HUNTIN' DAYLIGHT - DECLINING PRICES MAGNIFY COST FOCUS

by: Wes Ishmael

“Expenses won't come down as fast as commodity prices,” says Stan Bevers, Texas A&M AgriLife Extension Service economist. “Cow-calf expenses won't come down as fast as cow-calf prices. 2016 will have lower calf prices but not to the extent it will affect these higher expenses. During 2017, expenses still will not be coming down, where calf prices will be in their second year of decline. That's what concerns me.”

As Andrew P. Griffith, agricultural economist at the University of Tennessee pointed out in his April 29 market comments, “It is hard to imagine a continuation of this downward price movement in the near term, but there has been little indication of the price deterioration slowing down.”

At the time, prices for calves and feeders continued to lose $5-$10/cwt. at auction, and wholesale beef values were losing substantial ground week-to-week at a time of year when gains are usually expected.

Heading into May, Griffith explained the spot June Live futures contract was at about a $10 discount to the just-expired April contract. “…which means market participants are anticipating more weakness in the market,” Griffith said.

At that stage, Griffith pointed out that calf and feeder prices were within spitting distance of the low prices experienced in 2013.

“This is not to say prices are at unprofitable levels, but poor managers may find themselves losing money this year if managing costs does not become a top priority in the near future,” Griffith explained. “Cost management will be the key to profitability for most producers if cattle prices do not become reinvigorated.”

Get a Grip on Herd Finances

Bevers shared information about Key Performance Indicators (KPIs) at the recent Texas and Southwestern Cattle Raisers Convention in Fort Worth. Combined, he says KPIs comprise a report card that can assist beef producers in measuring factors crucial to an operation.

“KPIs provide a rancher with an analysis of the operation and detail whether the operation is fulfilling the goals of ownership,” Bevers explains.

KPIs that Bevers suggests ranchers look at include:

• Revenue per breeding female.
• Nutrition base expense as a percent of total expenses.
• Labor and management expense as a percent of total revenue.
• Operating expense as a percentage of total revenue.
• Net income ratio.
• Cost per hundredweight of weaned calf.
• Total investment per breeding female.
• Debt per breeding female.
• Equity-to-asset ratio on market basis.
• Asset turnover ratio on cost basis.
• Rate of return on assets on market basis

“Can profitable beef operations go broke?” wondered Kris Ringwall, Extension beef cattle specialist at North Dakota State University, in one of his insightful weekly BeefTalk outlooks about a year ago. “Absolutely.”

One reason, Ringwall explained, is that definitions of profit are often misused, equations for their discovery are frequently inappropriate, and their meaning misinterpreted. Never mind that farm and ranch records are as diverse as the unique operations they seek to define.

“Care needs to be taken to make sure the numbers used are the numbers needed to answer the question,” Ringwall said. “The market price of a calf minus the direct expenses of producing that calf often is stated as profit. However, that calculation is far from any indication of the financial status of a beef operation.”

According to Ringwall, the effective process for gathering pertinent data and calculating meaningful financial information is encompassed in the integrated resource management programing efforts offered by universities in the 1990's. Nationally, the most visible program is Standardized Performance Analysis (SPA).

“The purpose of the program was to assist producers in evaluating and reducing their cost of production while improving their production and marketing efficiency,” Ringwall explains. You can find the SPA program at www.beefusa.org/spacalculationsworksheet.aspx. Be aware that is a time-intensive effort.

“The point is that the current generation needs to provide the financial analysis that will determine an acceptable Return on Total Assets (ROA),” Ringwall explained. “Knowing the actual current ROA is needed to establish a future goal. If the ROA is adequate, life is good. If not, then evaluate and reduce the cost of production and improve production and marketing efficiency. Then start planning for the next generation.”

Market Glimmers

Although cattle prices will trend lower in cyclical terms, there are some price-supportive factors in the short term.

“Recent Cattle on Feed reports do not indicate supplies that will collapse the fed cattle market, like happened in late 2015,” say analysts with the Livestock Marketing Information Center (LMIC), in the latest Livestock Monitor.

Other than two percent fewer placements in March, the monthly Cattle on Feed estimates released in April came in about par with average year-to-year expectations with total cattle on feed one percent more Apr. 1 and marketings seven percent more in March.

As well, the most recent Cold Storage report from USDA indicates that both beef and red meat stocks are down for the first time in a long while.

Total pounds of beef in frozen storage Mar. 31 was five percent less than the previous month and three percent less than the same time a year earlier. Total red meat frozen stocks were three percent less than the prior month and six percent less than the previous year. That included frozen pork supplies being two percent less from the last month and nine percent less than last year.

“The general expectation is for price erosion,” LMIC analysts say. “Do expect to see prices below year-ago levels and below early 2016 for both fed and feeder cattle moving into this summer and fall. An increasing cattle herd and therefore increasing supplies of feeder cattle and fed cattle will continue to put downward pressure on cattle prices.”

Mounting global inventories, withering export demand and weak global economic growth, which caused U.S. farm income to plummet by 25 percent in 2015, will continue to plague the U.S. agricultural industry in 2016, according to the latest Quarterly Rural Economic Review from CoBank.

“Continued strength in the U.S. dollar and tepid economic growth in China and other emerging markets are the primary culprits for the current situation. Plus, the weaker currencies in competing agricultural countries like Russia, Ukraine, Brazil, Argentina, and Canada are signaling to farmers there to expand acreage and boost production,” says Leonard Sahling, vice president in CoBank's Knowledge Exchange Division. “Unless weather changes temper that expansion, we expect the market for grains and oilseeds—which are already fiercely competitive—to become even more aggressive in the year ahead.”







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