and economic performance in Iowa.” Details about the project are available on the Leopold Center website, www.leopold.iastate.edu/long-term-agroecological-research. Information about related research can be found on the ISU Organic Agriculture website, http://extension.agron.iastate.edu/organicag/.
The USDA released their final rule on Country of Origin Labeling (COOL) on Thursday of this past week. The ruling reflected decisions for muscle meat cuts that supposedly address the latest World Trade Organization (WTO) ruling. The final rule requires that origin designations on muscle cuts include where an animal was born, raised, and slaughtered and removes the allowance for commingling of muscle cuts. The final rule was published in the May 24, 2013 Federal Register. Beef industry groups heavily criticized the move citing an “outpouring of concern from affected companies”. The American Meat Institute (AMI) stated that the ruling, “shows a reckless disregard for trade relations and for companies whose very survival is at risk because they rely upon imported livestock”. The NCBA called the rule “burdensome”. According to the AMI, costs to meatpackers and retailers could be as much as $192 million. The Canadian and Mexican governments are concerned that the new ruling will hurt their beef industries and amounts to discrimination. In order to allow the industry to comply with the new ruling, the USDA will a six-month outreach and education program and companies will be allowed to use old labels until they are out of stock.
The rule requires COOL labels to include specific information regarding the three production steps.
• The U.S. label will state: “Born, Raised, and Slaughtered in the United States.”
• For meat derived from animals born outside the United States, one type of label may state, for example: “Born in Mexico, Raised and Slaughtered in the United States.”
• For meat derived from animals imported for immediate slaughter, another type of label may state: “Born and Raised in Canada, Slaughtered in the United States.”
• Labels for imported meat are unchanged by the rule. Those labels will continue to read; “Product of [Country X].”