Beef Production in the New Economic Environment GEOFF BENSON, PhD Extension Economist Dept of...

Beef Production in the New Beef Production in the New Economic EnvironmentEconomic Environment

GEOFF BENSON, PhDExtension Economist

Dept of Agricultural and Resource EconomicsNorth Carolina State

University

GEOFF BENSON, ARE, NCSU 2

OutlineOutline

Situation and OutlookBeef Production Sales Prices

Forecasting prices Cost of production Weathering the Storm


Beef Production, 2001-09FBeef Production, 2001-09F

Source: USDA, WASDE reports


Meat Production, 2001-09FMeat Production, 2001-09F



Consumer DemandConsumer Demand

At HomeMuscle Meats

Processed Meats

Prepared Foods

Meals Eaten Out


Meat Demand OutlookMeat 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


..

20

30

40

50

60

70

80

90

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

Lb./P

erso

nPER CAPITA MEAT CONSUMPTION, 1980-2009F

BEEF PORK BROILER


Prices, 2001-09FPrices, 2001-09F



2009 Price Outlook2009 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


Fat Cattle Futures, Fat Cattle Futures, $/100 lb, 3/6/09$/100 lb, 3/6/09


Feeder Cattle Futures, Feeder Cattle Futures, $/100 lb, 3/6/09$/100 lb, 3/6/09


What does all this for me?What does all this for me? Cow-calf:

Value of your cattle – their particular characteristics

Time of year of saleCost of production

Stockers:Buying price and selling priceCost of gain


Feeder Cattle Futures, Feeder Cattle Futures, $/100 lb, 3/6/09$/100 lb, 3/6/09


Price ForecastingPrice 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 cattleWeightSexFrame sizeMusclingBreed or crossOther, e.g., market channel


Price ForecastingPrice 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

ButCME feeder cattle futures contract is for

650-849 lb. M&L 1&2 steers in truckload lots

NC Auction Prices are for 600 to 799 lb. M&L1&2 steers

Contract months are Jan, Mar, Apr, May, Aug, Sept, Oct, & Nov.


““BASIS”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


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

-14

-12

-10

-8

-6

-4

-2

0

J F M A M J J A S O N D

$ p

er c

wt.

AshevilleSiler CitySmithfield


NC Basis, 1990-2000NC 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


Price ForecastingPrice 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


Graded Sales, M1 Steers, Graded Sales, M1 Steers, 1991-20011991-2001

.Weight, lb.

Fall Calf Spring Stocker

400-499 + 4.5¢ + 3¢

500-599 Base Base

600-699 - 3¢ - 11¢

700-799 - 7¢ - 19¢


Graded Sales, M1 Steers, Graded Sales, M1 Steers, 1991-20011991-2001

.

Weight, lb.

Fall Calf Fall Calf

400-499 + 4.5¢ + 11.5¢

500-599 Base + 7¢

600-699 - 3¢ + 4¢

700-799 - 7¢ Base

Price relationships using different bases. 7-weight base is appropriate for comparing your cattle to the futures price.


Graded Sales, M1 Heifers v. Graded Sales, M1 Heifers v. Steers, 1990-2001Steers, 1990-2001

Weight, lb. Fall Spring

400-499 -12¢ -15¢

500-599 -8.5¢ -14¢

600-699 -8¢ -12¢

700-799 -6.5¢ -6¢


Graded Sales, 500-599 lb. Graded Sales, 500-599 lb. Steers, 1990-2001Steers, 1990-2001

Grade Fall Spring

M1 Base Base

S1 -11¢ -16.5¢

LMS2 -6¢ -9.5¢


Selected BreedsSelected 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

HerefordHolstein (dairy)Jersey (dairy)LimousinLonghornMaine AnjouNellorePiedmontesePinzgaurPolled Hereford


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

Breed Fall Spring

Black Base Base

B&W + 0.5¢ + 0.5¢

Exotic X - 6¢ - 6¢

Hereford - 10¢ - 3¢

Str. Cont. - 12¢ - 14¢


Marketing OptionsMarketing Options Regular auction = Base Graded sale Special programs, e.g., Southeast

Pride, pre-conditioned sales Direct sale Truckload lots Retained ownership


Marketing OptionsMarketing Options Choices are affected by

Number of cattle for saleUniformity of cattle

Market premiums vary with method of sale

Marketing cost varies with method of sale

Consider risk


Price OutlookPrice 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…


..

