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April 2011 Archive for Out to Pasture

RSS By: Steve Cornett, Beef Today

Read the latest blog from Steve Cornett.

Family Farm Heaven

Apr 17, 2011

Hey you locavores and family farmers, I’m in heaven this week. Peru. We’re here to see the country, but it’s hard not to notice the way these folks live and farm.

This is the home of corn, you know. And potatoes. Agriculture has more history here than anywhere in the New World. The Incas were good farmers, blessed with an abundance of water and fertile soils incredibly friendly weather.

Alas, they have to import food to keep themselves fed. But other than that, it’s locavore, family farmer heaven.

There is some commercial production (especially asparagus) in Peru, but agriculture still employs 30% of the population, with many of those folks working in jobs and living lives that have hardly changed since the Spanish conquest. We spent last week in the Highlands area around Cuzco and Machu Picchu. None of those nasty “factory farms” here. These folks have a garden-sized farm each and grow their own food and a little extra to sell. They keep their cattle and pigs tied in the yards among the chickens and their kids out herding the sheep. It’s all communal stuff, farmed the Inca way. “You help me this week, I’ll help you next week.”

And they’ve got political clout, these folks. They were largely responsible for pushing through all the agrarian and land reform efforts of the 20th Century, all trying to make agriculture “more fair” as opposed to more efficient. While much of South American agriculture promises to be a serious contender in the beef trade, places like Peru and Venezuela are sliding backwards under leadership with less interest in larger pies than equal pieces for all.

To be fair, the pendulum has swung here because it had swung too far the other way. Large landowners, plantation masters, controlled all the land. The rich were very rich and the poor were very poor. But the country was a net exporter of agricultural produce. It has been a net importer for decades, despite an abundance of natural resources. In their efforts to make things fairer, government after government—and they swing from far right to far left—has created an environment in which capital fears to tread.

And, by the way, the rich are still very rich and the poor are still very poor.

We’ve seen one tractor in a week of travel around the Cuzco highlands area. They use bulls of the mongrel breed to pull their tillage equipment. They cut their corn by hand and shock it to dry, then hand shuck it and cart it about on their backs or in wheel barrows.

It’s very good for their “rural communities,” this sort of agriculture.  They don’t have to buy equipment made by high priced union employees in some city like Moline, Ill. They and their neighbors carve everything they need! They don’t ship their cattle and eggs and milk off to some corporate processor. No sir, they haul it to the local Mercado, where people kill the hogs and pigs in the backyard and sell “direct to the consumer” without even the need for buying a corporate-produced refrigerator.

As one of our guides said, “it’s funny that here, the organic produce is the cheapest.” And, not coincidentally, the stuff he suggests staying away from.

And no wonder: He says the typical farmer’s income is about 30 soles a month. Something like $10, which, when you figure the man-hours available and the number of man-hours it takes to, basically, garden a given amount of food, is probably not far off. It’s fortunate that the government provides adequate welfare, because these folks get no help from Willie Nelson.

I don’t think the guys demanding that USDA and GIPSA to use their clout to keep U.S. pie shares equal want to take us that far back, to one pig and one cow tied in the front yard. They’ve got in mind something between that and what we’ve got now. Most of them, I think, would like for the government to allow us to own at least 100 cows each. But somewhere after that, it’s too much.
Their political allies in the locavore movement may want a little less, yet. They want to be able to buy everything they eat from a small, local producer, preferably with a straw between his teeth; every town surrounded by apple orchards and hand-milked dairies.

It works for these Peruvians pretty well, if you don’t mind spending your life in drudgery. There is a long history of that in this culture. The thousands of miles of hand-laid rock terraces attest to people’s willingness to toil long and hard in uninteresting occupations.

But they also have year-round agriculture with no freeze and “micro climates” up and down the mountains allowing for corn, potatoes, wheat and tropical fruit all within a few miles. And, because the land is so beautiful, the people so friendly and history so interesting, they can count on a bunch of well-heeled tourists with interesting jobs in other places to keep their economy afloat.

This is not my first time here, and I hope not the last. And one of the things I like is that agrarian, small town feel about it. The chicken eggs look like eggs looked when my mom kept chickens. The bread is fresh. They even grow their own coffee and tea and roast and grind it at home.

