Price Risk Management in Extension Beef Carcass Evaluation Programs: The

Georgia Beef Challenge Experience

R. Curt Lacy, Patsie Cannon, Jim Collins, John C. McKissick, and Robert L. Stewart

Department of Agricultural & Applied Economics, UGA

Department of Animal & Dairy Sciences, UGA

Georgia Cattlemen’s Association

Thanks to our partners

Georgia Cattlemen’s Association Georgia Department of Agriculture Iowa State University Tri-County Steer Carcass Futurity (TCSCF) USDA – Agricultural Marketing Service

Highlights of the Georgia Beef Challenge

Began in 1991 as a way for producers to gather information regarding the type of cattle they produce

Partnership between UGA, GA Cattlemen’s Association, GA Department of Agriculture/USDA-AMS, and other industry partners

Goals of the GBC– Improve the marketability of Georgia-bred cattle by

establishing a database of feedlot performance and carcass information

– Provide educational information to Georgia cattlemen regarding the carcass merit of their genetics and explore the feasibility of retained ownership.

Growth of the Georgia Beef Challenge

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Head Consigned

How Does it Work?

1. Producer completes and mails consignment form2. Producer is told when and where to deliver his calves3. At delivery cattle are weighed, graded, and assigned a

market price4. Calves are shipped to IA5. Members of the Tri-County Steer Futurity (TCSF) feed the

calves6. The animals are harvested and marketed on a carcass

basis7. Carcass and production data are returned to producers

along with a check (usually)

History of Risk Management in the GBC

In early years done on an ad-hoc basis As numbers grew so did the RM implications

county agent began doing projections and handling RM after consulting with GBC personnel & consignors

He soon realized there had to be a better way About 3 years ago a RM Committee was

formed to handle RM for the program

Georgia Beef Challenge Risk Management Plan

Risk Management Committee comprised of extension economists, beef specialists, and producers

Consignors approve pricing objectives at annual meeting

RMC implements the plan

Pricing Objectives for 2004-2005

1. Lock in a $50 profit when available

2. Buy enough protection to lock in value of cattle when they left GA

3. Do whatever is necessary to limit losses to $50/head

Making Decisions

1. Patsie Cannon sends a report on the numbers, weights, and sexes of cattle when they are shipped.

2. Curt Lacy uses UGA Custom Finishing Budgets to estimate breakevens and estimated profits.

3. Risk Management committee discusses and evaluates alternatives via phone or e-mail

4. A decision is made and implemented via our broker in Iowa

Caveats

1. Producers with a futures contract worth of cattle in the same pen can do their own risk management

2. They can consult with the risk management committee regarding alternatives

3. They can ask the risk management committee for assistance in implementing their plan

4. They can use our broker in IA

Alternatives Utilized

Hedge Put option Synthetic put Fence ½ hedge

Example Worksheets

Example Report 1 Breakeven Example Final Report

Profits From Feeding

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Profits per Head

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Profits Per Head for 2003-2004

$47.76/head profit average

Lessons Learned – General

Our genetics are as good as any Preconditioning pays when it comes to

shipping cattle Price risk management is important

Lessons Learned - Risk Management

It is better to have a plan and to let “experts” implement the plan

Producers need to a have a clear understanding of what they are agreeing to

It is imperative that breakevens be calculated for every pen

Past feedlot and carcass performance do play a role in breakevens

Communications between feedlots, broker, and risk management committee are crucial

Lessons Learned – Risk Management

There is a HUGE difference between a textbook hedge/option and the real world

Managing price risk on the input side is less straightforward– Hard to estimate physical needs– Timing of feed needs is difficult– Some type of cash strategy probably works best

Lessons Learned – Risk Management

Live Cattle options are different from grains Often there is very little liquidity at the strike

price you want Sometimes delivery dates make you exit early Timing of sales can create “opportunities” for

hedging or options

Changes in Attitudes, Latitudes, and Behaviors

Some producers have: Learned that not everyone can be above

average Decided to focus on raising high quality feeder

calves Changed genetics Started preconditioning and vaccinating Developed their own risk management plans

Other Developments

Resulted in cattle marketing workshops Some collective feeder cattle sales now require

some form of carcass data Some producers raising discounted feeder

cattle have begun retaining ownership Cattle shipped in 2004-2005 have EID tags USDA-AMS FSMIP Grant

Summary

GBC has been a very educational program for beef cattle producers

Risk management makes the carcass information gathering process less expensive

There is considerable difference in teaching risk management and actually doing it!!