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Beef Production in the New Economic Environment GEOFF BENSON, PhD Extension Economist Dept of Agricultural and Resource Economics North Carolina State.

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Presentation on theme: "Beef Production in the New Economic Environment GEOFF BENSON, PhD Extension Economist Dept of Agricultural and Resource Economics North Carolina State."— Presentation transcript:

1 Beef Production in the New Economic Environment GEOFF BENSON, PhD Extension Economist Dept of Agricultural and Resource Economics North Carolina State University

2 GEOFF BENSON, ARE, NCSU2 Outline n Situation and Outlook  Beef Production  Sales  Prices n Forecasting prices n Cost of production n Weathering the Storm

3 GEOFF BENSON, ARE, NCSU3 Beef Production, F Source: USDA, WASDE reports

4 GEOFF BENSON, ARE, NCSU4 Meat Production, F Source: USDA, WASDE reports

5 GEOFF BENSON, ARE, NCSU5 Consumer Demand n At Home  Muscle Meats  Processed Meats  Prepared Foods n Meals Eaten Out

6 GEOFF BENSON, ARE, NCSU6 Meat Demand Outlook n 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. n 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

7 GEOFF BENSON, ARE, NCSU7.

8 8 Prices, F Source: USDA, WASDE reports

9 GEOFF BENSON, ARE, NCSU Price Outlook n The futures market gives the best indication of what prices are likely to do because participants are putting their money where their mouths are n BUT, prices do move based on new information, both expected and unexpected n AND an individual producers cattle may not match the contract specifications, so projecting prices takes some extra effort

10 GEOFF BENSON, ARE, NCSU10 Fat Cattle Futures, $/100 lb, 3/6/09

11 GEOFF BENSON, ARE, NCSU11 Feeder Cattle Futures, $/100 lb, 3/6/09

12 GEOFF BENSON, ARE, NCSU12 What does all this for me? n Cow-calf:  Value of your cattle – their particular characteristics  Time of year of sale  Cost of production n Stockers:  Buying price and selling price  Cost of gain

13 GEOFF BENSON, ARE, NCSU13 Feeder Cattle Futures, $/100 lb, 3/6/09

14 GEOFF BENSON, ARE, NCSU14 Price Forecasting n Nearby Futures Contract Price for sale month n “Basis” = futures price – local cash market price for similar product n Use premiums & discounts to estimate the value of your cattle  Weight  Sex  Frame size  Muscling  Breed or cross  Other, e.g., market channel

15 GEOFF BENSON, ARE, NCSU15 Price Forecasting n 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 n But  CME feeder cattle futures contract is for 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.

16 GEOFF BENSON, ARE, NCSU16 “BASIS” n Basis is the difference between the spot cattle price in North Carolina and the price for comparable cattle in the futures market n If basis is predictable, then we can use the futures market to project local North Carolina prices and use this to make business decisions n Some historic basis data are available at

17 GEOFF BENSON, ARE, NCSU17 NC Basis, Avg

18 GEOFF BENSON, ARE, NCSU18 NC Basis, n Negative n Seasonal: Smaller in spring, larger negative differences in the fall n Varied by market, west to east n Updated information is not available

19 GEOFF BENSON, ARE, NCSU19 Price Forecasting n Futures Contract Price for sale month n “Basis” = futures price – local cash market price for similar product n Use premiums & discounts to estimate the value of your cattle  Weight  Sex  Frame  Muscle  Breed  Time of year/seasonality  Other, e.g., market channel

20 GEOFF BENSON, ARE, NCSU20 Graded Sales, M1 Steers,

21 GEOFF BENSON, ARE, NCSU21 Graded Sales, M1 Steers,

22 GEOFF BENSON, ARE, NCSU22 Graded Sales, M1 Heifers v. Steers,

23 GEOFF BENSON, ARE, NCSU23 Graded Sales, lb. Steers,

24 GEOFF BENSON, ARE, NCSU24 Selected Breeds n Angus n Braford n Brahman n Brangus n Braunveih n Charolais n Chianina n Devon n Galloway n Gelbveih n Red Poll n Sahiwal n Salers n Santa Gertrudis n Shorthorn (dual) n Simmental n South Devon n Tarentais n Zebu + Crosses & Composites Hereford Holstein (dairy) Jersey (dairy) Limousin Longhorn Maine Anjou Nellore Piedmontese Pinzgaur Polled Hereford

