It’s no secret that agriculture is a risky business, but when we hear the term “risk management,” we typically think of using futures, options or other tools to manage the risk of lower prices for cattle or higher prices for inputs such as feed.
Those types of risk management are important, but beef producers face a long list of other risks, from weather, disease, missed opportunities or wrong decisions. Fortunately, while we can’t eliminate all these risks, we can manage them with planning and informed decision making in everyday management. Long-term goals and investments are good, but during a time of economic crisis you might need to focus more on short-term returns. Spending money on parasite control for example, which can directly increase the pay-weight or your calves, probably is a better choice than buying a new tractor.
Measure and plan
Start with a marketing plan, says Iowa State University Extension livestock specialist Shane Ellis, PhD. Part of that marketing plan involves measuring and knowing your costs, in order to calculate breakeven sale prices and evaluate different marketing options.
A good understanding of production costs also allows evaluation and management of those costs, Ellis says. Develop a priority list, and scrutinize each cost to determine which are necessary, which are not and which might be necessary eventually but you could put off.
Once you know your production costs and establish a breakeven benchmark, Ellis says the next step is to assess your level of risk tolerance. If you fear a downturn in the market before your cattle are ready for market, consider your options for managing that price risk.
Ellis says several methods of forward pricing can help you limit risk and “strike when the iron is hot,” by locking in a profit when the market offers it. Forward contracts and futures market hedges will lock in a price, he says, and are the best protection from decline in the market. If you just want to set a price floor with the opportunity to profit from a market upturn, purchasing put options or price insurance from your insurance agent may be the best choice.
While various types of forward pricing can protect you against swings in market prices, your profitability still depends on the pounds of calves and quality of calves you deliver on sale day.
Dave Dargatz is a veterinarian with the USDA/APHIS Veterinary Services, who coordinates the beef activities of the National Animal Health Monitoring System. He reminds producers that some of the greatest risks they face can be related to animal health. Fortunately, these are risks we can manage, but when margins are tight, producers sometimes cut back. In the 1997 NAHMS cow-calf survey, 14.1 percent of producers indicated they reduced veterinary services and 7.7 percent used less herd medications in response to low calf prices in 1996. Parasite control, for example, plays a critical role in production efficiency. A recent Iowa State University economic analysis of pharmaceutical technologies in beef production concluded that neglecting to use dewormers increases breakeven costs in cow-calf operations by an average of 34 percent, or $165 per head. The analysis notes that numerous studies demonstrate that deworming improves pregnancy rates, weaning weights and weaning rates, all critical for profitability.
Biosecurity is a key consideration in managing risk of introduction of diseases such as bovine viral diarrhea. “This is not the time to be bringing new females into a herd without knowing quite a lot about the source herd or testing and having a suitable quarantine program for new additions,” Dargatz says. BVD is of particular concern, as introduction of a persistently infected animal can have serious consequences, including reproductive failure and calf morbidity and mortality. And yet, results of the 2007 NAHMS beef study show that 34 percent of operations had brought new cattle into the operation during the previous 12 months, and of those, just 33 percent quarantined any of those animals before introducing them into the herd.
The level of BVD risk can vary considerably between operations, influencing decisions on the most cost-effective control strategies. Kansas State University specialists have developed an online tool to help producers assess their risk and plan cost-effective measures to prevent and control the disease. Check the sidebar for links to this and other BVD resources.
Reputation and verification continue to play significant roles in the prices producers receive for their calves, says Steve Swigert, an economic consultant with The Samuel Roberts Noble Foundation in Oklahoma. Producers who put together a package that will perform in the feedyard — meaning good genetics and documentation of a sound health program — find more bidders at auction. Swigert says in today’s market producers with quality, process-verified cattle may not earn significant premiums, but they minimize their risk of discounts at sale time.
Research bears this out. In a recent study of price trends at Iowa sale barns, calves with certified vaccination claims and weaned at least 30 days averaged $6.15 per hundredweight over the base. Calves with the seller’s uncertified claims for similar weaning programs received $3.40 per hundredweight more than the base. Holding calves beyond weaning results in more weight to sell but also additional expenses. The researchers compared prices for a 500-pound calf sold at weaning versus a 600-pound calf sold 45 days later. Subtracting the preconditioning cost from the gross value difference left a $35.45 per head advantage to preconditioned calves.
