News Update

News Update
April 15, 2008

Correction: Cattle Buyers’ Summit Date

The Cattle Buyers’ Summit in Kearney, Neb., will take place Aug. 1 at the Ramada Inn. The Cattlemen’s Beef Board (CBB) submitted a correction to its original release, which posted an incorrect date of July 11. Additional events are scheduled for May 15 in Billings, Mont., and May 22 in Chattanooga, Tenn.

The program is geared toward anyone who trades feeder cattle, fed cattle and market cows and bulls. Each summit will include a roundtable breakout session to allow participants to better understand the Beef Quality Assurance (BQA) program and offers suggestions about how to make BQA better fit the needs of the industry’s cattle marketing segment.

For more information go to www.mtbqa.org or visit www.beefboard.org.

Homeland Security Report Analyzes Risks for FMD

Members of the House of Representatives Energy and Commerce Committee are debating the location of the country’s foot-and-mouth disease (FMD) research efforts.

The Plum Island Animal Disease Center, a secluded location 100 miles northeast of New York City, was established in 1954 and has since housed the government’s efforts to research and contain the highly contagious disease. Now, the Bush administration is likely to move FMD research from the aging facilities on the remote island to one of five locations on the U.S. mainland, according to The Associated Press (AP). Potential sites for the new National Bio- and Agro-Defense Facility include Manhattan, Kan.; Athens, Ga.; Butner, N.C.; San Antonio, Texas; and Flora, Miss. The new site will be selected later this year, and the lab would open by 2014, AP reports.

The House committee is debating the move, with many skeptical leaders demanding internal documents from the Department of Homeland Security, which gained oversight of the facility from the U.S. Department of Agriculture (USDA) in 2003.

A report submitted to the committee details an accidental release of FMD into cattle holding pens in 1978 and other in-laboratory incidents since 1954. Jay Cohen of the Department of Homeland Security pointed to precautionary measures taken since that time and noted the lab animals would not be corralled outside the new facility and would be incapable of coming into contact with local livestock.

Committee members are also looking at a 2002 simulated FMD outbreak, part of a government exercise called “Crimson Sky.” The simulation ended in chaos, according to AP, with protests, food shortages, fictional riots and tens of millions of dead farm animals — so many in fact, the government said it would require a ditch in Kansas 25 miles long to bury carcasses.

House leaders will continue to assess the risks and benefits of moving FMD research to the mainland and each site’s proximity to the nearest livestock operations.

According to AP, the new facility will add research on disease that can be transferred from animals to humans, something the Plum Island facility is incapable of due to security concerns.

Farmers Advised to Hedge Crops Cautiously

Extremely volatile commodity prices due to high energy costs has led to the suspension of forward price cash contracts — a marketing tool used among farmers to reduce price risk and increase profits each year, according to Texas AgriLife Extension Service economists.

The suspension of forward contracts is a result of grain elevator operators’ and merchants’ inability to cover margin spreads, said Mark Welch and John Robinson, economists in College Station.

Corn, wheat, cotton, soybeans and other commodities have eclipsed record prices this year as a result of increased biofuel demand, acreage adjustments, production shortfalls, tight carryover stocks and speculative investment, Welch said.

“Many farmers wanting to lock in prices at these historic levels are turning to forward price contracts,” he said.

Forward price contracts of a growing crop establish a “price and delivery provision,” Welch said, which transfers price risk from the producer to the writer of the contract.

“(This is) usually a grain elevator or cotton merchant,” Welch said. “The elevator or merchant may then transfer this price risk to speculators by hedging in the futures market.”

A contract hedge consists of selling an equivalent amount of cotton or grain in the futures market to cover inventory or forward contracted commodities that they hold, he said.

“If prices are lower at harvest, gains in the futures market offset the price difference between the higher contract price and the current cash price, protecting the elevator’s or merchant’s price margin,” Robinson said. “If prices go up at harvest, losses in the futures market are offset by the ability to sell the forward contracted grain or cotton at a higher price.”

