Kub’s Den – Hay Bales: High Priced Time Capsules

Originally published on 6/28/23 by DTN at Hay Bales: High-Priced Time Capsules (dtnpf.com)

If I were a poet, I would write a poem about hay. It would convey how profoundly memories can be affected by scents, and the way dried prairie grass can be a magical form of time travel. Even in the middle of a February blizzard, when the cattle’s water tank is frozen and your face is whipped raw by the wind and everything seems miserable, the sunshine and honey aroma of a late-June morning can still hit you from inside a dry hay bale, cracked open and delivered straight to your nostrils and your brain. Time and memory are preserved like a bouquet of dried yellow blossoms inside the previous summer’s hay.

In some senses, all dried or preserved food has this quality — pickles, jerky, beans. They’re all little time capsules from the moment when the food was fresh, to the moment in the future when they are consumed, however far in the future that may be. But there is something about the palpable contrast of the outdoor environments in which we create and use hay — baling hay on a hot summer day versus feeding hay to livestock in a rotten winter storm — that make it that much more powerful.

Not only powerful, but also expensive these days. On a recent trip to Colorado, I saw small square alfalfa bales priced at $10 per bale in the field (and presumably much higher than that delivered or purchased at retail). Assuming 65 pounds per bale, that puts the alfalfa over $300 per ton. In today’s world, where the price of nearly everything — but especially labor — has rocketed higher with inflation, this shouldn’t be too surprising.

It’s also born out in official data from USDA’s Agricultural Marketing Service across a range of states — Nebraska and Kansas have alfalfa trades and asking prices ranging from $230 to $300 per ton. Missouri’s hay harvest is seen at about 70% complete and, with large pockets of extreme drought across the state, mixed grass rounds of good quality are running $150-$200 per ton, or 60% higher than last June’s range of $80-$140 per ton.

All across the nation, hay supply seems to be lighter than hay demand after drought has limited grass yield and condition. There’s a widespread area where long-term drought is ongoing, specifically a cloud stretching north and south and east from Omaha. But there are also dominant hay-producing areas farther west that may have received enough rain recently to relieve drought, but which were quite dry earlier in the grass-growing season (i.e., Texas and Oklahoma or Montana and the rest of the Mountain West).

The most recent weekly Crop Progress report shows only 44% of the nation’s pasture and range in good or excellent condition, and 24% in poor or very poor condition. Now, that doesn’t seem so bad compared to last year’s 43% poor or very poor at this time in the season. However, when you consider that a lack of happy grass affects not only the availability of hay that’s been cut and baled, but also the underlying yearlong demand for hay when grazing supplies are short, we can see why hay prices have been climbing and why both buyers and sellers are fierce negotiators this summer. In Texas, 43% of pasture and range is still poor or very poor. In Illinois, it’s 46%. And in Michigan, a full 68% of pasture and range is classified in those grim categories.

A chart of hay prices over a photo of large round hay bales

A long-term series of hay prices isn’t well-tested every week and may seem volatile due to trades of varying quality and terms. (Chart by Elaine Kub)

To be sure, the overall condition ratings have been improving compared to last year and especially after recent rains. But hay prices can be sticky once traders get a number in their head, like $200 per ton for prairie hay in large rounds. There’s no perfect long-term series of hay prices to show exactly how the market shifts from week to week, because it’s not a perfectly standardized commodity with the same interchangeable substance being tested every week. In any given location, there may be varying quality from one trade to the next, or varying delivery terms. However, plain, good-quality prairie/meadow grass baled into large rounds in Nebraska are about as standard and well-tested as the hay market gets, and the psychological benchmark for these bales seems to have risen from $100 per ton in 2021, to $150 per ton at the start of 2022, to $200 per ton once the dry conditions and willingness of the market became clear.

There is no price to put on memory, especially happy memories, and no price to put on perfect June days. But in a world of scarce supply and ever-inflating markets, there is definitely a price to put on hay.

**

Comments above are for educational purposes only and are not meant as specific trade recommendations. The buying and selling of grain or grain futures or options involve substantial risk and are not suitable for everyone.

