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% 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.” |
