With prices for corn and other grain
commodities skyrocketing, along with increasing fuel costs, many
beef producers are likely asking themselves the question, “Where
will it end?”
Unfortunately, no one has the answer. So, the next question
becomes, “What should I do?”
Here, there is consensus on the answer. K-State ag economist
James Mintert, longtime industry economist Harlan Hughes, and
Barry Dunn with the King Ranch Institute for Ranch Management
all give the same advice to cow-calf producers – “Find ways to
be a low cost operator.”
Hughes says, “We’re operating in an environment we’ve never been
in before…It’s a whole new ball game with $5-6 corn to finish
cattle on.” He acknowledges that beef prices have still remained
good, but there are still a lot of unknowns.
Likewise, Dunn says, “It seems we
were all caught off guard with the tremendous run up in costs.
We’ve been enjoying high prices, but our costs are just
exploding at the same time.” As an example, Dunn says annual cow
costs for 2008 are probably going to average $460-560/head for
the year – when they are typically $360/year.
Mintert is projecting those cow
costs could even be as high as $700/cow for some producers in
2008.
With those kind of projections,
it could be a rough ride ahead for cattle producers. Dunn says,
“I think in the future, operations that rely on high levels of
labor, fossil fuel, harvested or purchased feed will be at
risk.”
To that end, he adds, “More than
anything being able to control costs – that’s the recipe for
survival.”
Thrifty Thoughts
So, where do you start to squeeze your costs down or manage your
risk? This trio offers a range of ideas to consider.
Lower investments. Dunn suggests
looking at ways to lower your investment in order to lower
costs. For example, perhaps you downsize the number of vehicles
– especially new ones – or equipment that the ranch owns. He
also says renting a portion of the land you run cattle on is
still cheaper than owning land.
Look at replacements. Along with
looking at investments, Dunn suggests putting some thought into
your replacement female strategy. “It takes several years for a
young female to pay, so the operation with the lowest level of
replacements is most profitable,” Dunn says. He adds that this
is especially important for commercial operations. “I recognize
that a rapid replacement rate is important for seedstock
operators, but for commercial producers, bulls are where you’ll
make the most genetic change. So keeping a strong healthy cow as
long as you can is important for profitability.”
Aim for average. Dunn makes the
point that almost everything has a point of diminishing return.
So rather than trying to produce 700-lb. weaning weight calves
at an exorbitant cost, go for the lower cost alternative of
500-weight calves. Likewise, a 98% pregnancy rate may be great,
but what did it cost you to get that?
Maintain herd health. Dunn says
being proactive on herd health and using preconditioning
programs is still important. He says, “There’s some paybacks and
it doesn’t cost that much. It’s not a place to cut costs.”
Crossbreed. Dunn says, “On most
ranches if I could change one thing it would be to bring
crossbreeding back to take advantage of heterosis. It produces a
20-25% improvement in production, and increases longevity of
cows which in turn reduces investment and should result in lower
breakevens.”
Match cow and environment. Dunn
says this doesn’t mean only small cows will do, it simply means
knowing what type of cow is most efficient in your environment.
Likewise, Mintert emphasizes that feed efficiency will be an
increasingly important trait as the industry battles high feed
costs.
Manage your range. By matching
stocking rate with carrying capacity and having the ability to
be flexible with stocking rates for drought management, Dunn
says you’ll also be able to better manage your cowherd costs.
Be savvy at marketing. Hughes
advocates that this requires knowing your breakeven costs and
looking at unit cost of production per pound of weaned calf.
Dunn says networking is important to the marketing process, and
adds that not only should you focus on how you market calves,
but also capitalize on how you sell cull cows.
Rethink retaining. For 2008,
Hughes believes it will be hard for cow-calf producers to add
value to calves beyond weaning. “I’m not excited about retained
ownership in 2008; my numbers don’t support it; and I’m not
encouraging it. My recommendation is to sell at weaning and try
to raise 2009 calves cheaper.”
