Risk Management Risk Management and the Cost of and the Cost of

ProductionProduction

University of Florida Beef Cattle University of Florida Beef Cattle Short CourseShort CourseMay 2-4, 2007May 2-4, 2007

Dr. Curt LacyDr. Curt LacyExtension Economist-LivestockExtension Economist-Livestock

University of GeorgiaUniversity of Georgiaclacy@uga.educlacy@uga.edu

University of Florida Beef Cattle Short Course

May 2-4, 2007

OverviewOverview

Recent trends and projected profits Recent trends and projected profits for 2007for 2007

Ways to manage risk in 2007Ways to manage risk in 2007

University of Florida Beef Cattle Short Course

May 2-4, 2007

Fertilizer Prices Fertilizer Prices 1997-20061997-2006

$100

$150

$200

$250

$300

$350

$400

$450

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

$/

ton

Nitrogen (AN) Phosphorous (DAP) Potash (Muriate)

Nitrogen prices have increased 76% since 2002

University of Florida Beef Cattle Short Course

May 2-4, 2007

Fuel Prices Fuel Prices 1997-20061997-2006

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$/

Gallo

n

Diesel (bulk)

Diesel prices are up 145% since 2002

University of Florida Beef Cattle Short Course

May 2-4, 2007

Impact of Fuel & Fertilizer Impact of Fuel & Fertilizer Prices on Cost of Prices on Cost of

ProductionProduction

$20$30$40$50$60$70$80$90

$100$110

2002 2007

500# Calf ($/ Cwt.) Hay ($/ ton)

Projected Profits for Projected Profits for 20072007ItemItem Returns Returns

Over Over Variable Variable

Costs Costs (ROVC)(ROVC)

Returns Returns Over Total Over Total

CostsCosts

(ROVC)(ROVC)

Expected Net Returns ($/cow) Expected Net Returns ($/cow) ($0.63)($0.63) ($90.94)($90.94)

Chance for Positive ReturnsChance for Positive Returns 49%49% 6%6%

Returns to Land, Labor, Returns to Land, Labor, Capital and Management Capital and Management ($/cow)($/cow)

$59.50$59.50 $59.50$59.50

Cost/cow ($/Cow)Cost/cow ($/Cow) $390.65$390.65 $481.09$481.09

Breakeven Price ($/cwt.)Breakeven Price ($/cwt.) $97.61$97.61 $120.57$120.57

Assumes 500 cows, 85% calf crop, 523# calf marketed in Aug-Sep

University of Florida Beef Cattle Short Course

May 2-4, 2007

High Return Producers High Return Producers Don’t Cheat On:Don’t Cheat On:

1.1. Animal healthAnimal health

2.2. NutritionNutrition

3.3. GeneticsGenetics

Source: Cattle-Fax

University of Florida Beef Cattle Short Course

May 2-4, 2007

Managing Risk in 2007 Managing Risk in 2007 and the Futureand the Future

1.1. Determine your costDetermine your cost2.2. Increase Calf Value (Revenue)Increase Calf Value (Revenue)

1.1. Higher priceHigher price2.2. More productionMore production

3.3. Reduce Cow CostReduce Cow Cost1.1. Cull open cowsCull open cows2.2. Cull unproductive cowsCull unproductive cows3.3. Examine replacement heifer alternativesExamine replacement heifer alternatives

4.4. Reduce the Cost of ProductionReduce the Cost of Production1.1. Evaluate economics of hay productionEvaluate economics of hay production2.2. Evaluate economics of annual foragesEvaluate economics of annual forages3.3. Consider alternative feedsConsider alternative feeds

University of Florida Beef Cattle Short Course

May 2-4, 2007

Know Your CostKnow Your Cost

1.1. $/Cwt. $/Cwt. ProducedProduced

2.2. $/Calf $/Calf MarketedMarketed

3.3. $/Cow$/Cow

Production Total

Costs Total Costs Variable $/Cwt.

WeanedCalves Total

Costs Total Costs Variable $/Calf

Exposed Females

Costs Total Costs Variable $/Cow

University of Florida Beef Cattle Short Course

May 2-4, 2007

Increase RevenueIncrease RevenueCalf ValueCalf Value

Forward price part of your Forward price part of your productionproduction

Short-term backgrounding/creep Short-term backgrounding/creep feedingfeeding

Retained ownershipRetained ownership StockeringStockering Custom-finishingCustom-finishing

What You Can Sell for Today-What You Can Sell for Today-Futures Based Price Futures Based Price

ProjectionsProjections

$80.00

$90.00

$100.00

$110.00

$120.00

May J ul J ul Aug Sep Oct Nov Dec

Basis Ocala, FL

$/c

wt.

