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  • Prospects for Retained Ownership in a High Input Cost Environment

    Prospects for Retained Ownership in a High Input Cost Environment

    Retaining ownership of calves beyond weaning is a value-added process that provides cow-calf enterprises access to a greater share of the retail dollar. There are costs and benefits to selling at weaning as well as costs and benefits when retaining ownership, each of which must be evaluated on an annual basis. Estimating expected returns is challenging in a normal year, and has been complicated in 2022 by drought, widespread culling, high feed costs, and increasing calf prices. Below is an analysis of the retained ownership decision using today’s market expectations.   

    We can roughly estimate the expected revenue generated from the sale of a weaned calf today.  The average price of a 7-8 weight steer in Joplin, MO the last week of April ran $1.63 per pound, meaning a 750-pound steer calf brought $1,224.38.  So the question of retained ownership is how much additional revenue (value-added) over $1,224 can I expect from selling a fed calf, and what is the additional cost associated with the added value.

    If we assume a current calf weight of 750 pounds for a 2021 spring-born calf, and an average daily gain (ADG) of 3.5 pounds, we can assume a target harvest date of mid-October at approximately 1,350 pounds. The board price for an October delivery fed steer last week averaged approximately $1.43 per pound. If we locked that price in today, a 1,350-pound steer would generate $1,930.50 in revenue.  Compared to selling today at $1,224, retaining ownership would generate an additional $706/head.  Now let’s look at the cost of achieving that additional $706. 

    Cost of Gain (COG) is a function of days on feed, cost of feed, and pounds of feed per pound of gain. It is commonly estimated using corn price, so it is significantly higher this year than in recent years. The increased cost of corn has cost of gain in the neighborhood of $1.20 per pound to $1.50 per pound depending on the feeding location, including an approximate 33% markup for yardage fees, overhead, and miscellaneous expenses. Subtracting COG from the expected value-added ($706.12) leaves the bottom-line Expected Net Revenue change from making the retained ownership decision.  The table below shows the expected net revenue impact of retained ownership for various COG estimates ranging from $1.20 to $1.50 per pound of gain. 

    Given the current COG and relative calf values retaining ownership through the feed yard seems to be a relatively less profitable choice against selling a weaned calf.  The market appears to value an additional 600 pounds of gain at a little over $700/hd while the cost of that gain could range from $720 to $900.

    Benavidez, Justin. “Prospects for Retained Ownership in a High Input Cost Environment“. Southern Ag Today 2(20.3). May 11, 2022. Permalink

  • 2022 Range and Pasture Conditions

    2022 Range and Pasture Conditions

    Last week’s Crop Progress Report from USDA provided the first data point on 2022 pasture and range conditions. Like other crops, the Crop Progress Report shows the percent of pasture in very poor, poor, fair, good, and excellent condition. According to the report, 29% of pasture is in very poor condition. Combined, 56% of pasture is in very poor or poor condition. Last year, 47% of pasture was in very poor or poor condition. Clearly, on a national basis, pasture conditions are worse than a year ago.

    There is a high degree of variability in range and pasture conditions across states. In the Southeast, for example, conditions are comparable to the previous 5-year average, with 10% of pasture in poor or very poor condition (AL 4%; AR 13%; FL 22%; GA 13%; KY 6%; LA 8%; MS 8%; TN 7%). In the Southern Plains, conditions are noticeably worse, with 57% of pasture rated as poor or very poor (KS 41%; OK 39%; TX 74%), a 79% increase compared to last year. Compared to last year, conditions in the West have improved, with 39% of pasture rated as poor or very poor, down 24% compared to last year.

    Forage availability and forage production costs will be two of the most significant factors determining the trajectory of U.S. cattle inventories through 2023. So far, in 2022, we have already started to see the effects of deteriorating pasture conditions. Feedlot inventories continue to set records, partially a result of drought pressure. Beef cow slaughter is averaging 17% higher year over year. The next few months will be crucial to monitor.

    Mitchell, James. “2022 Range and Pasture Conditions“. Southern Ag Today 2(20.2). May 10, 2022. Permalink

  • Milestone Indicators of U.S. Cotton Supply and Demand

    Milestone Indicators of U.S. Cotton Supply and Demand

    It is generally the case that the U.S. cotton market is influenced by aggregate production uncertainty.  One reason for this is that a majority of the U.S. acreage is planted in Texas (Figure 1), with much of that under dryland conditions contributing to historical abandonment rates between 4% and 62% statewide.  In drought years like the current one, this production risk is only heightened.  The management of this risk is potentially helped by publicly available market information data.

    The first upcoming major information source is the May 12th USDA “World Agricultural Supply and Demand Estimates” (WASDE) report published by the USDA’s World Agricultural Outlook Board (https://www.usda.gov/oce/commodity/wasde ).  The May report is notable for publishing USDA’s first official, comprehensive projections of U.S. and world crop supply and demand variables.  Historically, the May WASDE report tends to be closely watched and is frequently associated with cotton market volatility.

    Like other crops, U.S. cotton is monitored by weekly crop condition reports and crop progress reports (on Mondays) from USDA’s National Agricultural Statistics Service (NASS, https://www.nass.usda.gov/).  Because cotton is a perennial bush in its native habitat, its growth and response to stress are different from annual grain crops.  Hence there is less correlation between weekly crop conditions and progress for cotton yield outcomes compared to grains.  Nevertheless, the news media and some market analysts pay attention to these weekly observations between the major report milestones.

