 This is Tim Petrie, NDSU Extension Livestock Marketing Economist. Three of my colleagues and I have put together a four-part backgrounding series for you. Dr. Carl Hoppe will talk about backgrounding rations and feed costs. Dr. Brian Parman will discuss backgrounding budgets and break-even prices. And Dr. Jerry Stucka is going to discuss some health concerns for backgrounding cattle with you. I am going to discuss the cattle price situation and outlook for backgrounding cattle. Just a point of reference here, you see that I did this on November 25th. And so if you are watching this later, prices for both corn and feeder cattle, both cash and futures prices do change. And so please keep that in mind. This is the time of the year, of course, when producers are deciding whether to sell their calves or backgrounding calves from strictly a price situation. There is potential for adding value to calves through backgrounding, but of course it all depends on what feeds you have availability and those feed costs. And also calf prices that you could sell your calves at and projected prices for heavier backgrounded cattle. So first of all, I am going to go through some of the current price fundamentals that are affecting the market. Both corn and fed cattle prices are important factors, both for calf prices at the current time and for what the backgrounded 7-9 wheat cattle will be whenever you sell them, January, February, or March. So those are the two important factors. Corn prices have been volatile and likely will continue to be volatile with all the uncertainty in what harvest and final supplies will be, yields, and so on. And then on top of that, of course, all the trade issues going on. So we have kind of a volatile market up there, more on that in a minute. There is a narrower than normal, 550 to 800 pound price spread for steers and heifers. A number of reasons for that that I'll just touch on now and get into more as we go through the slides. First of all, in the Southeastern U.S., drought the last several months has caused forced calf sales. Normally when it cools off down there and rains, they can keep calves longer before they enter the feedlot. But in this year, they were forced to sell calves because it was so dry, even liquidated some cows for that matter has caused high cow slaughter. So anyway, coupled with that, there's dryness in the winter wheat grazing area, at least in parts of it, particularly Western Oklahoma. So that's also reduced the demand for calves, both from where they're being forced sold over in the southeast as well as our calves that might be going down there. So we've got actually more calves on the market and kind of reduced demand. There's a reason why calf prices are lower relative to the heavier ones. Moving up here then in the corn belt, of course, it's very wet, harvest still going on and lots of corn left to harvest. And then add that with snowfall around the northern plains, which has caused late weaning and a lot of other issues and has caused lower quality feeds, which actually could be a plus for back only because we have a number of them. Carl Hoppe is going to talk to you about the possible wet corn and low test weight corn, maybe some corn, even that didn't make black layers and made in silage and whatever. Low quality wheat, barley on harvest, lots of those available because of the weather. And Carl will discuss some of those options with you that may provide opportunities for backgrounding. The farmer feeders are busy with harvest. Farmer feeders, I'm identifying as those along southern South Dakota and Minnesota and into Iowa, not the bigger commercial lots that would be in Nebraska, central western Nebraska and Colorado and Texas. And so very little buying interest from those farmer feeders because they're still combining corn and also have wet lot. And so lower buying interest there also puts pressure on calf prices because we're in there. Those farmer feeders in the seats at auction markets, they're liking nice high quality calves we have up here and helps to provide demand. Furthermore, the April life cattle futures today were right at 125. And so that's created a good demand for over 700 pound feeder cattle on the other hand by June it drops off $9 there to 116 and another $2 in to the August future. So that negatively impacts calf prices because the over 700 pound cattle can still make that April May market or have a higher hedging potential for the feed lots. But by the time we get past April May and the calves put on full feed would be more into the June life cattle futures in August at lower levels. So that would negatively affect calf prices as well. Then of course, this time of the year with the heavy runs and all the weather related issues even from spring and with calving difficulties and so on. Or big discounts for unween calves or short ears or tails that have might have had some wet spring weather issues or muddy calves from the lots and so on. So keeping those calves in a backgrounding situation probably add value to them just when there aren't as many to sell and can kind of straighten them up. Going first of all to corn, which is again a good half the equation there on what calves are worth now and what backgrounded calves will be worth in the spring. As I said, we've had a very volatile corn market this year. The blue line is this is corn prices in Omaha. I use Omaha's because that's where the feed lots are that will buy our backgrounded cattle when they are ready. This spring I'll be moving down to, you know, the Nebraska, like I said, Colorado, that area down there and so using that as a proxy for corn. So, you know, we had a corn near where it is now for the beginning of the year, but then ran it up to 450 by July with all the problems we had with planting and the thoughts of a smaller crop. But then of course they plummeted back down to near current levels. We had another spike in prices there up into mid-October with some maybe potential for some trade issues in a smaller crop and so on. But now I've fallen back off interestingly enough to just about exactly there at 350 where they were last year at this time and the average. So the big question mark there on the right hand side is what are corn prices going to do. They're likely to be volatile, you know, trade issues are a big thing and then what's the ending of stocks going to be. And so a lot of volatility could be ahead of us in something to watch for cattle prices. Looking at the slaughter steers, the other half of the equation of what feeder cattle are worth. The red line is this past year and the green line