Speaking at a Cattlemen’s College session at the Beef Industry Convention in January, Tom Brink, senior vice president, cattle ownership and risk management at Five Rivers Cattle Feeding, described his company’s efforts to control production costs. Although his examples come from a cattle-feeding environment, the general principles could apply anywhere.
“Buying a loss every day is not a good strategy,” Brink says. Cattle feeders, he explains, tend to have a “reaching mentality,” in which they bet on higher prices in the future and give away their feeding margins. They limit their risk-management options and make less-effective management decisions as a result of buying cattle at a loss. Feedyard occupancy, he says, often wins out over reasonable breakevens.
Beginning in 2003, Five Rivers initiated, Brink says, a more disciplined buying strategy that draws a hard line on breakevens. They made a conscious decision to leave pens empty if they couldn’t project reasonable breakevens on replacement cattle. Occupancy during the first year dropped 5 percent, but profits on finished cattle averaged $5 per head. Even during late 2008, when virtually all fed cattle were closing out at a loss, Five Rivers kept losses to a minimum because their average breakevens were well below industry averages.
A steer fed for 185 days consumes about 50 to 60 bushels of corn, so corn prices play a major role in feeding breakevens. Volatility in the corn market, Brink says, means that “hand to mouth” is not a viable strategy in grain purchases. Five Rivers forward-prices or hedges at least 50 percent of their corn needs as cattle are placed. Sometimes they cover more than that, but by pricing half, they cover some risk and still can benefit if prices drop.
The company also is moving to feed heavier cattle, as an 800- to 900-pound steer fed for 130 days will consume about 10 fewer bushels of corn than a 600- to 700-pound steer on feed 190 days.
Evaluate your labor situation carefully, Brink says. Look at every staff position, make sure all full-time positions really are full-time and consolidate where possible. Use technology to reduce labor needs. Also, take a close look at energy expenses, identify your biggest energy users and seek ways to conserve. Match the right piece of equipment to the job — if 40 horsepower will do, don’t use 100 horsepower.