500# steer 750# Steer

Source: CME & www.beefbasis.com

University of Florida Beef Cattle Short Course

May 2-4, 2007

What You Can Sell for Today-What You Can Sell for Today-Futures Based Price Futures Based Price

ProjectionsProjections

$400.00

$500.00

$600.00

$700.00

$800.00

$900.00

May J un J ul Aug Sep Oct Nov Dec

$/H

ea

d

500# steer 750# Steer

Creep-feeding or Short-term Creep-feeding or Short-term BackgroundingBackgrounding

Sell 500# Calf in July vs. 650 or 750 AugustSell 500# Calf in July vs. 650 or 750 August

WeightWeight Value Value ($/Head($/Head

))

AdditioAdditional nal

WeightWeight

AdditioAdditional nal

ValueValue

BreakevBreakeven COGen COG

500500 $541.0$541.088

650650 $661.0$661.022

150150 $119.8$119.844

$79.95$79.95

750750 $746.6$746.633

250250 $205.5$205.555

$82.22$82.22

University of Florida Beef Cattle Short Course

May 2-4, 2007

Reducing Cow Cost

1.1. Cull open cowsCull open cows

2.2. Cull unproductive cowsCull unproductive cows

3.3. Evaluate replacement female Evaluate replacement female economicseconomics

University of Florida Beef Cattle Short Course

May 2-4, 2007

Cull Unproductive CowsCull Unproductive Cows

Yeah Buts:Yeah Buts: Must be able to match cows and calvesMust be able to match cows and calves Based on average cow costBased on average cow cost Borderline young cows may get a passBorderline young cows may get a pass

Cost Cow Total - Price) Calf Weight x (Calf Profit Cow Annual

Cost Cow Total - Value Calf Profit Cow Annual

University of Florida Beef Cattle Short Course

May 2-4, 2007

Replacement Female Replacement Female EconomicsEconomics

Compare alternativesCompare alternatives Include the opportunity cost of Include the opportunity cost of

heifersheifers Do whatever it takes to get second Do whatever it takes to get second

calf heifers bredcalf heifers bred

Replacement Female Replacement Female Economics – Value of Economics – Value of

Getting 2Getting 2ndnd Calf Heifers Calf Heifers BredBred

% of 2% of 2ndnd Calf Calf

Heifers Heifers CalvingCalving

Current Current Economic Economic

ValueValue

Rate of Rate of ReturnReturn

Breakeven Breakeven Purchase Purchase

PricePrice

100%100% ($162)($162) 3.30%3.30% $919$919

85% (Base)85% (Base) ($222)($222) 1.96%1.96% $859$859

75%75% ($262)($262) 1.06%1.06% $819$819

50%50% ($362)($362) -1.13%-1.13% $718$718

$1,080 initial value, 7 years useful life, 7% interest

University of Florida Beef Cattle Short Course

May 2-4, 2007

Reducing the Cost of Reducing the Cost of ProductionProduction

Allocation of Expenses

Feed11%

Labor13%

Interest5%

Mktng + Other5%

R&M4%

Minerals + Vet10%

Hay18%

Pasture34%

Pasture and feed cost make up 63% of Variable Expenses

University of Florida Beef Cattle Short Course

May 2-4, 2007

Reducing the Cost of Reducing the Cost of ProductionProduction

1.1. Reduce pasture costReduce pasture cost

2.2. Hay production economicsHay production economics

3.3. Reduce feed costsReduce feed costs

University of Florida Beef Cattle Short Course

May 2-4, 2007

Reducing Pasture CostsReducing Pasture Costs

1.1. Reduce pasture costReduce pasture cost1.1. Soil testSoil test

2.2. Alternative fertilizersAlternative fertilizers

3.3. Legumes?Legumes?

4.4. Rotational grazing?Rotational grazing?

5.5. Economics of annualsEconomics of annuals

University of Florida Beef Cattle Short Course

May 2-4, 2007

Forage Production RiskForage Production Risk

4,000

6,000

8,000

10,000

12,000

Lbs. DM/ Ac.