that's kind of right on top of it is last year's prices. So very interesting except for a couple deviations. This year's fed cattle prices have been very nearer last year. Last week, for example, they were exactly the same. At 1.16 you see the red and green line there together in November. And looking ahead then, last year prices inched up now to the end of the year and that's the expectations. That red dot is the December 2019 live cattle futures and up there right at 1.20 which would be right where cash fed cattle were last year. So some increasing prices there will help to at least support feeder cattle prices and go back into the next year of 2020. We go to the blue squares futures and again last year they inched up and that's the expected expectation for this year as February. And then like I mentioned the April futures before up there at 1.25. So we're at 1.16 now up to 1.25 be a further increase in price. Which again if that comes to fruition is supportive for feeder cattle prices. And again a lot of things can happen. Domestic demand is strong and export demand is strong and we've got some trade issues out of straighten out. So these are we're just looking at the futures market here. Go to the 550 to 6 weight calves here in North Dakota. And this is at the four markets reported by the USDA starts off at West Fargo and then Napoleon, Mandan and Stockman. So we have the four markets worth of prices here. The green line is this year's prices and we compare that then to the blue line which is was last year's prices. And for the first half of the year again we were pretty well lock stepped there. But recently have fallen below last year for all the reasons I talked about before you know in October. They're corn prices spike but up and so then feeder cattle fell down there to 149. But then as corn prices fell back down to last year's levels and they picked up some but we're still on a price situation below last year. Because again those force movements out of the southeast and drought in the corn belt and all no farmer feeders and all those other issues. Why we're looking at this chart is because this is the starting value for calves for a backgrounding program. Either this is a price you could get for selling them or the price you could get for buying them. The average last week was right there at 153 or they've been averaging there between 150 and 155. But again there's a wide range in price and we'll get to a market report in a minute and show you that. So this is our starting point then for kind of valuing what calves are worth going into the backgrounding program. Move to the heavier weight 800 pound cattle then and of course what we're mostly interested in here is what are those prices going to be when these backgrounded cattle get to 750, 800 pounds or whatever maybe even up to 900 there in January, February or March. Now the green line is this year's prices compared to the blue line from last year. And again we're just a little bit below not as far below as calves where we were last year and so let's move ahead then to that January through March time period. And we see the blue squares then our 2020 futures again and so we see the January feeder cattle futures trading right today at 142 in January all the way into March and then up to 143, 44 by April. But again through that January, March time period of 142 they were averaged 143 and changed last week. So again pretty much the same as they are now is what the futures market is saying. But the big unknown of course is what our corn price is going to do and then we have to watch fed cattle as well to make sure that you know these prices here are based on some improvement in fed cattle prices. And so all that has to come to fruition but right now it looks like you know in the low 140s is what the market is saying prices will be this. Here's the market report for last year for those four markets and again it's for all the different weight classes just in the interest of time. Today I'm going to kind of focus on those 550 to 6 weight calves highlighted in the middle and then also go down and look at the backgrounding calves. But starting off with the 550 to 6 weight calves again you see that 153 average last week but the wide right range in prices there from 143, 50 up to 161, 75 and even some fancy ones up to 165, 50. So you know that's just on the regular range there is an 1825 per 100 weight range from the highs to the lows. And so you know it's important for you to know when you're pricing calves into a backgrounding program are you at the top of the range or at the bottom of the range. I'll talk more about this in a minute but you know under average prices maybe that's an opportunity to background and add some value to them if they're maybe unween now or have some other issues that I discussed before. Then go down to the heavier weights then the 800 pounders again like we said average last week and 143, 50 and 134, 145 range there. Notice it all the way down from 700 pounds all the way up to 950 pounds very little difference in prices because these are prices for cattle that can make that kill by April and May and so on. So selling very close and very well there. Switch to the heifers then and we always do background a lot of heifers in North Dakota and I think that'll be the case this year again. Heifers are always discounted quite a bit in the fall of the year with the heavier runs. And so simply looking up there at those 450 to 500 pounders we see about a $25 discount to their steer counterparts but by the time we get down to the 750 to 850s we see about a $13 decline. So every 50 pounds you put on heifers they're going to gain in price to steers which just is another although they may be a little bit more inefficient. This is another reason why you might want to background heifers because they're gaining in price to steers as we go along to ultimately at the slaughter level. Heifers and steers are the same price. Another consideration probably on heifers and the others are going to maybe talk about this is that you know in particular on the lighter weight end of those heifers down there maybe instead of pushing along hard in a background program you want to back off and more winter them on a less heavy ration and so they're keeping thin. And then by the spring of the year they could go on grass and they're always in the spring of the year by may a really good demand for grass cattle and so far with all the moisture we had it looks like be some good grass conditions next year. So just thought. Okay. Here then we want to kind of get more into the nitty gritty. So