Cattle Outlook

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Cattle Outlook Risk Management

• James Mintert, Ph.D.
• Professor Extension State Leader
• Department of Agricultural Economics
• Kansas State University
• Nevada Cattlemens Association Convention
• Elko, Nevada
• November 17, 2006
• www.agmanager.info/livestock/marketing
• jmintert_at_ksu.edu

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A Shrinking IndustryResponding to a Lack of
Profitability
Current inventory is about 26 smaller than in
1975
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Rising Productivity Is Partially Responsible
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But Weaker Demand Was Key Beef Demand 1980-1998
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Measuring Changes In Beef Demand1998-2004
Demand in 04 Was Up About 25 from 1998 Level
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Measuring Changes In Beef Demand1998-2005
Beef Demand During All of 05 Decreased About
4 But Demand in 05 Was Still Up About 21 from
1998 Level
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Demand Improved Steadily from 98 through
04Downward Blip in 02 Following 9/11
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Downturn Got Underway in mid-2005
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Beef Demand ShiftersWhats been taking place
recently?

• Demand index does not indicate why shifts occur
• Possible reasons for recent downturn
• Low carb diet effect has worn off
• Larger chicken supplies
• Consumers disposable income growth slowing
• Expect more domestic demand weakness
• How do we turn this around?

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International Trade Outlook
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U.S. Was A Net Exporter From 1981-2003
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Top 5 Importers Accounted for 91 of U.S. Exports
U.S. needs to recapture these markets to regain
s and volume
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Cattle Imports from Canada Are Increasing But
Remain Well Below 2002s Record Level
Jan-July 2006 imports 32 below 2002s and 21
below 2001s
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Beef Imports From Canada Decline
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Result U.S. Imports Falling Below 2005s
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Where Are We Headed?

• Trade
• Other countries may have comparative advantage in
  cow-calf production
• U.S. strength is in high quality beef products
• Exports to Pacific Rim increasing in 07
• Regaining market share will take several years
• Market access is key
• Consumer incomes in importing countries are key
  to long-run growth in exports

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Long, Slow Road to Export Recovery
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Export Recovery Means Net Beef Imports in 2007
Could Be 1/2 2004s
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Supply Side in the U.S.
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Mid-Year Inventory Was Above 2005s, And
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Strong Profitability Encouraging Expansion, But
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Poor Pasture Conditions Could Be Holding Back
Expansion
Livestock Marketing Information Center Data
Source USDA/NASS
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U.S. Beef Cow Slaughter Up 17 vs. 2005
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But Producers Have Been Holding Back Heifers
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Slaughter Is Expected To Rise Modestly
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Long Term Trend Toward Higher WeightsBut Will
Rising Grain Prices Hold Weights Down?
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And Beef Production Will Rise Cyclically
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Prices Near Record High in 06 Again in 07
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But Higher Corn Prices Lead To Lower Bids for
Feeders
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Cattle Feeders Will Adjust Bids Based Upon Higher
Feed CostsPrices in 07 Headed Lower
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Rising Corn Prices Pushing Prices Lower
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Higher Feed Costs Mean Lower Prices Are
AheadCycle Peak in 05 06
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Ethanol, Corn Prices, Cattle
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3 Largest Corn Crops On Record
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But Corn Usage Has Been Growing Rapidly
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Ethanol Usage Growing Rapidly
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U.S. Will Need More Corn AcresHow Do We Get Them?
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It Will Take Higher Prices To Push Acreage Higher
Average Prices Will Be Higher and Frequency of
Price Spikes Could Increase
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Where Are Corn Prices Headed?Higher Corn Prices
Spell Trouble for Livestock Producers
Ethanol increases the likelihood of price spikes
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• Increasing Market Volatility Means Managing Risk
  Will Be More Important In The Future
• Livestock Risk Protection Insurance
  How Does It Work?

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LRP-What Is It?

• Livestock Risk Protection (LRP) Insurance
• LRP for feeder cattle available in Nevada
• Provides protection against a decline in CME
  Feeder Cattle Price Index while you own cattle
• CME Feeder Cattle Price Index is a 7 day weighted
  average of cash feeder cattle prices across the
  U.S.

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How Does LRP Work?