Find a new marketing window
So what about retaining ownership even beyond a 30- or 45-day weaning period? Owning calves longer, through a backgrounding or finishing program, can offer market flexibility and economic advantages, especially when demand for calves is flat. Ellis says some years ISU specialists recommend extending ownership at least through a backgrounding phase. Some other years they advise definitively against it, and some years fall in between. This year, with the potential for plentiful harvest and cheaper feed, he says, the recommendation is somewhere between a “good idea” and “absolutely do it.”
After months of negative margins, feedyard buyers are being very cautions, Ellis says. The general economy and lack of consumer confidence continue to pressure beef and fed-cattle prices. Even as feedyards begin to project healthier closeouts during the fourth quarter and into next year, calf-price improvements may be limited this fall, as finishers prefer to place yearling cattle. Producers who have the resources to hold at least some of their calves to sell as heavier feeders next year could benefit from better market timing, especially if an improving economy boosts beef demand.
Swigert says growing numbers of cow-calf producers in his region are looking at the option of retaining ownership through the winter on wheat pasture. Swigert believes the outlook for yearling prices next spring favors retaining ownership through a winter grazing program, but he’s less optimistic about the benefits of retaining ownership through finishing. High cost of gain in the feedyard probably will chip away at any profits accumulated during the growing period.
Kansas State University Extension livestock specialist Sandy Johnson says producers with good supplies of low-cost forage have the best opportunity to benefit from retaining their calves beyond weaning this fall.
Johnson stresses that the first step in determining whether extended ownership is economically viable is to calculate production costs through the backgrounding period. The market can give you an idea of what those extra pounds will be worth, but you need to know what it costs to produce them.
Ellis and specialists at the Iowa Beef Center have developed an online resource producers can use to evaluate the economic prospects for backgrounding calves, with regular updates to reflect market trends. See the sidebar for links to the site, along with other risk-management resources.
Control feed costs
Feed costs always come into play when looking at breakevens, and producers need to seek ways to minimize them. Alternative feeds, in many cases, can cost-effectively stretch forage and hay supplies. Ellis encourages producers to identify feeds available in their area and watch for good purchase opportunities. Depending on the market and their ability to store the products, they could capitalize on seasonally low prices and stockpile commodities for later use.
Johnson says alternative feeds can come with challenges such as balancing new rations, storage and delivery, but producers might need to spend some time pushing their pencils to take advantage of low-priced ingredients available in their area.
The same applies to conventional feeds. Corn prices, Ellis points out, are tied to energy prices and, thus, have been volatile. As of late August, the U.S. corn crop looked good, with USDA predicting yields just under 160 bushels per acre and a 12.8 billion-bushel harvest. The agency also expects demand to be high for feed, ethanol and exports. Corn prices typically are at their annual low around harvest, and this could be a good time to lock in a contract on some of your corn needs or purchase for delivery if you have storage. Keep an eye on market trends, Ellis says, and watch for pricing opportunities.
Johnson believes that with feed typically accounting for the lion’s share of production costs, wasted feed adds up to a significant expense. Many producers, she says, probably could reduce production costs considerably by harvesting forage at the right time, putting it up and storing it properly, and feeding the right quantities.
Swigert advises taking inventory of standing forage supplies and making early decisions on additional feed needs. He adds that producers increasingly seek more efficient ways to run cattle and run their operations. One factor that drives the trend, in addition to economics, is the shortage of good labor on livestock operations. Producers need to simplify and focus on tasks that make money in their operations. Intensive rotational grazing programs, for example, shift harvest duties to the cattle and away from machines and hired hands.
For more information
Drovers compiled an extensive list of online risk-management information in our Crisis Management Resource Center. Find the listed items and more at www/Drovers.com/Crisis.
- Iowa Beef Center Cattle Marketing Assessment Tool
- The value of third-party certification claims at Iowa’s feeder-cattle auctions
- Byproduct feed price listings from the University of Missouri
- Iowa Beef Center analysis of retained-ownership options
- Drought-planning information from the Natural Resource Conservation Service
- Drought calculator decision tool from the Natural Resource Conservation Service
- Ag Decision Maker support tool from Iowa State University
- Profit variability and risk-management analysis of calf-fed and yearling production systems, from the University of Nebraska
- Measuring systematic risk for crop and livestock producers, from Purdue University
- Beef production in the new economic environment, from North Carolina State University
- Insurance options for farmers can help protect revenue in 2009, from Montana State University
- Risk-management library from K-State’s AgManager site
- Cattle Basis Risk Analysis Tools from K-State
- Cattle-feeding risk analyzer from the North American Institute for Beef Economic Research
- BVD resources, including K-State’s BVD risk-assessment tool