Beef Production in the New Economic Environment GEOFF

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Beef Production in the New Economic Environment

• GEOFF BENSON, PhD
• Extension Economist
• Dept of Agricultural and Resource Economics
• North Carolina State University

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Outline

• Situation and Outlook
• Beef Production
• Sales
• Prices
• Forecasting prices
• Cost of production
• Weathering the Storm

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Beef Production, 2001-09F
Source USDA, WASDE reports
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Meat Production, 2001-09F
Source USDA, WASDE reports
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Consumer Demand

• At Home
• Muscle Meats
• Processed Meats
• Prepared Foods
• Meals Eaten Out

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Meat Demand Outlook

• Economic Outlook for 2009
• Income GNP down 2.0 from 2008
• Inflation 1.2, down from 2008 ( 3.8)
• Unemployment 8.4 up from 5.8 in 2008
• Population growth Up 0.9
• Other -- demographics, diet fads, etc.
• Meat demand down 1.1 lb./person
• Beef down 0.6 lb. per person
• Chicken down 1.1 lb. per person
• Pork up 0.7 lb. per person

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Prices, 2001-09F
Source USDA, WASDE reports
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2009 Price Outlook

• The futures market gives the best indication of
  what prices are likely to do because participants
  are putting their money where their mouths are
• BUT, prices do move based on new information,
  both expected and unexpected
• AND an individual producers cattle may not match
  the contract specifications, so projecting prices
  takes some extra effort

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Fat Cattle Futures, /100 lb, 3/6/09
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Feeder Cattle Futures, /100 lb, 3/6/09
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What does all this for me?

• Cow-calf
• Value of your cattle their particular
  characteristics
• Time of year of sale
• Cost of production
• Stockers
• Buying price and selling price
• Cost of gain

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Feeder Cattle Futures, /100 lb, 3/6/09
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Price Forecasting

• Nearby Futures Contract Price for sale month
• Basis futures price local cash market price
  for similar product
• Use premiums discounts to estimate the value of
  your cattle
• Weight
• Sex
• Frame size
• Muscling
• Breed or cross
• Other, e.g., market channel

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Price Forecasting

• The most useful comparison for a cow-calf
  producer is the NC cash (spot) price and the
  feeder cattle futures price for the closest month
  past the intended sale month
• But
• CME feeder cattle futures contract is for 650-849
  lb. ML 12 steers in truckload lots
• NC Auction Prices are for 600 to 799 lb. ML12
  steers
• Contract months are Jan, Mar, Apr, May, Aug,
  Sept, Oct, Nov.

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BASIS

• Basis is the difference between the spot cattle
  price in North Carolina and the price for
  comparable cattle in the futures market
• If basis is predictable, then we can use the
  futures market to project local North Carolina
  prices and use this to make business decisions
• Some historic basis data are available at
  http//www.ncsu.edu/project/arepublication/AREno32
  .pdf

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NC Basis, Avg. 1990-2000
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NC Basis, 1990-2000

• Negative
• Seasonal Smaller in spring, larger negative
  differences in the fall
• Varied by market, west to east
• Updated information is not available

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Price Forecasting

• Futures Contract Price for sale month
• Basis futures price local cash market price
  for similar product
• Use premiums discounts to estimate the value of
  your cattle
• Weight
• Sex
• Frame
• Muscle
• Breed
• Time of year/seasonality
• Other, e.g., market channel

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Graded Sales, M1 Steers, 1991-2001
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Graded Sales, M1 Steers, 1991-2001
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Graded Sales, M1 Heifers v. Steers, 1990-2001
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Graded Sales, 500-599 lb. Steers, 1990-2001
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Selected Breeds

• Angus
• Braford
• Brahman
• Brangus
• Braunveih
• Charolais
• Chianina
• Devon
• Galloway
• Gelbveih

• Red Poll
• Sahiwal
• Salers
• Santa Gertrudis
• Shorthorn (dual)
• Simmental
• South Devon
• Tarentais
• Zebu
• Crosses Composites

• Hereford
• Holstein (dairy)
• Jersey (dairy)
• Limousin
• Longhorn
• Maine Anjou
• Nellore
• Piedmontese
• Pinzgaur
• Polled Hereford

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Graded Sales, 500-599 lb. M1 Steers, 1991-2001
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Marketing Options

• Regular auction Base
• Graded sale
• Special programs, e.g., Southeast Pride,
  pre-conditioned sales
• Direct sale
• Truckload lots
• Retained ownership