• To use LRP to protect against a price decline,
• you would purchase LRP insurance for a particular
  set of cattle ( of hd. ending wt.)
• you must choose
• Coverage Price (this is similar to an options
  Strike Price)
• End Date (e.g., the date coverage ends)
• Price you pay is known as LRP premium

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Definitions

• Expected End Value
• A forecast of the CME Feeder Price Index on the
  insurance policys end date
• Coverage Level
• The of the expected end value covered by the
  policy

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Definitions

• Coverage Price
• Level of protection provided by policy in /cwt.
• Expected End Value X Coverage Level Coverage
  Price
• End Date
• The date that coverage period ends for each
  contract
• You selects weeks of coverage desired
  (within limits set by RMA-usually 13 to 39 weeks)

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LRP Feeder Cattle Premium

• To calculate actual LRP premium you must know
• Number of cattle ready for market (weighing less
  than 9.0 cwt) on End Date
• Target Weight per head
• Ownership share in cattle

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LRP Feeder Cattle Premium

• Insured Value Equals
• of Head x Target Weight (cwt) x Coverage Price
  x Ownership Share ()
• Total Premium Equals
• Insured Value x Rate
• Producer Premium Equals
• Total Premium minus USDA Subsidy
• USDA Subsidy 13 of Total Premium

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LRP Premium Calculation Example

• An operation has 100 head of feeder cattle on
  Aug. 16
• Expects to market the feeder cattle at a target
  weight of 7.00 cwt each in mid-November
• Insured share is 100 percent
• Assume Expected End Value (updated daily by RMA
  on its website) is 116.45 per live cwt

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Premium Calculation Example

• Producer selects a coverage price which is a of
  the Expected End Value published by RMA
• Assume producer selects 110 per cwt. coverage
  price (e.g., 94 of RMAs Expected End Value)
• For this coverage price, the rate is 0.6773
• The premium subsidy is 13 percent

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Premium Calculation Example

• 100 head 7 cwt 700 cwt.
• 700 cwt. coverage price (110) 77,000
• 77,000 insured share (1.00)
• 77,000 Insured Value

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Premium Calculation Example

• 77,000 rate of 0.006773 521.52 Total
  Premium
• 521.52 .13 (subsidy) 67.80 subsidy
• 521.52 (total premium) minus 67.80 subsidy
  producer premium of 453.72 0.65/cwt.
  producer paid premium

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Calculating Indemnity

• Indemnity is payable if actual ending price is
  less than coverage price
• Calculate indemnity by
• Multiplying number of head by target weight (in
  live cwt.)
• Subtract actual ending value from coverage price
• Multiplying total weight by difference between
  actual ending value coverage price

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Indemnity Calculation Example

• Expected End Value for 13 weeks of coverage is
  116.45 per live cwt.
• Producer selects a coverage price of 110 per
  cwt. (e.g., 94 of Exp. End Value)
• Actual End Value is 97.77 per cwt. (e.g., CME
  Feeder Cattle Index 97.77 on End Date)

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Indemnity Calculation Example

• 100 head 7.00 cwt 700 cwt.
• Subtracting actual ending price of 97.77 from
  the coverage price of 110 12.23/cwt.
• Multiplying 700 cwt. by 12.23/cwt 8,561
• Multiplying 8,561 by insured share of 1.00
  gross indemnity payment of 8,561
• Net indemnity payment 8,107.30

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Indemnity Calculation Example

• What happens if CME Feeder Index on End date
  112?
• Subtracting actual ending price of 112 from the
  coverage price of 110 neg. 2/cwt.
• Therefore, no indemnity payment is made to
  producer
• This is analogous to a feeder cattle put option
  that expires worthless

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LRP Coverage Prices Levels

• Price guarantees change daily
• Premiums change daily
• Coverage available ranges from
• 70 to about 95 of Expected End Price,
• Max guarantee generally less than 95

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Premium

• Premium quotes via RMAs Premium Calculator
  available on USDA-RMAs web site
• Premium must be paid on day LRP insurance is
  purchased for coverage to be provided
• Rates available at
• http//www.rma.usda.gov/tools
• Under livestock reports
• Or use link on AgManager
• www.agmanager.info/livestock/marketing

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LRP Summary

• LRP protects against a decline in
• Feeder cattle price level as measured by CME
  Feeder Cattle Price Index
• LRP does NOT guarantee the basis
• LRP does not guarantee a cash price
• Policy does not cover any other peril

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LRP Summary

• Insure the exact number of head that you choose
• Flexible contract size matches small operations
  vs.
• Feeder cattle futures that represents about 67
  steers weighing 750 pounds
• Live cattle futures that represents about 33
  steers weighing 1200 pounds
• Can incrementally minimum price a few head at a
  time

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