25 GEOFF BENSON, ARE, NCSU25 Graded Sales, lb. M1 Steers,

26 GEOFF BENSON, ARE, NCSU26 Marketing Options n Regular auction = Base n Graded sale n Special programs, e.g., Southeast Pride, pre-conditioned sales n Direct sale n Truckload lots n Retained ownership

27 GEOFF BENSON, ARE, NCSU27 Marketing Options n Choices are affected by  Number of cattle for sale  Uniformity of cattle n Market premiums vary with method of sale n Marketing cost varies with method of sale n Consider risk

28 GEOFF BENSON, ARE, NCSU28 Price Outlook n Use futures price, basis, and information on premiums and discounts to estimate local prices as part of your production and marketing decisions n But what about cost of production…

29 GEOFF BENSON, ARE, NCSU29. Source: USDA, “World Agricultural Supply & Demand Situation

30 GEOFF BENSON, ARE, NCSU30 Prices Paid Index for Selected Inputs USDA Index = 100 Jan 2006 Jan 2007 Jan 2008 Jan 2009 %  (06/07) to ‘09 Nitrogen fert % P & K fert % Diesel fuel % Field Crop Seeds % Source: Agricultural Prices, NASS, USDA, January 2009

31 GEOFF BENSON, ARE, NCSU31 Forage Production Costs, NCSU Enterprise Budgets, $/ton of DM Crop Perennial cool season pasture6086 Per. grass - clover pasture4564 Cool season grass hay, Lge Rnd Bale Warm season perennial pasture6390 Warm season per. hay, Lge Rnd Bale90124 Summer annual66101 Winter annual60110 Corn silage67101 Small grain silage GEOFF BENSON, ARE, NCSU31

32 GEOFF BENSON, ARE, NCSU32 Beef Production Costs, NCSU Enterprise Budgets, 2008, $/head sold Enterprise Cow-calf (88% calf crop)8581,136 Back-grounding on winter annual pasture* Summer grazing on spray field $0 fertilizer* Finishing on grain*1,1521,432 Finishing on pasture*1,0071,168 GEOFF BENSON, ARE, NCSU32 * Includes cost of cattle

33 GEOFF BENSON, ARE, NCSU33 Outlook Summary n Outlook for US production, sales and prices is poor:  26,110 mil. lb.   61.6 lb. per person   Fed cattle $89.00/cwt. =  Feeder cattle prices at $102.00/cwt  n Feeder calf prices next fall are expected to be similar to 2008 and still good relative to historic prices n Higher cost of production n Stocker profits depend heavily on anticipating price movements correctly or hedging

34 GEOFF BENSON, ARE, NCSU34 Where are Costs & Profits Headed? n 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 n 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 GEOFF BENSON, ARE, NCSU34

35 Economics works! n When production costs increase  Producers’ profits shrink  Producers 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 GEOFF BENSON, ARE, NCSU35

36 GEOFF BENSON, ARE, NCSU36 Economics works! n When demand falls  Markets are oversupplied, prices fall  Buyers 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

37 GEOFF BENSON, ARE, NCSU37

38 GEOFF BENSON, ARE, NCSU38

39 GEOFF BENSON, ARE, NCSU39

40 GEOFF BENSON, ARE, NCSU40 Cattle Cycles n Low prices force liquidation of breeding stock, adding to beef supplies and reducing prices further n Reduced production leads to higher prices encouraging heifer retention for breeding, reducing beef supplies and raising prices further n Lags causing the 10 to 12 year cycle  Decision making  15 months to raise a heifer to breeding age  Breeding seasonality & 9-month gestation  month birth to slaughter

41 Beef Product & $$ Flows 41 $ CONSUMER $ RETAILER WHOLESALER PACKER FINISHING STOCKER COW-CALF PROCESSOR GEOFF BENSON, ARE, NCSU

42 The Big Picture Message n 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 n The cow-calf producer takes more of a hit in a downturn and gets more of the gravy on the upswing n An unanswered question is how the new cost structure affects regional competitiveness n Eventually, prices must adjust to higher costs of production so that enough producers can make an acceptable profit to stay in business n There is wide variation in financial performance among farms GEOFF BENSON, ARE, NCSU42