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Marketing Options

• Choices are affected by
• Number of cattle for sale
• Uniformity of cattle
• Market premiums vary with method of sale
• Marketing cost varies with method of sale
• Consider risk

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Price Outlook

• Use futures price, basis, and information on
  premiums and discounts to estimate local prices
  as part of your production and marketing
  decisions
• But what about cost of production

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Source USDA, World Agricultural Supply Demand
Situation
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Prices Paid Index for Selected Inputs
Source Agricultural Prices, NASS, USDA, January
2009
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Forage Production Costs, NCSU Enterprise Budgets,
/ton of DM
GEOFF BENSON, ARE, NCSU
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Beef Production Costs, NCSU Enterprise Budgets,
2008, /head sold
Includes cost of cattle
GEOFF BENSON, ARE, NCSU
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Outlook Summary

• Outlook for US production, sales and prices is
  poor
• Production _at_ 26,110 mil. lb. ?
• Consumption _at_ 61.6 lb. per person ?
• Fed cattle prices _at_ 89.00/cwt.
• Feeder cattle prices at 102.00/cwt ?
• Feeder calf prices next fall are expected to be
  similar to 2008 and still good relative to
  historic prices
• Higher cost of production
• Stocker profits depend heavily on anticipating
  price movements correctly or hedging

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Where are Costs Profits Headed?

• Forage Production
• Continued higher fertilizer prices and tight
  supplies
• Temporary relief then higher fuel prices
• Longer term, general cost increases resulting
  from higher energy costs
• Cattle
• Higher forage costs
• Continued higher purchased feed prices
• Longer term, general cost increases resulting
  from higher energy costs
• Little change in cattle prices in 2009
• Losses for many producers in 2009

GEOFF BENSON, ARE, NCSU
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Economics works!

• When production costs increase
• Producers profits shrink
• Producers respond by buying and using less and/or
  looking for alternatives
• If adjustments in production practices fail to
  return the business to profitability producers
  cut back and some quit entirely
• Reduced supplies tighten up the market and prices
  increase to the point where producers can make
  adequate returns
• A new market balance is achieved

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Economics works!

• When demand falls
• Markets are oversupplied, prices fall
• Buyers respond to lower prices by buying more and
  by switching away from substitutes or
  alternatives, which lowers their prices too
• Producers respond to lower prices by producing
  less, which helps moderate the price reductions
  long term
• A new market balance is achieved

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Cattle Cycles

• Low prices force liquidation of breeding stock,
  adding to beef supplies and reducing prices
  further
• Reduced production leads to higher prices
  encouraging heifer retention for breeding,
  reducing beef supplies and raising prices further
  
• Lags causing the 10 to 12 year cycle
• Decision making
• 15 months to raise a heifer to breeding age
• Breeding seasonality 9-month gestation
• 14-18 month birth to slaughter

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Beef Product Flows

• CONSUMER

RETAILER
WHOLESALER
PROCESSOR
FINISHING
PACKER
STOCKER
COW-CALF
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The Big Picture Message

• In the near term, the US meats sector poultry,
  pork and beef must shrink so meat prices can
  increase. Shrink fewer livestock marketed
  and, probably, fewer producers
• The cow-calf producer takes more of a hit in a
  downturn and gets more of the gravy on the
  upswing
• An unanswered question is how the new cost
  structure affects regional competitiveness
• Eventually, prices must adjust to higher costs of
  production so that enough producers can make an
  acceptable profit to stay in business
• There is wide variation in financial performance
  among farms

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Cow-calf returns over operating expense, US
regions, 2006-7
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N/A
153
-111
-70
N/A
-169
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US avg. net income over operating expense/cow for
2006-7 -/10/cwt. Regional differences from US
average are shown
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MN Cow-calf Cost Returns, 2007
Source MN Farm Business Management database
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MN Stocker Cost Returns, 2007
Source MN Farm Business Management database
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Two Issues NC Producers Face

• All producers are not alike affect longer term
  financial prospects for each individual producer
  i.e., competitiveness
• Can you survive?
• If so, do you want to?
• Short term survival strategies

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1. Long term Why do you have Cattle?
OR
FUN OR MONEY?
GEOFF BENSON, ARE, NCSU
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Do you know your production cost?