Elaine Kub, CFA is the author of “Mastering the Grain Markets: How Profits Are Really Made” and can be reached at masteringthegrainmarkets@gmail.com or on Twitter @elainekub

Kub’s Den – Cows More Profitable Than Corn Under Which Circumstances?

Originally published on 6/14/23 by DTN at Cows More Profitable Than Corn: Under Which Circumstances? (dtnpf.com)

Projections for annual cow-calf returns to reach in the hundreds of dollars per head in 2023 and 2024 are enough to make a person sit up and start shopping around for heifers. But is it enough to make someone dig out their old seed drill and replant some quarters to grass? Recall how producers tore up sod and converted grassland to cropland during the ethanol boom of the late 2000s (https://www.pnas.org/…) — is it time for the reverse to occur?

Steers coming through sale barns in Nebraska and South Dakota this month at about 600 pounds are reliably seeing prices above $260 per hundredweight, and the strong futures market through the end of this year suggests that by the time this spring’s calf crop hits the sale barns later this year, they too can expect favorable prices.

For argument’s sake, let’s say each calf’s value will be $1,560 (600 pounds times $2.60 per pound), but raising them requires $961 in annual cost per cow-calf pair, depending on various assumptions about ownership, interest costs, mineral programs, local grass leasing costs, etc.

That results in a very generous $599 annual profit per pair. Broken out per acre of production, the way corn or soybean budgets present their economic situations, this is equivalent to $101.83 in profit per acre, assuming we’re looking at a region where it takes about 5.88 acres to stock each beef cow-calf pair for six months (0.17 pairs per acre, or about 27 pairs per standard 160-acre quarter-section pasture).

The density at which you can stock cattle on grassland varies greatly across the United States, from as few as 2 acres per beef cow in the Northeast and Lake States to sometimes as many as 50 acres per beef cow in the western Mountain states. Land values vary accordingly, so the profitability estimations made here shouldn’t be considered representative of every cattle operation everywhere.

However, it’s this “transitional” Cattle Country region that’s particularly interesting (using 5.88 acres per pair), because this is characteristic of the places with a climate and soils that can justifiably go either way — to crop production or pasture grazing.

For instance, think of places like Walworth County South Dakota on the east side of the Missouri River, for instance, or Sheridan County Nebraska with both farming and sandhills topography, or the rolling hills of Johnson County Missouri. These are all places where, depending on a given field’s attributes, the land could be deployed either to stocking beef cattle at roughly this rate, or potentially growing 150 bushels per acre (bpa) of corn or 39 bpa of soybeans.

There is a broad swath of Cattle Country that has faced this choice over time — to enlist the land into producing either crops or cattle. Should these fields grow corn on somewhat marginal ground, requiring investment in expensive machinery and inputs? Or should they grow beef animals on grass, requiring investment in barbed wire and labor?

It’s finally this year — when the cattle supply has been squeezed so low by drought — that the math really starts to get interesting, because most crop prices also remain relatively favorable. Let’s see how they stack up in this example region:

CORN

155.5 bpa at $4.83 new crop cash bid = $751.07 revenue this fall

PROFIT: $57.94 per acre

**

SOYBEANS

38.6 bpa at $11.48 new crop cash bid = $443.13 revenue this fall

Minus $413.01 cost of production per acre

PROFIT: $30.12 per acre

**

SPRING WHEAT

63.4 bpa at $7.40 new crop cash bid = $469.16 revenue this summer

Minus $615.30 cost of production per acre

LOSS: -$146.14 per acre

**

COW-CALF PAIRS

0.17 pairs per acre at $1560 per calf = $265.20 revenue this fall

Minus $163.37 cost of production per acre

PROFIT: $101.83 per acre

**

Charts of profitability overlaid on a photo of a red heifer in a farm pasture

Your mileage may vary, and all these assumptions require a lot of wiggle room for real-world productivity. They also don’t necessarily represent reality for farmers in the I-states, where cattle operations may exist specifically to be an outlet for corn, or in the South, where prices may not be as high or drought may drive up forage values, or in the Mountain West, for that matter, where the alternative to pursue row crop production doesn’t really make any sense.

