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CATTLE TODAY

HUNTIN' DAYLIGHT -- FLEXIBILITY DAMPENS INPUT COSTS

by: Wes Ishmael

For the first two months of 2008, the cost of gain for steers averaged $75.47/cwt. Last year's average was $71.23. For heifers sold in the first two months of 2008, average cost of gain was $77.63/cwt., four percent more than 2007. When compared to the 2002-2006, average cost of gains for both steers and heifers were $22/cwt. higher in early 2008. That's according to the Livestock Marketing Information Center, based upon the Kansas State University Focus on Feedlots survey.

That's why there's lots more chatter about putting more pounds on cattle before they get to the feedlot. As Derrell Peel, Livestock Marketing Specialist at Oklahoma State University noted recently, “Despite high input costs, the general incentive is for the cattle industry to emphasize forage-based gains and minimize the competition for scarce grains.”

Of course, that's more possible with native pastures than tame grass.

“Cattle producers with improved forages that require substantial fertilizer are essentially competing with crop production for purchased inputs,” says Peel.

Any of you trying to find nitrogen-based fertilizer, let alone purchase it, know the story inside-out. Natural gas prices—the primary component of nitrogen-based fertilizer—has essentially doubled in cost over the past four years, from about $5/BTU to $10/BTU.

“Cattle production in this situation may not justify across-the-board fertilizer applications for pasture and hay production. On the other hand, the implications of reduced fertilization on the quantity and quality of summer forage, dry standing forage and hay should be carefully evaluated,” says Peel. “Producers may need to consider carefully targeted fertilization of the best hay and pasture meadows and adjust stocking rates for reduced forage production on the remaining acres. There is not a single right answer for all producers and careful and thorough analysis is the only way to determine the best approach.”     

Whether you're running on native or tame pastures, Peel recommends taking a hard look at buying feed earlier this year than later.

“All cattle producers should monitor feed markets, thinking ahead to winter supplement needs. Pasture management this summer can help to minimize supplemental feed needs next winter. Although feed prices are expected to remain high, it may make sense to book some feed needs earlier rather than later if weather threatens crop production this summer,” says Peel.

Taking Stock of Opportunities

None of that is news, but all of it represents essential consideration for survival in an age when escalating commodity prices appear to be sustainable for the long haul. Peering at it from a different direction, Ron Gill, Extension Livestock Specialist at Texas A&M University explained at last year's Southwest Beef Symposium, “Being forced into an immediate management decision or reaction can be one of the most economically damaging events in a livestock operation. Having a management plan that anticipates both negative and positive influences in the business will allow management to prevent large losses and capitalize on available business opportunities.”

In other words, flexibility borne out of understanding inventory and options is increasing in value with every tick up in commodity prices.

Specifically, Gill explains these areas represent prime fodder for adding flexibility.

Stocking Rate — “In any operation one of the most significant business/management decisions that will determine inherent management flexibility is stocking rate,” says Gill. “Cow-calf operations that are stocked above 75 percent of ‘normal forage production potential' for any given area will periodically be forced into liquidation of stock or forced to purchase additional outside feed due to drought conditions.

“Lease rates have risen to levels that make producers feel compelled to stock to maximum carrying capacity in order to reduce per head grazing expense. In theory, that is a sound and logical approach, but the past few years have reminded us of the need to conserve forage resources. Any long term successful ranching operation uses a ‘moderate' stocking rate for the base cattle herd. Production specialists and economist are constantly chastising ranchers for not fully utilizing their resource and therefore leaving money on the table. One area that is rarely considered in these calculations is the cost of forced destocking during any catastrophic event such as drought or fire.”

Enterprise Selection/ Diversification — “Excess forage can easily be managed with stocker cattle. Stock cows or yearlings can be utilized to harvest available excess production without exposing the operation to additional capital expenditures,” explains Gill. “However, most moderately stocked cow-calf operations will have adequate equity position in the base cow herd to purchase stock animals if that pencils as the best alternative. One problem with any combination cow-calf/stocker operation is bio-security of the base cow herd. The last thing you would want to do is expose a naive herd to pathogens that will affect health and reproductive performance of the base cow herd. If part of the flexibility needed on an operation relies on bringing in stocker cattle the base cow herd needs to have an outstanding herd health plan in place…One way to alleviate that problem or consideration is to not have a ‘base cow herd.' Ultimate flexibility can be gained when cattle are used as they should be and treated as a simple means to harvest available forage. Many ranches have gone broke trying to maintain the, ‘genetics we have worked years to put together.'”