Like I said, it’s locavore heaven, just like the New York Times writers want. But I can’t help be struck by the current mood of certain segments of the U.S. electorate and agriculture and the similarity to some of the sentiments behind all those “agrarian reforms” that have created the Peru’s of the world.

And we could do it in the U.S. All we need is more people to volunteer to be the peons.

Where Should Feeder Cattle Futures Settlement Prices Be?

Apr 04, 2011

Not being sure whether our friend Bill has ever hedged any cattle, and given his recent reaction to an earlier post let’s return to basis talk for his edification.

You might recall the argument is whether the weights used for calculating feeder cattle futures settlement prices should be raised. Bill, you might also recall, had recently charged that his arch-nemesis, NCBA, had suggested that action simply to help cattle feeders and packers defraud cow calf producers out of millions or even “billions” of dollars.

My response—indeed the reason behind the suggested change—is that the most important thing for everybody concerned, both long and short sides of a futures market—is accuracy. My argument is that if I’m hedging cattle that are, say, fleshy, black baldy steers weighing 761.2 lbs per head  to be delivered at 6:35 a.m. Oct. 15,  9 miles from Poteau, OK, my ideal settlement situation is for a whole contract based on cattle of that exact description.

It is unlikely, of course, that CME would ever offer such a contract. There would be too few sellers and too few buyers to make a market.

So, if I want that exact deal, then I find a buyer willing to name a price. Such a buyer is most likely to use the board one way or another to protect his investment. Even if I personally don’t understand basis or trust the futures market—the difference in the settlement prices for October feeders and the value of my specific cattle—that buyer does. He will base his bid on his best guess about how much more or less value my cattle enjoy over the average.

The key word is “guess.” Basis varies day to day, month to month, year to year. The less certainty that buyer has in basis, the more risk he is going to price into what he pays me. In other words, the less accurate the futures settlement price, the less my cattle are worth to him. We both want an accurate settlement. The actual futures price doesn’t matter. The guy will pay $1.25 for my steers, whether futures are $1.20 and he calculates a 5 cent positive basis or futures are at $1.30 if he expects a negative 5 cent basis.

But the more doubt he has about that basis, the more “insurance” he’s going to buy by pricing my cattle lower. We could have an honest argument about the proper size for feeder cattle settlement. But we can’t have an honest—key word there—argument about that basis relationship.

In the interest of arriving at some agreement on the proper definition of a “feeder,” let me offer some web search results. Here is an old, but still relevant, explanation for how basis impacts contract prices: http://pods.dasnr.okstate.edu/docushare/dsweb/Get/Document-2000/AGEC-579web.pdf

Here is a graph showing how current placement weights are running far above 10-year averages.
  

steveblogchart1


And here is a graph showing the spread between calf and feeder prices. It’s hard to read, but UGA’s Curt Lacy offers some explanation:

“Back in 2008 when feed prices reached their historical highs, the spread between 500-600 pound steers and 700-800 pound steers narrowed to $3.52 per hundredweight a much smaller difference than the normal $13.50.  Currently the spread between calves and feeder cattle is actually at a 5-year high at roughly $24 per hundredweight. “
steveblogchart2

What my buyer doesn’t need when he tries to decide how much insurance he needs on my 750-lb. baldies is for the calf/feeder spread to provide extra risk.

Bill is right about one thing. There are still some <700 lb. calves placed on feed, and that is especially true this year when drought in much of the wheat pasture country has pushed cattle off early. Bill doesn’t need to tell me about it. The La Nina scared me into sending my own steer calves to town last fall.

But cattle wean larger today than they used to. That’s a trend with no end in sight. With ethanol and cotton both pushing corn prices upward, nobody wants to place little cattle. They eat too much corn. Much better to buy them and put them on grass—the same grass opened up by all the cows that aren’t there anymore—for some cheaper gains.

The more settlement prices reflect those evolving realities, the less “guess” my buyer has to price into what he offers me on that hypothetical cash offer.

You can certainly argue about the ideal size for the feeder cattle settlement. But to argue that there is something nefarious about suggesting an increase in the weight range is pure demagoguery.

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