• Operating cost - out of pocket expenses, e.g.
  forage production, other feed, vet, fuel, repairs
• Fixed/Ownership/Investment costs
• Depreciation
• Interest
• Taxes insurance
• Labor cost or charge for the value of your time

GEOFF BENSON, ARE, NCSU
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Are You Financially Healthy?

• Farm is profitable most years by return on
  investment to management
• Producer has cash flow to meet operating
  expenses, debt service, family living needs in a
  timely manner
• Business is solvent has low debt load and high
  equity as collateral for loans and as a reserve
• Financial performance cannot be predicted
  from farm performance
• There are relatively few practices that can
  be recommended in all situations

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2. Short-term Coping with Higher Costs

• Forage production costs
• Fertilization
• Choice of forage crop
• Renovation
• Forage utilization costs
• Pasture management
• Stored forages
• Risk (drought) management
• Cattle options

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Fertilization

• Fertilizer cost
• Shop around and price nutrients by the lb.
• Consider alternative sources, e.g., broiler
  litter
• Substitute legumes for bought N
• Mine P and pH -- if the farm has a future
• Rent more pasture
• Change the forage mix type of pasture, grazing
  v. stored forages
• Cut waste and losses

GEOFF BENSON, ARE, NCSU
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Pasture Fertilization

• Five Issues related to Nitrogen
• Production response to nitrogen and soil
  fertility status
• Cost of additional production
• Cost to graze an animal
• Effect on carrying capacity
• Effect on profitability

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Nitrogen Response in Tall Fescue
Source Mueller Green, NCAES, AG 338
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Nitrogen Response, lb. DM/per acre

• Fescue From Mueller Green

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Soil Fertility

• Response to N depends on soil type, pH and
  availability of other nutrients such as P and K
• Lime and other nutrients are needed to maintain
  fertility now and long term affects cost of the
  fertilization program
• Example Lime, P, K, etc. needed at a cost of 60
  per acre, applied N at .50, .75 and .90 per
  lb of N

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Average Cost per lb of DM

• Fescue yields from Mueller Green
• Average response 30 lb DM/1 lb. N
• /- 60/acre of lime, P, K, etc.

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Average Cost/Cow, N 60/acre

• If cow needs 30 lb DM per day
• 180 days of grazing/acre (no hay)
• Grazing loss 50 of production

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Carrying Capacity, Fescue e.g.

• Cow needs 30 lb DM per day X 180 days of
  grazing/acre (no hay) with grazing loss of 50
  10,800 lb DM production/cow

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Fertilization strategy

• Soil Test! Apply only what is needed to maintain
  soil fertility pH, P, K, etc.
• Fertilizer cost affects grazing cost per cow no
  or low N may not be the most profitable strategy
• Pasture response to N levels affects
  pasture carrying capacity ? joint decision about
  fertilization and number of cattle on the farm

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Forage Production Costs, NCSU Enterprise Budgets,
/ton of DM
GEOFF BENSON, ARE, NCSU
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Losses Grazing Management

• Use controlled grazing to reduce waste
• Loss 25 with strip or rotational grazing
• Loss 50 if cattle are grazed for, say, three
  weeks in the same pasture
• Controlled Grazing Example
• 10 acres at 2 tons DM/acre
• Permanent fencing water exist
• It costs 15 per move X 12 moves 180
• Cattle eat 15 tons v. 10 tons if set stocked
• Cost of saved feed 180/5 tons 36/ton DM
• Add any cost of transporting cattle, etc.

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Grazing Management Cost

• New investment in fencing, water, etc. is a major
  cost full economic cost can be up to 200 per
  acre for a rotational grazing set up
• Time equipment to move livestock
• Example
• ¾ Ton Pick-up _at_ 19.81 /hour
• Labor _at_ 9.40 /hour
• Total 29.21 /hour
• (4-wheeler cost is less than 10/hour)

GEOFF BENSON, ARE, NCSU
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Hay Making Cost, DM basis

• Small square bales -- 89/ton of DM (76 as made)
• Large round bales -- 78/ton of DM (66 as made)
• Add cost of growing the hay crop to this
• Hay costs 164/ton of DM for LRB (139 as made)
• Add to this the risk of rain losses in storage
  and feeding plus feeding costs
• What are your hay costs?
• What are your alternatives -- Can you buy it
  cheaper? Can you change your crop management to
  reduce hay needs, e.g., by changing
  fertilization, stockpiling?

