General Dwight D. Eisenhower is credited with saying, “In preparing for battle, I have always found that plans are useless but planning is indispensable.”
Though economic wonderments are light years away from World Wars—life and death—the same advice continues to apply; taking seriously rather than for granted the opportunity to chart strategy based on both hard facts and rational assumptions.
“Producers must commit themselves to making their operations financially successful. They must measure and monitor progress toward production goals and financial goals. Their production and marketing strategies must not remain static but must continually evolve with the marketplace,” says K.C. Olson, an extension beef cattle nutritionist with Kansas State University. He's summarizing one of the keys to cow-calf producers succeeding, as cited by an audit of studies conducted at Iowa State University, University of Missouri, Texas A&M University and USDA.
The notion is worn smoother than a favorite saddle, but its necessity is growing with every national and global financial failure.
For perspective, Tim Petry, agricultural economist at North Dakota State University noted in his 2009 Outlook, “On a weekly basis, the USDA reported the five-market average fed-steer price peaked at more than $101 per hundredweight in July. However, during the price collapse in late 2008, prices fell to about $84, which was the lowest level since the summer of 2006… Although feed prices also plummeted in the fourth quarter, plunging fed cattle prices caused the lowest quarterly yearling prices since 2004 and calves were the lowest since 2003. In the fourth quarter, 700-800-pound feeder steers averaged about $96 per hundredweight and steer calves averaged near $104.”
At least as difficult to manage around as plummeting commodity prices has been the extreme volatility of them. Petry points out, “While fed cattle prices fell about 17 percent from high to low in 2008, crude oil prices declined about 75 percent, corn crashed more than 60 percent, slaughter hog prices dove more than 40 percent and wholesale chicken breast prices declined nearly 34 percent.”
There's no reason to expect volatility to soften. For one thing, the price of food commodities has become linked at the economic hip to energy commodities, via federal policy.
“Commodity price volatility in the past year has been the result of the crude oil linkage, and indicates a new era of price levels and market volatility,” explains Scott Irwin, an agricultural economist with the University of Illinois.
Corn, for example ended the year within spitting distance of what most folks would consider the realm of fundamental reality. Unfortunately, those prices are too near breakeven to offer corn producers the incentive to plant the number of acres demanded by feed usage and mandated levels of grain-based ethanol. In other words, the market will likely begin bidding the market higher in order to buy more acres of production.
In assessing shifting dynamics of the commodity markets, Irwin explained, “From January 1947 to January 1973, the average monthly price of corn was $1.28. Between 1973 and 2007, the average was $2.42. Corn price action since has indicated prices will likely range from $6.70 to $3.00 with a $4.60 average price.”
Despite the head-snapping turns in price, cattle producers have some constants they can count on when it comes to planning, such as feed costs as a primary driver of profitability.
“Feed costs explain over 50 percent of the variation in herd-to-herd profits according to an Iowa State University study,” says Olson. “High-cost, low-return feeding management options at the cow-calf level include calving at seasonally inappropriate times, allowing calves to suckle dams too long, unnecessary grain processing, creep feeding, self feeding, and over-reliance on harvested forages.”
Conversely, Olson suggests producers consider lower-cost, higher-return practices, such as:
• scheduling calving season so calving and lactation coincides with peak forage quality
• weaning calves before cow body condition slips below a moderate level
• avoiding the feeding of harvested forages during winter
•grazing cool-season forages or grazing dormant warm-season forages and supplement with ruminally-degradable protein during winter
•offering supplements on an alternate-day basis
Another constant is that specialization tends to offer more net return that generalization.
“Managers of small beef herds typically find it very challenging to raise both quality replacement heifers and quality terminal feeder cattle. The reason for this challenge is that herd improvement comes very slowly when selecting for both maternal and terminal characteristics within the same small herd,” explains Olson. “Managers of large beef herds (> 400 cows) minimize this problem by dividing their herds into maternal and terminal breeding programs. Managers of small beef herds can take a similar tack by specializing in either terminal or maternal-type calf production. In the former case, replacement heifers are purchased and the majority of revenue is generated through the sale of calves that excel in terminal traits like growth and carcass merit. In the latter case, the majority of revenue comes from the sale of replacement heifers.” You can find all of Olson's advice at www.asi.ksu.edu/beeftips.
Besides production management, Job Springer, an agricultural consultant with the Noble Foundation based at Ardmore, OK explained in a recent article, “Agricultural producers are fortunate to have several options to help them minimize their exposure to commodity price risk.” Among these, he cites forward contracts, hedges via the futures market, puts and options, crop insurance, as well as a number of programs offered through USDA's Risk Management Agency.
“We could see prices go higher in 2009, but some analysts think we still have not seen the bottom of the market,” says Springer. “It is always wise to do what you can to lock in a satisfactory profit for your operation. While some of these tools may work better than others in your particular situation, they are all potential risk-reducing tools.”
For that matter, limiting overall risk sometimes necessitates accepting additional risk in the short term.
“It is relatively easy to add value to beef calves through health programs, improved genetics, and special nutrition. Unfortunately, adding value is not synonymous with value capture,” explains Olson. “Most of the value added by the cow-calf producer through management and breeding is harvested after weaning. It is nearly impossible to significantly improve value capture without retaining ownership for some length of time past weaning. Backgrounding, retaining ownership through finishing, and marketing alliance membership each offers a means to improve value capture; however, all come with increased investment risk.
Planning with Perspective
Stirred with a different stick, Derrell Peel, livestock marketing specialist at Oklahoma State University says, “It's easy to become rather fatalistic about our situation when markets are weak and volatile, especially when many of the causes are external to our industry and broad-based across the economy…Changing economic conditions implies that every producer needs to think about the means they have to make as much adjustment as possible to endure hard times in the short run and prosper longer term.”
More specifically, Peel encourages producers to:
• “Assess the extent to which the current situation threatens the very survival of your business… An operation facing serious threat of failure must consider the possibility of significant debt restructuring, liquidation of some assets and significant adjustments to family living expenses, among others. The current economic climate may well mean that producers should consider an expanded risk management program to reduce the threat of a fatal economic outcome in the midst of volatile markets.”
• “Re-optimize your operation. Changing values of products and resources means that it is necessary to adjust input and output levels to maintain the profitability of production activities, or in the worst case, minimize losses in the short run… It is important to consider not only the level of use of various inputs, but to consider adjustments in timing, intensity and targeting of input use. Changing values for alternative products likely means that you need to reduce production of some products, expand production of others and possibly reduce overall production levels.”
• “Look for new opportunities. A dynamic and volatile economy shakes up the status quo and causes many negative impacts but also necessarily results in new opportunities. It is the nature of markets that someone's reduced sale value is someone else's buying opportunity. Producers should be looking for and prepared to take advantage of opportunities for new investment, upgrading assets or repositioning their business as the economy works through a wide range of adjustments and revaluation of resources. Such opportunities may be rather short-lived and producers must have the vision and courage to act quickly to take advantage of them…”
Of course, all of this is lots easier to talk about than exploit. Another thing Eisenhower is credited with saying: “Farming looks mighty easy when your plow is a pencil and you're a thousand miles from the corn field.”