Source: USDA, “World Agricultural Supply & Demand Situation


Prices Paid Index for Selected InputsPrices Paid Index for Selected Inputs

USDA Index

1990-92 = 100Jan 2006

Jan 2007

Jan 2008

Jan 2009

% (06/07) to ‘09

Nitrogen fert. 236 202 283 380 + 74%

P & K fert. 168 149 257 353 + 126%

Diesel fuel 236 241 332 232 - 3%

Field Crop Seeds 177 191 218 287 + 56%

Source: Agricultural Prices, NASS, USDA, January 2009


Forage Production Costs, NCSU Forage Production Costs, NCSU Enterprise Budgets, $/ton of DMEnterprise Budgets, $/ton of DM

Crop 2006 2008

Perennial cool season pasture 60 86

Per. grass - clover pasture 45 64

Cool season grass hay, Lge Rnd Bale 124 164

Warm season perennial pasture 63 90

Warm season per. hay, Lge Rnd Bale 90 124

Summer annual 66 101

Winter annual 60 110

Corn silage 67 101

Small grain silage 101 137



Beef Production Costs, NCSU Enterprise Beef Production Costs, NCSU Enterprise Budgets, 2008, $/head soldBudgets, 2008, $/head sold

Enterprise 2006 2008

Cow-calf (88% calf crop) 858 1,136

Back-grounding on winter annual pasture*

794 967

Summer grazing on spray field pasture @ $0 fertilizer*

769 921

Finishing on grain* 1,152 1,432

Finishing on pasture* 1,007 1,168

GEOFF BENSON, ARE, NCSU 32* Includes cost of cattle


Outlook SummaryOutlook Summary Outlook for US production, sales and

prices is poor: Production @ 26,110 mil. lb. Consumption @ 61.6 lb. per person Fed cattle prices @ $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


Where are Costs & Profits Headed?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


Economics works!Economics works! When production costs increase

Producers’ profits shrinkProducers 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



Economics works!Economics works! When demand falls

Markets are oversupplied, prices fallBuyers 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


Cattle CyclesCattle 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

Beef Product & $$ FlowsBeef Product & $$ Flows

41

$ CONSUMER $ RETAILER

WHOLESALER

PACKER FINISHING

STOCKERCOW-CALF

PROCESSOR

GEOFF BENSON, ARE, NCSU

The Big Picture MessageThe 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



--$$111111

+$153

N/A-$169-$169--$70$70

+$55

US avg. net income over operating expense/cow for 2006-7 = -$/10/cwt. Regional differences from US average are shown

+$1

+$62N/A

Cow-calf returns over operating expense, US & regions, 2006-7


MN Cow-calf Cost & Returns, 2007MN Cow-calf Cost & Returns, 2007

LowProfit

Avg.Profit

HighProfit

Revenue $394 $524 $710

Operating cost $481 $437 $376

Margin over op. cost -$87 $87 $334

Fixed & O/H cost $149 $115 $79

Labor & Mgt charge $83 $84 $102

Total cost $713 $836 $556

Net Return -$319 -$112 $154

Source: MN Farm Business Management database


MN Stocker Cost & Returns, 2007MN Stocker Cost & Returns, 2007

LowProfit

Avg.Profit

HighProfit

Revenue, net $110 $207 $252



Fixed & O/H cost $59 $25 $21


Total cost $333 $223 $187

Net Return -$223 -$16 $65


Two Issues NC Producers FaceTwo 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


GEOFF BENSON, ARE, NCSU 47GEOFF BENSON, ARE, NCSU 47

1. Long term: Why do you have Cattle?1. Long term: Why do you have Cattle?

OR

FUN OR MONEY?


Do you know your production cost?Do you know your production cost?

Operating cost - out of pocket expenses, e.g. forage production, other feed, vet, fuel, repairs

Fixed/Ownership/Investment costsDepreciationInterestTaxes & insurance

Labor cost or charge for the value of your time

Are You Financially Healthy?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


2. Short-term: 2. Short-term: Coping with Higher CostsCoping with Higher Costs Forage production costs

Fertilization

Choice of forage crop

Renovation

Forage utilization costsPasture management

Stored forages

Risk (drought) management Cattle options



FertilizationFertilization Fertilizer cost

Shop around and price nutrients by the lb.Consider alternative sources, e.g., broiler

litterSubstitute legumes for bought N“Mine” P and pH -- if the farm has a futureRent more pasture

Change the forage mix – type of pasture, grazing v. stored forages

Cut waste and losses



Pasture Fertilization

Five Issues related to NitrogenProduction response to nitrogen

and soil fertility statusCost of additional productionCost to graze an animalEffect on carrying capacityEffect on profitability


Source: Mueller & Green, NCAES, AG 338

Nitrogen Response in Tall Fescue


Nitrogen Response, lb. DM/per acre Fescue: From Mueller & Green

N applied, lb/acre

Production, lb of DM/ac

Ave- erage

Inc-rease

0 1,500-2,100 1,800 --

100 4,200-5,450 4,825 3,025

150 6,000-8,100 7,050 2,225


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


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.