Those participating in the futures market must have enough margin money deposited to cover potential losses. The margin is balanced daily and those profits accrued in excess of the margin requirement may be withdrawn.

“Any losses that draw the margin account below the minimum maintenance level must be offset by additional deposits to restore the account to its initial balance,” Welch said.

Those that fail to bring the account up to the initial required level results in liquidation of the position and the holder of the account must absorb all losses.

As a result of rapid escalation of commodity prices, elevator and merchants who wrote forward price contracts are facing “enormous proportions,” Welch said.

“Wheat that was hedged at planting last October for a then all-time record high price of $7 per bushel (bu.) has incurred margin calls of $6 per bushel or $30,000 per contract.”

Forward-contracted corn last fall has increased in price by more than $2 per bu., he said.

“The margin requirement to maintain each of those contracts is now around $10,000,” he said. “For a medium to mid-sized grain elevator to maintain their hedged positions, they have had to deposit millions of dollars in margin money. Add to this the interest cost of funds required to maintain margin requirements, and the financial burden of offering and maintaining forward contracts is considerable.”

Farmers are now left with the option of either hedging their crops by selling futures contracts, buying options or a combination of the two, Welch said.

“The impact of severe margin calls on the commercial sector should give growers renewed pause about the margin risks of hedging via selling straight futures,” he said. “Many producers are uncomfortable or unfamiliar or had unprofitable experiences with these marketing alternatives. It’s important that a prospective hedger learn all they can about these markets and understand the risks and rewards before initiating a hedging program.”

In order for producers to stay updated on changing market conditions, Welch and Robinson advised them to have ongoing communication with lenders and the grain or cotton merchants.

“Working together, it’s possible to forge an effective strategy to manage price risk even in these volatile markets,” Welch said.

Commodity organizations representing grain and cotton industries have complained to the Commodity Futures Trading Commission the markets are no longer working as intended. A public hearing is scheduled April 22 in Washington as the Commodity Futures Trading Commission will hear from representatives of the U.S. Department of Agriculture (USDA), the commodity exchanges, traders, merchants and producers.

“Some of the topics to be addressed are the lack of convergence between cash and futures markets, the impact of higher margin requirements, and the role of speculative investment in the commodity markets,” Welch said.

Both Welch and Robinson distribute weekly e-mail marketing newsletters. To subscribe, contact Welch at JMWelch@ag.tamu.edu and Robinson at jrcr@tamu.edu.

— Release provided by the Texas AgriLife Extension Service and the U.S. Department of Agriculture.

Ethanol, Biodiesel Commentary Online

Abdul Waheed Bhutto, assistant professor at Dawood College of Engineering and Technology in Karachi, Pakistan, offers his thoughts on crop-based fuels and its effects on food security. Visit http://onlinejournal.com/artman/publish/printer_3168.shtml to view the article.

Canada: Beef is Out, Wheat is In, and Swine are Doomed

Many cattle producers in Manitoba, Canada, are selling their cattle and switching to wheat production to cash in on soaring grain prices, CBC News reports.

According to CBC News, Canadian cattlemen have been struggling with soaring feed costs, low livestock prices and a high Canadian dollar.

Read the full article at www.cbc.ca/canada/manitoba/story/2008/04/14/beef-wheat.html?ref=rss.

Meanwhile, the Chicago Mercantile Exchange (CME) Daily Livestock Report noted a grim fate for much of Canada’s swine population.

According to the report, the Winnipeg Free Press reported April 11 that Canadian producers are planning to kill up to 25,000 healthy weanling pigs per week since producers can’t afford to feed them. U.S. customers who had contracted to buy the pigs for feeding in the U.S. are backing out of the contracts due to feed costs and the possibility that U.S. packers won’t buy pigs due to mandatory country-of-origin labeling (sometimes referred to as COL or COOL).