Nevertheless, just about any way you slice it, cow-calf operators are, for once, in the nice position of actually being able to pencil out $100 or $200 or more in profit for each mama cow they care for. Not all grain producers can say the same for each acre they’ve planted in 2023.

**

Comments above are for educational purposes only and are not meant as specific trade recommendations. The buying and selling of grain or grain futures or options involve substantial risk and are not suitable for everyone.

Elaine Kub, CFA is the author of “Mastering the Grain Markets: How Profits Are Really Made” and can be reached at masteringthegrainmarkets@gmail.com or on Twitter @elainekub

Hog Market Needed Clearer, Faster Prop 12 Signals

Lean hog futures prices have hit another patch of volatility — mostly downward volatility, like last Thursday’s (Aug. 19) $2 drop — and although it’s impossible to point the finger at any singular, certain bearish influence, it does make you wonder, as 2022 inches closer, if the markets themselves are finally starting to reflect the uncertainty and industry-wide angst that results from California’s Prop 12 measure.

So far, most of the worry for the pork market has been centered on California itself, which voted in 2018 to pass the Farm Animal Confinement Proposition (Prop 12), making it illegal, starting in 2022, to sell pork inside the state unless it can be documented that the pork comes from an animal that was farrowed by a breeding sow that had at least 24 square feet of pen space (and other requirements). Not much of the pork currently available in the United States meets those requirements, so the state of California is expected to experience a dramatic shortage in some of its favorite meats, driving the prices of bacon in the grocery stores and carnitas tacos on the streets of Los Angeles sky high. (https://apnews.com/…)

There are still legal efforts that may prevent California’s Prop 12 from disrupting the nationwide pork supply chain (see https://www.dtnpf.com/…), but if it can’t be stopped, those of us in the rest of the country need to get ready for a sudden collapse in demand for pork from conventionally-raised hogs. Data from the National Pork Board’s Pork Checkoff shows California represented 8% to 9% of fresh pork retail sales and total pork retail sales in 2018, 2019 and 2020, both by dollars spent and volume purchased. Other estimates have suggested California accounts for as much as 15% of the nation’s pork consumption. However we slice the ham, if the traditional U.S. pork market suddenly loses 9% to 15% of its customer base because those customers won’t be able to legally purchase pork from conventionally raised animals, then prices will fall. There will effectively be two separate pork supply chains — a high-priced, scarce supply of Prop 12-compliant pork destined to be sold inside California and a glut of oversupplied conventional pork flooding cold storage everywhere else.

Lean hog prices typically trail the pork cutout by about $5 per hundredweight. So, if wholesale pork averages about $75 per cwt, then nearby lean hog futures would be expected to trade around $70 per cwt. This week, October pork cutout futures are around $101 per cwt and October lean hog futures are around $88 per cwt. That’s a $13 spread, but even that is well within the range of what is sometimes seen in this market, especially in comparison to mid-2020 when packers were struggling to stay open during the COVID-19 pandemic. The average spread through 2020 was $16 per cwt and the worst was $56 in mid-May when pork ($114 per cwt) was hotly demanded at grocery stores but overweight hogs ($58) had to be turned away from some packing plants and destroyed because there simply wasn’t enough capacity to process all the animals that reached their market weight on a biological schedule that had been set in motion months before.

Not to get too apocalyptic about this California Prop 12 scenario, but one wonders just how much damage could occur to the lean hog market in January 2022 when the law is scheduled to go into effect. As long as the packing plants stay open and continue to process their usual volume of hogs (approximately 470,000 head per day lately), things should be fine. But without California’s 9% to 15% of U.S. demand, what happens to all that pork? Some of it can be exported, sure; some of it can be stashed away in cold storage. But at some point, any market that is oversupplied with a commodity — in this case, market-weight lean hogs — will eventually push back with lower prices. Looking at history when the hog market was oversupplied, like 2016-18 when swine herd expansion outpaced slaughter capacity growth, we might expect prices to drop 10% to 20% compared with the pork cutout.