00-01 01-02 02-03 03-04 04-05 05-06

Dry Matter Yield of Marshall Ryegrassat Tifton 2000-2006

Marshall

Average Yield

University of Florida Beef Cattle Short Course

May 2-4, 2007

Annual EconomicsAnnual Economics

$/Day Drylot Costs 100$ 125$ 150$ 175$ 200$

0.50$ 200 250 300 350 4000.75$ 133 167 200 233 2671.00$ 100 125 150 175 2001.25$ 80 100 120 140 1601.50$ 67 83 100 117 133

Grazing Days Required to Breakeven at Various Dollars Per Day Drylot Cost & Per Acre Cost

University of Florida Beef Cattle Short Course

May 2-4, 2007

Annual EconomicsAnnual Economics

Cost Feedt Replacemen

Cost Forage Required Days Grazing

Days Grazing

Cost Forage Cost Feedt Replacemen

University of Florida Beef Cattle Short Course

May 2-4, 2007

Reducing Pasture CostsReducing Pasture Costs

2.2. Hay productionHay production1.1. What are your costs?What are your costs?

2.2. Buy hay/reduce stocking rate?Buy hay/reduce stocking rate?

3.3. Corn silage?Corn silage?

4.4. Baleage?Baleage?

5.5. Irrigation?Irrigation?

Costs of Producing HayCosts of Producing Hay

50

60

70

80

90

100

110

120

130

140

150

$/to

n

2000 2001 2002 2003 2004 2005 2006

Actual Production Costs for Hay ($/Ton)Southwest Georgia Experiment Station (Plains, GA)

2000-2006

$/ton

Cost Comparison of Hay Cost Comparison of Hay and Silageand Silage

ItemItem VC VC ($/ac.($/ac.

))

AF/VC AF/VC ($/ton)($/ton)

DM/VC DM/VC ($/ton)($/ton)

AF/TC AF/TC ($/ton)($/ton)

DM/TC DM/TC ($/ton)($/ton)

Bermuda Bermuda hay hay DrylandDryland

413.1413.199

56.3756.37 66.3266.32 74.7474.74 87.7387.73

Bermuda Bermuda hay hay IrrigatedIrrigated

512.2512.288

51.2351.23 62.2762.27 65.3265.32 76.6776.67

Corn Corn silage silage DrylandDryland

491.9491.933

32.8032.80 93.7293.72 35.6135.61 101.74101.74

Corn Corn Silage Silage IrrigatedIrrigated

693.3693.377

31.5231.52 90.0590.05 37.9837.98 108.51108.5185% DM Hay, 35% DM Silage

University of Florida Beef Cattle Short Course

May 2-4, 2007

Reducing Feed CostsReducing Feed Costs

3.3. Reduce feed costsReduce feed costs1.1. Forage testForage test2.2. Consider alternative feedsConsider alternative feeds

1.1. Crop by-products Crop by-products 1.1. CottonseedCottonseed2.2. Soy hullsSoy hulls3.3. MolassesMolasses4.4. DDGDDG

2.2. Commodity feedsCommodity feeds1.1. Bakery productsBakery products2.2. Other manufactured productsOther manufactured products

3.3. CONFIRM INGREDIENTS OF BY-CONFIRM INGREDIENTS OF BY-PRODUCTSPRODUCTS

University of Florida Beef Cattle Short Course

May 2-4, 2007

Alternative Feedstuffs Alternative Feedstuffs Economics CalculatorEconomics Calculator

Excel spreadsheetExcel spreadsheet Users enter current or base feeding Users enter current or base feeding

scenario and alternative feeding scenario and alternative feeding scenarioscenario

Users also enter cost info for Users also enter cost info for additional facilities or equipmentadditional facilities or equipment

Net returns for the alternative Net returns for the alternative feeding scenario are calculated on feeding scenario are calculated on per herd and per cow basisper herd and per cow basis

University of Florida Beef Cattle Short Course

May 2-4, 2007

Decision-aidsDecision-aids

Replacement Female CalculatorReplacement Female Calculator Marketing Alternatives CalculatorMarketing Alternatives Calculator Alternative Feedstuffs CalculatorAlternative Feedstuffs Calculator

WWW.UGABEEF.ORG

University of Florida Beef Cattle Short Course

May 2-4, 2007

SummarySummary 2007 and the next few years will be 2007 and the next few years will be

challenging for beef cattle producers.challenging for beef cattle producers. Don’t cheat on the important thingsDon’t cheat on the important things

HealthHealth NutritionNutrition GeneticsGenetics

MarketingMarketing High feed prices create economic incentives High feed prices create economic incentives

for “grass-weight” on calves and feeders. for “grass-weight” on calves and feeders. Retaining ownership MAY be an alternativeRetaining ownership MAY be an alternative

University of Florida Beef Cattle Short Course

May 2-4, 2007

SummarySummary

CowsCows Cull open and unproductive cows.Cull open and unproductive cows. Compare replacement female Compare replacement female

alternatives.alternatives. Production CostsProduction Costs

Examine your pasture costs.Examine your pasture costs. Revisit hay costs.Revisit hay costs. Consider other forage alternatives.Consider other forage alternatives. Look at alternative feedstuffs.Look at alternative feedstuffs.