    June 30th “Planted Acreage” is another closely watched major report that is conducted by USDA/NASS.  This report is sometimes associated with market volatility when it contradicts expectations based on the March 31st “Prospective Plantings report from USDA.  USDA’s Farm Services Agency (FSA) provides supplemental acreage information with periodic certified acres data through the summer (https://www.fsa.usda.gov/news-room/efoia/electronic-reading-room/frequently-requested-information/crop-acreage-data/index ). 

    For U.S. cotton, the September WASDE report represents the first extensive proven yield sampling for areas outside of South Texas, in addition to grower interviews.  This sample-based production estimate is refined in subsequent WASDE reports through December, as well as with data on cotton ginnings.  The uncertainty about cotton yield may be further exacerbated in 2022 from restricted input applications.  For example, anecdotal evidence of reduced quantities of nitrogen fertilizer applications (due to the higher cost) could contribute to lower-than-average yields.   The resulting yield effect from fewer inputs might not be realized until the ginnings data in November.  Hence, this season could involve extended price volatility beyond the normal resolution of weather market uncertainty.

    Robinson, John. “Milestone Indicators of U.S. Cotton Supply and Demand“. Southern Ag Today 2(20.1). May 9, 2022. Permalink

  • In Historic Town Centers Beauty is More than Skin Deep

    In Historic Town Centers Beauty is More than Skin Deep

    Amid widespread decline and disinvestment, numerous small towns and rural communities throughout the US have taken action to restore their downtown as the focal point for economic, social, and civic activity in the region.

    Downtown revitalization approaches—such as the widely adopted “Main Street Program”—typically operate from the principle of “if you build it, they will come,” requiring community leaders, business owners, and volunteers to invest their resources and efforts in a vision that is hoped for, but not guaranteed. This involves capital investment toward building rehabilitation and corridor beautification, as well as less tangible investments of time and coordination toward promoting downtown, organizing events, and managing limited resources. 

    But does it work? The continuing popularity of the Main Street Program—with 1,500+ participants and counting—would suggest that downtown revitalization programs are, to some degree, effective. For many policymakers, however, anecdotal data is not sufficient to justify the investment of time and resources required to engage in revitalizing downtown.

    In a pair of recent articles, I examined the quantitative effect of the Main Street Program. The first study focused on job growth, finding that small towns in Iowa gained new retail jobs and establishments in the years after adopting the program. In the other study, I focused instead on residential property values, finding that homebuyers placed a higher premium on homes located closer to downtown districts with an active Main Street Program. Together, the two studies provide evidence for the idea that revitalization efforts go a lot further than simply beautifying a town’s historic business district. Vibrant downtowns are building momentum as places where people increasingly desire to live and work, creating the conditions for strong rural economies to flourish.

    Van Leuven, Andrew J. . “In Historic Town Centers Beauty is More Than Skin Deep“. Southern Ag Today 2(19.5). May 6, 2022. Permalink

  • Removing Fertilizer Tariffs is Not a (Phosphate) Rock and a Hard Place

    Removing Fertilizer Tariffs is Not a (Phosphate) Rock and a Hard Place

    Last month, 90 members of Congress sent a letter to the chair of the U.S. International Trade Commission (USITC) requesting suspension of the countervailing duties on phosphates from Morocco to help ease fertilizer prices for American farmers. These duties were imposed in March 2021 when the USITC ruled that fertilizer imports from Morocco and Russia were receiving illegal subsidies that were hurting the U.S. fertilizer industry. Farmers know the rest of the story—since the duties took effect, prices of phosphates have increased over 300% to record levels (See Figure 1). While inflation, China’s recent export ban, and other supply chain issues may be putting additional strain on the fertilizer industry, the USITC tariffs are certainly not helping. 

    The USITC is not stuck between a (phosphate) rock and a hard place on this issue. The U.S. is the third largest phosphate producer in the world, behind China and Morocco. The Mosaic Company—the largest U.S. producer—was the original petitioner requesting the USITC to investigate Moroccan and Russian imports. After a recent acquisition of CF Industries’ phosphate mines in Florida, Mosaic’s market share was recently estimated at around 74% of the U.S. market. And, instead of being crowded out of the market by foreign competitors, Mosaic exports around half of its annual production, mostly to Canada and Mexico. In fact, Mosaic’s own statements suggest that it does not need tariff protection. Larry Stranhoener, former CFO of Mosaic, said in an interview in 2013, “[fertilizer] is a product that is freely traded and frequently traded across borders, so regional market share data should not matter.”

    We agree with Mr. Stranhoener. The U.S. fertilizer industry will be fine if the USITC removes these duties. Doing so would alleviate at least some of the strain on U.S. fertilizer prices. On top of ongoing energy and food inflation pressure, global supply chain failures, and the ongoing agri-food consequences of the Russian invasion of Ukraine, U.S. farmers and consumers should not have to bear the costs of geopolitical posturing in the fertilizer market. 

    Figure 1. Phosphate rock and diammonium phosphate (DAP) and triple superphosphate (TSP) prices ($/MT): January 2017 – December 2021  

    Note: Phosphate rock is the f.o.b. price for North Africa; DAP is the f.o.b. US Gulf price, and TSP is the import US Gulf price. MO1 and MO7 on the horizontal axes correspond to the first and seventh calendar month (i.e., January and July).
    Source: World Bank Commodity Price Data (The Pink Sheet). Data visualization provided by Professor Andrew Muhammad, PhD, University of Tennessee.                              

    Beeler, Ashley, and K. Aleks Schaefer. “Removing Fertilizer Tariffs is Not A (Phosphate) Rock and a Hard Place Issue.” Southern Ag Today 2(19.4). May 5, 2022. Permalink