The problem with all of this is the uncertainty. If the industry had known all the details of Prop 12 compliance several years in advance, or even now, if we knew for sure what was going to happen in January 2022, then we would expect the market to work in an orderly way to motivate an appropriate-sized shift from conventional hog production to Prop 12-compliant hog production, and a subsequent reduction in conventional hog production, forestalling any concerns about a sudden glut of oversupply in early 2022. Unfortunately, those market signals haven’t happened, or haven’t happened clearly enough or fast enough. In fact, Iowa State University’s latest estimated returns for a conventional farrow-to-finish operation remain above $50 per head — highly motivating to expand production, not reduce it. Their estimated returns for hogs sold in June 2021 were $63 per head — the most profitable this industry has been since August 2014.

Pork that will be on sale in U.S. grocery stores in January 2022 will come from hogs that are slaughtered and processed in December 2021. It takes approximately 17 weeks to finish a hog on calibrated feed rations to reach its target market weight, so those hogs are just now being moved to finishing barns. Prior to that, the animals spent approximately six weeks in a nursery, and before that, approximately three weeks in a farrowing barn from birth to weaning. Therefore, the hogs in question were already born in mid-June. Their sows — the animals whose production practices determine whether the ultimate product will be Prop 12 compliant or not — were already bred back in February. Whatever market signals hog farmers needed to receive to adjust their production quantities in a non-chaotic way, they would have been needed months ago. It’s too late now to avert the coming crush of conventionally raised pork that will have to be absorbed by the non-California rest of the world. Pork cutout futures have some open interest for the October ($100 per cwt) and December 2021 ($95 per cwt) contracts, but nothing past that yet to indicate the market’s price expectations.

Pork packing companies have been communicating with the hog producers who supply their animals to determine what proportion of their market will be Prop-12 compliant by early 2022 and to offer premium bids for such animals, which will be tracked and processed through a separate supply chain destined for the California market. Individual producers have been making decisions about whether those premium prices will be enough to offset the expenses of retrofitting farrowing barns with the necessary group housing arrangements. Packer-owned hog production facilities themselves are perhaps best placed to take advantage of the premiums, having more certainty about what will be required to reach the California market and what the financial rewards might be. In March, Rabobank analysts estimated less than 4% of U.S. sow housing was able to meet the Prop-12 standards. By now, it’s likely that portion is somewhat higher after months of frantic installation of new sow feeding and handling equipment across the country. But will it be enough to meet the sudden shift into a two-path U.S. pork supply chain? So far, the futures markets have been only tentative at signaling what might happen.

Elaine Kub is the author of “Mastering the Grain Markets: How Profits Are Really Made” and can be reached at masteringthegrainmarkets@gmail.com or on Twitter @elainekub.

(c) Copyright 2021 DTN, LLC. All rights reserved.

Note: This column drew on original research by Elaine Kub originally published in July 2021 (see pdf: “Elaine Kub analysis Prop 12 _07062021):

Download PDF Here

Beef Market: When High Prices Aren’t Enough

In the commodity markets, we often say “the cure for high prices is high prices.” Either the tantalizing profits will motivate a huge surge in production of that high-priced commodity (and then the fresh oversupply will bring prices back down) or the forbiddingly expensive price tag will discourage end users from buying so much of the stuff (and then the drop in demand will bring prices back down). Either way, hot commodity prices never stay flat for very long.

The exception in 2021 seems to be beef, with wholesale prices still 36% higher than they were a year ago, and yet the country’s herd of beef cattle actually shrunk 2% between July 1, 2020, and July 1, 2021. In this market, there may be no easy “cure” for high prices, and the condition could persist for a few years due to two structural reasons.