Cost: $/lb of N

0 lb. N no P,K

100 lb N + P, K

150 lb N + P, K

$0.50 0 2.3¢ 1.9¢

$0.75 0 2.8¢ 2.4¢

$0.90 0 3.1¢ 2.8¢


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

N Cost 0 Fert. 100 lb N 150 lb N

$0.50/lb $0 $246 $207

$0.75/lb $0 $302 $264

$0.90/lb $0 $336 $299


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

0 Fert. 100 lb N 150 lb N

DM prod/ac 1,800 4,825 7,050

Acres/cow 6.0 2.2 1.5

Cows per 100 acres

17

45

65


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


Forage Production Costs, NCSU Forage Production Costs, NCSU Enterprise Budgets, $/ton of DMEnterprise Budgets, $/ton of DM

Crop 2008

Perennial cool season pasture 86

Perennial grass - clover pasture 64

Cool season grass hay, Lge Round Bale 164

Warm season perennial for grazing 90

Warm season perennial hay, LR Bale 124

Summer annual 101

Winter annual 110

Corn silage 101

Small grain silage 137



Losses: Grazing Management Use controlled grazing to reduce waste

Loss ~ 25% with strip or rotational grazingLoss ~ 50% if cattle are grazed for, say, three

weeks in the same pasture Controlled Grazing Example

10 acres at 2 tons DM/acrePermanent fencing & water exist It costs $15 per move X 12 moves = $180Cattle eat 15 tons v. 10 tons if set stockedCost of saved feed = $180/5 tons = $36/ton DM

Add any cost of transporting cattle, etc.


Grazing Management CostGrazing 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 @ $19.81 /hourLabor @ $ 9.40 /hourTotal = $29.21 /hour (4-wheeler cost is less than $10/hour)


Hay Making Cost, DM basisHay 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?


Bale Feeding CostsBale Feeding Costs

2008 Tractor, 55 HP, + spear

Annual ownership cost

Operating cost

Total Machine cost

+ Labor

Total cost

$ 4.41/hr

$ 11.95/hr

$ 16.36/hr

$ 9.40/hr

$ 25.76/hr


Losses Add to Feed CostsLosses 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


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


Drought (Risk) ManagementDrought (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?



Cattle Options Change cattle types, numbers,

management practicesCow numbers (fewer?), selling fewer

calves taken to heavier weights?Improving animal performanceMarketing -- prices & premiums related to

sale weight, frame, breed/color, season, choice of market etc.

For stockers, buying and selling pricesValue-added, e.g., finishing cattle & direct

marketing beef


MN Cow-calf Cost & Returns, 2007MN Cow-calf Cost & Returns, 2007

LowProfit

Avg.Profit

HighProfit

Revenue $394 $524 $710



Fixed & O/H cost $149 $115 $79


Total cost $713 $836 $556

Net Return -$319 -$112 $154



Beef Production Costs, NCSU Enterprise Beef Production Costs, NCSU Enterprise Budgets, 2008, $/head soldBudgets, 2008, $/head sold

Enterprise 2008

Cow-calf (88% calf crop) 1,136

Back-grounding on winter annual pasture*

967

Summer grazing on spray field pasture @ $0 fertilizer*

921

Finishing on grain* 1,432

Finishing on pasture* 1,168

* Includes cost of cattle

Whole Farm IssuesWhole Farm Issues Financial decisions depend on the

whole farm and family situationOther farm enterprises, e.g., cattle on

poultry and hog farms, supplementary enterprises on crop farms

Farm overhead costsFarm tax benefits

Ag Use valuation for property taxes Filing taxes as a farmer

Non-farm income and lifestyle



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 differType of operation, scale and production

practices differProfitability and financial health varies among

farms


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 adjustmentsKnow your cost of production and profit

(loss) margin Identify alternative production systems and

practices Evaluate the effects on income and/or costs


SummarySummary 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



SummarySummary 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



SummarySummary No $ilver Bullet$ No $imple an$wer$!! Sometimes there are no solutions, just

tough decisions Seek help with the economics if you are

not comfortable doing it

=+


Geoff BensonGeoff Benson

Phone: (919) 515-5184 Fax: (919) 515-6268 E-mail: [email protected] Web page: http://www.ag-econ.ncsu.edu/

faculty/benson/benson.html NCSU Enterprise Budgets web site:http://www.ag-econ.ncsu.edu/extension/Ag_budgets.html

Beef Production in the New Economic Environment GEOFF BENSON, PhD Extension Economist Dept of...

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