Genetic Makeup of the Cow Herd — “If a base cowherd is to be maintained, flexibility can also be built into the genetic base of the cows,” says Gill. “It is often said that the cow herd should be selected to fit the environment and the bull battery be selected to fit the market. When the term market is not defined, most think this saying is about breeding calf crops to fit some terminal market. Market can be defined however you want it to be in this scenario. Look for an opportunity or niche market with added value potential and breed the cow herd to fit that market. It may be replacement heifers or high marbling genetics or superior lean meat yield or natural/organic or some other available market.”

Counter Cyclical Management — “There is always a point in a cattle cycle when the price of calves will start down. Cow value usually lags behind the calf value. In most analysis it would be best to sell all or part of the cow herd about the second to fourth year of the down-turn,” says Gill. “In the past, cattle cycles were easy to predict and fairly easy to manage. That has not been the case with the latest cattle cycle, and who knows what future cycles will look like. When the cow calf sector is not profitable you probably will not make up the difference in volume. Look to stocker cattle as the alternative means of capturing value of available forage. As you look at any cycle there will be a point when cows are ‘dirt cheap.'

Outside Investment Opportunities — “The cattle industry has evolved into a predatory industry where one or two segments are all that seem to remain profitable at any given time. Until the industry changes from this predatory system and works together to make the value of the end product high enough to sustain profits throughout the different segments of the system we need to look at opportunities to invest or participate in the other segments or in competing enterprises,” says Gill.

“For example, if the evil packers are starting to look like they are going to be making large profits why not buy stock in those that are publicly traded. If feeders are just stealing your calves when you sell them, retain ownership into the stocker or feedlot sector. If the packers are not paying what your cattle are worth on a live basis, feed and market them on the rail into a program that will. You might find out you were getting more than they were worth.

“Look at other alternatives that are available. If a particular input for the cattle operation looks like it is going to increase sharply look to investing in that industry. This can be through stock or speculation in the market. Look for opportunities to invest in businesses or commodities that represent your high cost centers. As with any venture capital only invest what you can afford to loose.”

Emergency Reserves — “Emergency cash reserves are critical to offset short-term losses and also can provide for that capital necessary to invest quickly as opportunities arise,” explains Gill. “One problem with cattle production at the cow-calf level is that it has emerged over time as a vehicle to reduce tax liabilities. The only way to reduce tax liabilities is to be unprofitable. Many operations look at taxes as the most evil of things. In the cattle business, particularly the cow-calf sector, any available profit is often consumed by family withdrawals or invested in depreciable assets to lower tax liabilities.

“Many ranch operations die as a result of heavy metal disease. Do not let tax management or excessive family withdrawals jeopardize the long term profitability of the operation. If you have an opportunity to turn a profit capture at least a portion of it into the cash reserve.

“Recent years of profitability in the cow-calf sector have created a move toward purchasing of excessive machinery and other infrastructure expenditures that probably should have been limited in light of current catastrophic events we have endured in the southwest ranching environment.

“You can also look at a moderate stocking rate as an emergency reserve of forage. If this is planned out, excess forage can be in a production system that allows the harvest and sales of this product. Some mix of introduced forages in a production system can be beneficial. Look for opportunities to plant adapted forages that can either be harvested for a cash crop in times of excess or utilized to support the base herd in times of emergency. The cash crop could be in stocker gain or hay sales.”

You can find more details about Gill's recommendations at http://cahe.nmsu.edu/ces/swbeef/ documents/07swbsproceedings. pdf

Arguing against the idiotic government policies that have spurred run-away feed, fuel and fertilizer costs is necessary and soul cleansing, but it doesn't grow grass or feed cattle.

“Look for opportunities and do not be afraid to step out of the box,” says Gill. “Always consider constraints of time and labor. Although diversification can add flexibility it might also create insurmountable obstacles due to labor requirements or time constraints. Allow yourself time to do what appears manageable and profitable, which may mean you have to pass on some opportunities.”

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