The first very obvious reason why the cattle industry hasn’t been expanding its production of beef animals is drought. No matter how much the nation’s ranchers may want to increase their herd sizes and deliver more animals to market, it’s simply impossible when 65% of the West is suffering extreme or exceptional drought. In the state of Washington, only 4% of pasture and range is rated in good condition and exactly 0% is rated excellent. In the High Plains (North Dakota, South Dakota, Wyoming, Colorado, Nebraska and Kansas), only 28% of cattle country isn’t in some sort of abnormally dry or drought condition. The land simply cannot sustain its usual abundance of grazing animals this summer. Miserable ranchers are forced to make the anguishing decision to liquidate portions of their herds, and total U.S. beef cow slaughter has been running 12% above its usual pace, although it’s much heavier in specific drought-stricken regions.

So, that’s one disconnect between the market signal and the response — it wouldn’t matter what price the beef market was signaling, the industry right now simply is not able to respond with overall numbers when drought is this widespread.
There is another disconnect between the beef market’s prices and beef animal production — the market may be giving a signal (consumers buying hamburger for $5.00 per pound and wholesalers selling choice boxed beef for roughly $2.70 per pound), but that signal isn’t getting passed to the right people. Packers are pocketing those high beef prices, profiting hundreds of dollars for each fed steer or heifer they process, but the profit doesn’t make it farther down the supply chain.

Fed cattle prices are $20 per hundredweight better now than they were during the COVID-19-challenged meatpacking environment of a year ago, but they’re not what they could be, according to historical price relationships. During the 10 years leading up to 2020, live cattle futures prices tended to average about 60% of the price of choice boxed beef per hundredweight. In April and May of 2021, when choice boxed beef was $300 per cwt (or more) and fed cattle were only bringing $115 per cwt, this relationship dipped below 40%. At today’s boxed beef prices ($267 per cwt), we might expect to see live cattle prices at $160, but they are instead stuck below $125 per cwt (46%).

Things have changed in the meatpacking industry and no doubt there are legitimate reasons why the profit margins throughout the industry shouldn’t be expected to exactly match those of 10 years ago, but some of these changes could, nevertheless, be addressed. According to the White House’s Fact Sheet that accompanied the July 9 Executive Order on Promoting Competition in the American Economy, “Consolidation … limits farmers’ and ranchers’ options for selling their products. That means they get less when they sell their produce and meat — even as prices rise at the grocery store. For example, four large meat-packing companies dominate over 80% of the beef market, and over the last five years, farmers’ share of the price of beef has dropped by more than a quarter — from 51.5% to 37.3% — while the price of beef has risen.”

For traders, of course, the question is not about which price level would be fair or what prices should be, but rather what prices will be. Reductions in the beef animal breeding herd have already cast the die for production quantities through the next few years. Mama cows who are culled this summer won’t have a calf next spring, and expectations for the 2022 calf crop should be correspondingly lowered. This, in turn, means fewer market-weight steers and heifers should be expected in mid-2023, keeping supply tight.

The dairy herd has been expanding by 2% at the same time the beef herd has been contracting, but calves from the nation’s 9.5 million head of milk cows cannot fully fill the long-term void that will be left after this drought.
There may be implications for the feed markets too — specifically corn futures — but when it comes to demand for U.S. feed grains, a slightly lower number of domestic cattle on feed in 2022 and 2023 could be outweighed by the continued expansion of poultry feeding in this country, not to mention the chances of strong feed grains exports to other countries that are feeding their own expanding herds of animals.

Meanwhile, the highest heat in the beef market may have peaked back in early June, when choice boxed beef (wholesale) hit $340 per cwt (well short of the May 2020 record high of $475, but impressive nevertheless). It has since softened to $267 per cwt in late July. However, the benchmark wholesale prices for 90% lean ground beef remain as strong as they were in June but may now be plateauing beneath $280 per cwt. Perhaps there is only so much a grocery shopper is willing to pay for beef, no matter how delicious it is and no matter how much of that price ever gets passed back to the producers of the animals. It may not be possible for cattle producers to cure high prices with higher production this year, but as always in a commodity market, it could be consumers who moderate the prices with more hesitant demand.

Elaine Kub is the author of “Mastering the Grain Markets: How Profits Are Really Made” and can be reached on that Contact Page or on Twitter @elainekub.

(c) Copyright 2021 DTN, LLC. All rights reserved.