we'll look at some projected backgrounding profits and reasons to background in the middle right above the table there under the heading you see a website there. And I have a backgrounding budget on my website and I use this as the basis for this chart. And I just simply use $3.09 corn and $90 hay given that there's a big range in corn prices across North Dakota from the ethanol plants the elevators and so on. But I just use that you have to use your own feed cost obviously in your budget to come up with a similar profit situation to me and Brian is going to talk with you more about that. So anyway the North Dakota weekly last week said that 550 steers were bringing 143.50 to 161.75 average and 153. So to start off we need a 550 steer purchase price and so circle there on top. Well I have a range you see of 140 to 165 of possibilities and $5 increments to give us an idea of profit potential. Then I selected 155 as a close price to last week's averages and in weight for calves or an in weight price for calves. And then on the left hand side I just selected 140 as a potential price for the backgrounded cattle coming out at 750, 800 pounds whatever they might be. Again summarized below with the January and March feeder cattle futures are about 142 and so coming across from 140 and down from 155 shows about a $50 bill for backgrounding. But again the lower price that they might bring or you have to buy them at the more profit potential or the higher price you get up to those high quality calves are sold at 165. You see you're going to have to have a pretty good price coming out there in the bottom to make any money. So again a lot of opportunity I think to add value to those lower priced cattle at the present time. So look at the seasonal price index for those heavyweight backgrounding cattle. The green arrow on the right there we start in November and there is a seasonal tendency for a decline into February. This is an index so you come across with one. Anything above one is above average prices for the year which typically happened then in July and August and then by into December below average and into February. So that doesn't say this year that has to happen. I've already talked about that. We're looking maybe in that 140 areas of potential there. But keep in mind the tendency here is and so possibly some kind of floor pricing or price risk management. Here's some price risk management tools that we do have available to us. We have cash forward contracts possibly where you would contract directly with a feedlot. Or video and internet auctions might be available to you. We do have a CME feeder cattle futures market and corresponding options market options where you could set a floor price. Again you need to go through a broker there. USDA has a livestock risk protection insurance program that's available. Maybe one of these might fit your or a combination might fit your marketing plan. So a little bit more details. Here's the March feeder cattle futures and in black the high loan clothes for the since April and what they've done. And then the green line is the CME cash index. Those two will come together there by March just to show you what the cash market and futures market has been doing. But anyway a lot of volatility at high futures prices back in May when there is anticipation of a huge corn crop with the more planting and so on. Then an abrupt fall off as we had planting problems and then low prices there in August, September with the Tyson plant closing and some other issues. But they've responded really nice in September back up to the May prices. And we see here then today closing right in that 142. So again you would need to go through a broker if you want to use the futures market and or options market to set a floor price. And you have to understand futures and options. I realize that but something you may want to consider. Another one I mentioned was the USDA livestock risk protection insurance. Just a note of some change here if you've used them before as the new farm bill did increase the subsidy rates for LRP. Again there are a bunch of different or several different coverage levels that you can select at different premium levels. But as you go down in the coverage level there is a new set of subsidy rates. Unlike the old rate was a 13% subsidy across the board. Now we have some different rates. So here for today again November 25th where it was the offering. These are just for the closest contract we can get is a 13 week contract which would end February 24th. And again a number of prices and costs available to you. But I just picked the highest price available today was $139.80. It would cost you $325.00 a hundred weight. What you're betting against is the current LRP cash price was $145.00. So the current price would have to fall below $139.80 for any payment there. But again you're just kind of setting a floor price and you can get $140.00 for a March 23rd or almost $142.00 for an April 20th. Whatever marketing date you might select and heifers a similar thing on the bottom. So again LRP is sold through crop insurance agents. I think most of you grow crops and so you would just go to your crop insurance agent. As I don't have time today to visit with you about all the ins and outs of LRP. And so you just just kind of showing you here the end. Always we kind of wonder then for both LRP and futures and options. How does that futures price or the CME cash settlement price that they're all based on? How does that compare to our cattle here? And my rule of thumb is for those east to west along I-94 markets for 800 pound steers were about on par. In other words on the average we're right about an equal price to the futures options LRP. However keep in mind that we do have a wide range in prices. And so you need to know whether you're at the top of the range or at the bottom of the range could affect your basis as well. Of course if you're north along highway to markets and so on you got to take a two to four dollars off. I suppose because of the transportation the normal flow is is south. So that's kind of a quick run through of some things affecting the market and so on. Again caution you that there is a lot of chance for volatility and some price risk out there. You may want to look at some kind of price risk management or floor pricing. But I do want to emphasize with the feeds we have and so on that there certainly are opportunities to background if you wish to do that. So I urge you to look at your own costs and listen to the other programs provided by the other three extension specialists and make your decision.