HUNTIN' DAYLIGHT -- PLANNING FROM MARKET HEIGHTS

by: Wes Ishmael

Returns beyond cash costs per cow are estimated to be at unprecedented levels this year, nearly $350 (basis Southern Plains), according to data from the Livestock marketing Information Center (LMIC). That's more than double the previous high in 2004.

What's more, as calf supplies grow tighter with herd expansion, there's plenty of reason to believe those returns could be as high next year.

Consequently, if there was ever a time for producers to reconsider what they're doing, how they're doing it and what they might change to increase efficiency and opportunity, then this seems like an appropriate time.

“Use this period to strengthen your operation,” encouraged Tom Brink at the recent Beef Cattle Conference at Auburn University. Brink is a consultant who previously served as Chief Risk Officer and Senior Vice President of JBS Five Rivers Cattle Feeding.

Whether it's reducing debt, improving facilities or buying better genetics, Brink advised producers to utilize current good times to invest in the future, one he believes will offer more value-added opportunity than ever before.

Although current historically high market prices make it easy to focus on the price side of the equation, when you consider the most and least profitable producers over time, one constant always seems to be that the highest-return producers are superior at managing costs relative to production.

Over the years, Kevin Dhuyvetter, until recently a longtime agricultural economist at Kansas State University, conducted a number of studies identifying what separated the highest-return and lowest-return beef producers who participate in the Kansas Farm Management Association.

Considering variation in economic returns over time, Dhuyvetter explained, “What is much more important is that the variability across producers at a point in time is much larger than the variability over time. In other words, even in the ‘good years' some producers are losing money and even in the ‘bad years' some producers are making money. This is important from a management perspective, because it indicates there are management changes producers can make to seek to improve their operations.

More specifically, Dhuyvetter explained, “The factor that is extremely important regarding profit and cost differences between producers is how well they manage/control their non-feed costs. Producers that had a high percentage of their total costs as feed (i.e., a low percentage as non-feed) had significantly lower costs and hence significantly higher profits. One of the ways to manage these non-feed costs is operation size as larger operations tended to have lower costs per cow for labor and especially for machinery and depreciation.”

In other words, the highest-return producers are not necessarily lowest cost in all areas. In various data sets over the years, the highest-return producers spent more than lower-return producers on such things as genetics, animal health and forage management.

Consider Your Goals

The consistency of results from studies like these implies, first of all, that the highest-return producers know what their costs are and understand how cost areas impact production and profit potential.

The consistency also suggests the highest-return producers have a firm grasp on what they're trying to accomplish with the resources in play.

Given the historically high levels of equity required to participate in any cattle sector today, the historically high levels of price volatility and associated risk, it seems that these high-return times would also present opportunity for producers to consider and re-consider their specific goals.

How do you define operational success? How do you quantify progress toward or away from specific goals that contribute to operational success?

Given the resources at your disposal, including your own expertise, what is your comparative advantage?

Is there room or reason to diversify? As an example, if you operate a cow-calf enterprise, specifically, is there economic opportunity to retain calves further beyond weaning by adding a backgrounding or stocker enterprise for your own or purchased calves? If you run stocker cattle, exclusively, is there opportunity to also develop heifers to develop as replacements?

Question Everything

Along the way, easy as it is to get caught up in day-to-day survival, how often do you question the things that you do which seem to be successful and how often do you question the reason you don't utilize management practices others have found to be economically worthwhile?

Consider implanting calves. According to the most recent data from the National Animal Health Monitoring Service (NAHMS)—Beef 2007-2008—only 11.9 percent of operations surveyed had implanted any calves prior to or at weaning during the previous year. Even for producers with 200 cows or more, only 31.1 percent reported implanting at least some calves.

Yet, there is no viable scientific study I've ever seen that suggests implanted calves will perform less well for the next owner. In fact, if you consider years of data from Superior Auction, buyers pay no less for calves that are implanted.

So, if you're not exploiting the high net economic return associated with implanting, why aren't you? If it's because you're channeling calves into an all-natural program, are you sure that the premium received more than compensates for lost performance and ‘out' cattle?

What about the net opportunity of using other management and technology such as synchronizing and timed-breeding cows, limit-feeding hay to cows during the winter, all of those kinds of things?

Markets Ahead

If the current supply and demand fundamentals are any indication, producers will have some time to question, consider and invest.

“Having reached such breathless levels in the past few weeks, it seems unlikely that prices (feeder) will continue to move higher,” explained Derrell Peel, Extension livestock marketing specialist at Oklahoma State University in his mid-June market comments. “At the same time there is little reason for feeder prices to drop much, if any. Current feeder prices clearly suggest poor feedlot margins ahead. Today's feeder prices imply feedlot breakevens at $160/cwt. or higher in coming months. It will take a significant increase in wholesale and retail beef prices along with fed prices to support these breakevens long term, even with the current good prospects for continued moderate feed prices. Beef demand and the rate of beef production in coming weeks and months will be very important to determine the upper limits on prices. At the same time, in the short run, there is little that feedlots can do about high feeder prices. There is no ‘crop year' relief for feeder prices, like there was for corn in 2013. Feeder supplies will continue to tighten at least until 2016. The wring-out of feedlot capacity is not over yet.”

Factors that could pressure the market, according to Peel, include: a significant deterioration in corn crop prospects, elevating feed costs; rapid widespread redevelopment of drought, reducing forage prospects and expansion possibilities; significant disruption in international demand for U.S. beef exports.

“All in all, there is relatively little downside risk for feeder markets in the second half of 2014. I generally expect feeder prices to move more sideways in the second half of the year,” Peel says. “Some seasonal pressure could develop in the fall but even that is likely to be muted. Especially in the Southern Plains, moisture conditions and fall forage prospects in August and September will be a key factor and could result in strong stocker demand in the fall.”







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