GEOFF BENSON, ARE, NCSU
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Bale Feeding Costs

• 4.41/hr
• 11.95/hr
• 16.36/hr
• 9.40/hr
• 25.76/hr

• 2008 Tractor, 55 HP, spear
• Annual ownership cost
• Operating cost
• Total Machine cost
• Labor
• Total cost

GEOFF BENSON, ARE, NCSU
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Losses Add to Feed Costs

• Harvest losses range from 5 to 50 of
  harvestable production
• Storage losses 5 to 20 of feed made
• Feeding losses 5 to 15 of feed available
• Combined losses 15 to 50
• Evaluate cost effective ways of trimming
  losses

Source Sustainable Dairy Systems Manual, UT UK
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What is Your Total Ration Cost?

• Yields quality vary for different forages --
  Figure the nutritional needs of the animal to
  achieve desired performance
• Figure total ration cost when comparing
  alternative forages including
• Supplementary feeds, minerals, etc.
• Storage and feeding losses
• The cost of putting out feed(s)
• If different rations produce different levels of
  in animal performance, figure both income and
  cost, e.g., income over feed cost

GEOFF BENSON, ARE, NCSU
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Drought (Risk) Management

• Carry a hay reserve (made or bought)
• Plan for more acres than needed normally
• Harvest and store any surplus
• Harvest and sell any surplus
• Diversify
• Grow more than one type of forage
• Spread production geographically
• In years when yields are poor
• Buy supplementary forages
• Buy commodities and by-products to stretch
  supplies
• All incur cost. Which is least costly with
  your farm history?

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Cattle Options

• Change cattle types, numbers, management
  practices
• Cow numbers (fewer?), selling fewer calves taken
  to heavier weights?
• Improving animal performance
• Marketing -- prices premiums related to sale
  weight, frame, breed/color, season, choice of
  market etc.
• For stockers, buying and selling prices
• Value-added, e.g., finishing cattle direct
  marketing beef

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MN Cow-calf Cost Returns, 2007
Source MN Farm Business Management database
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Beef Production Costs, NCSU Enterprise Budgets,
2008, /head sold
Includes cost of cattle
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Whole Farm Issues

• Financial decisions depend on the whole farm and
  family situation
• Other farm enterprises, e.g., cattle on poultry
  and hog farms, supplementary enterprises on crop
  farms
• Farm overhead costs
• Farm tax benefits
• Ag Use valuation for property taxes
• Filing taxes as a farmer
• Non-farm income and lifestyle

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Summary

• Higher production costs will persist
• Livestock production and prices will adjust
  eventually so the remaining producers can make
  adequate returns. Who will survive?
• Livestock producers are a diverse group
• Family goals differ
• Type of operation, scale and production practices
  differ
• Profitability and financial health varies among
  farms

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Summary

• Long-term Questions
• Can your operation meet family goals and needs
  with increased costs of production?
• Do you have the financial resources to make it
  through the adjustment period?
• Making adjustments
• Know your cost of production and profit (loss)
  margin
• Identify alternative production systems and
  practices
• Evaluate the effects on income and/or costs

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Summary

• Evaluate forage options
• Growing your own forages
• Evaluate fertilizer sources and unit prices
• Evaluate optimum fertilizer use -- Consider
  fertilization and carrying capacity jointly
• Soil test and selectively Mine P pH
• Include more legumes
• Reduce losses-- Substitute time and management
  for cost
• Change forage mix
• Rent pasture

GEOFF BENSON, ARE, NCSU
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Summary

• Estimate impact of forage choices on total feed
  cost, including supplements, year round
• Evaluate cattle options -- Include the effects of
  changes in livestock type, numbers and
  performance on income
• How does the bottom line change? IS IT ENOUGH?
• There is nothing new in these ideas but the
  current economic environment creates added
  incentives to re-evaluate livestock enterprise
  and adopt proven profitable practices

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Summary

• No ilver Bullet
• No imple anwer!!
• Sometimes there are no solutions, just tough
  decisions
• Seek help with the economics if you are not
  comfortable doing it

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Geoff Benson

• Phone [phone]
• Fax [phone]
• E-mail geoff_benson_at_ncsu.edu
• Web page
• http//www.ag-econ.ncsu.edu/ faculty/benson/bens
  on.html
• NCSU Enterprise Budgets web site
• http//www.ag-econ.ncsu.edu/
• extension/Ag_budgets.html

GEOFF BENSON, ARE, NCSU
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