Records a must. Hughes also
suggests herd performance records are now more important than
ever. He tells producers, “You need to use records to figure out
how to push your cows to produce more…It will require intensive
management of herds, but increasing production – without
increasing costs – is the best way to reduce unit cost of
production.”
Manage risk. Lastly, producers
may consider becoming more active in risk management through
hedging and the futures market. Mintert references a new website
–
www.beefbasis.com – that has been developed as a cattle
basis risk analysis tool to help improve marketing decisions.
The site is free to use and was developed by K-State, USDA’s
Risk Management Agency and Custom Ag Solutions.
What’s Ahead?
As cow-calf operators make adjustments, what can be expected for
the remainder of 2008?
Mintert is forecasting that cattle prices will soften some. For
calf prices he’s anticipating $115-117, which is down from 2007
prices.
The futures market suggests a
$111 average cash price for 700-800 Kansas steer prices in the
last half of 2008. Mintert calls that “more optimistic” than he
thinks the cash price will likely be.
Mintert says a reduction in the
U.S. beef cow inventory is also starting to occur, but says the
rate of reduction remains to be seen. “The bulk of cow slaughter
occurs in the fourth quarter of the year, so the extent of the
reduction is unclear.”
Hughes also predicts that due to
the higher prices for grain commodities, farmers who have beef
cows will likely be getting out of the beef business. But he
adds, “This should help cattle numbers in total go down. If
demand remains steady, prices should stay up and will add
strength to the remaining beef industry.”
“I think cow-calf producers will
do O.K.,” says Hughes, but he reiterates that the key will be
being a low cost operator – “that’s the qualifier,” he
concludes.
A Changing Economy
Despite the slow down in the U.S. economy, a bright spot for the
beef industry is the continued growth for beef exports – which
in turn is helping keep beef demand and prices up.
According to the U.S. Meat Export Federation, beef exports
showed impressive gains during the first quarter of 2008, with
the outlook for even more growth. Highlights from the first
quarter included a 29% increase to 435.7 million pounds –
representing a 40% increase in value to $682.7 million.
K-State economist James Mintert
says beef demand – both domestic and via exports – are very
important to the future picture of the beef industry. He
explains that steady or increasing demand will help keep cattle
prices up, which in turn can offset some of the escalating costs
the industry has seen.
But the question is how fast the
demand can grow? Domestically, Mintert says it would be nice to
get stronger beef demand, but that’s not likely to happen in the
next year or two given the economy.
Internationally, Mintert says,
“Exports are growing, but not rapidly enough.” He adds that
Japan and South Korea are two key U.S. beef customers that will
greatly help the U.S. beef industry as their resumption of U.S.
beef trade gets ramped back up. Export levels have not come
close to reaching their pre-BSE levels in 2003.
U.S. exports to Mexico, Canada,
and relatively new trading partners such as Vietnam have also
helped exports in 2008 grow from last year. This year U.S. beef
exports are expected to be 1.7 billion pounds, a 19% increase
from 2007. Next year’s exports are expected to increase an
additional 11%, to 1.89 billion pounds.
While the demand picture remains
fairly positive, there are some other issues building in the
industry that won’t likely help the economy. They include:
A smaller livestock sector across
the board, meaning fewer numbers of beef, poultry and pork.
Mintert says while that is supportive of live prices, “That’s
just starting, so the implications on food prices is yet to be
seen for 2009 and beyond.”
Additionally, rising feed and
energy costs have had a big impact on cattle feeders and
packers. Mintert anticipates that another beef plant will close
in the next year to get capacity in line with cattle numbers. As
corn is gobbled up for ethanol, he sees some shifts in cattle
feeding as well. Namely, he says the Southern Plains will likely
lose some of its cattle feeding market share while the Northern
Plains gains cattle feeding numbers because of the available
byproduct feeds.
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