43 GEOFF BENSON, ARE, NCSU43 -$111 +$153 N/A -$169 -$70 +$55 US avg. net income over operating expense/cow for = -$/10/cwt. Regional differences from US average are shown +$1 +$62 N/A Cow-calf returns over operating expense, US & regions,

44 GEOFF BENSON, ARE, NCSU44 MN Cow-calf Cost & Returns, 2007 Low Profit Avg. Profit High Profit 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

45 GEOFF BENSON, ARE, NCSU45 MN Stocker Cost & Returns, 2007 Low Profit Avg. Profit High Profit Revenue, net$110$207$252 Operating cost$200$179$149 Margin over op. cost-$90$28$103 Fixed & O/H cost$59$25$21 Labor & Mgt charge$75$19$16 Total cost$333$223$187 Net Return-$223-$16$65 Source: MN Farm Business Management database

46 Two Issues NC Producers Face n 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? n Short term survival strategies GEOFF BENSON, ARE, NCSU46

47 GEOFF BENSON, ARE, NCSU47GEOFF BENSON, ARE, NCSU47 1. Long term: Why do you have Cattle? OR FUN OR MONEY?

48 GEOFF BENSON, ARE, NCSU48GEOFF BENSON, ARE, NCSU48 Do you know your production cost? n Operating cost - out of pocket expenses, e.g. forage production, other feed, vet, fuel, repairs n Fixed/Ownership/Investment costs  Depreciation  Interest  Taxes & insurance n Labor cost or charge for the value of your time

49 Are You Financially Healthy? n Farm is profitable most years by return on investment & to management n Producer has cash flow to meet operating expenses, debt service, family living needs in a timely manner n 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 GEOFF BENSON, ARE, NCSU49

50 2. Short-term: Coping with Higher Costs n Forage production costs  Fertilization  Choice of forage crop  Renovation n Forage utilization costs  Pasture management  Stored forages n Risk (drought) management n Cattle options GEOFF BENSON, ARE, NCSU 50

51 GEOFF BENSON, ARE, NCSU51 Fertilization n Fertilizer cost  Shop around and price nutrients by the lb.  Consider alternative sources, e.g., broiler litter  Substitute legumes for bought N  “Mine” P and pH -- if the farm has a future  Rent more pasture n Change the forage mix – type of pasture, grazing v. stored forages n Cut waste and losses GEOFF BENSON, ARE, NCSU51

52 GEOFF BENSON, ARE, NCSU52 Pasture Fertilization n Five Issues related to Nitrogen  Production response to nitrogen and soil fertility status  Cost of additional production  Cost to graze an animal  Effect on carrying capacity  Effect on profitability

53 GEOFF BENSON, ARE, NCSU53 Source: Mueller & Green, NCAES, AG 338 Nitrogen Response in Tall Fescue

54 GEOFF BENSON, ARE, NCSU54 Nitrogen Response, lb. DM/per acre n Fescue: From Mueller & Green N applied, lb/acre Production, lb of DM/ac Ave- erage Inc- rease 01,500-2,1001, ,200-5,4504,8253, ,000-8,1007,0502,225

55 GEOFF BENSON, ARE, NCSU55 Soil Fertility n Response to N depends on soil type, pH and availability of other nutrients such as P and K n Lime and other nutrients are needed to maintain fertility now and long term – affects cost of the fertilization program n Example: Lime, P, K, etc. needed at a cost of $60 per acre, applied + N at $.50, $.75 and $.90 per lb of N

56 GEOFF BENSON, ARE, NCSU56 Average Cost per lb of DM n Fescue yields from Mueller & Green n Average response ~ 30 lb DM/1 lb. N 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 $ ¢1.9¢ $ ¢2.4¢ $ ¢2.8¢

57 GEOFF BENSON, ARE, NCSU57 Average Cost/Cow, N + $60/acre n If cow needs 30 lb DM per day n 180 days of grazing/acre (no hay) n Grazing loss = 50% of production N Cost0 Fert. 100 lb N150 lb N $0.50/lb$0$246$207 $0.75/lb$0$302$264 $0.90/lb$0$336$299

58 GEOFF BENSON, ARE, NCSU58 Carrying Capacity, Fescue e.g. n 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 N150 lb N DM prod/ac1,8004,8257,050 Acres/cow Cows per 100 acres

59 GEOFF BENSON, ARE, NCSU59 Fertilization strategy n Soil Test! Apply only what is needed to maintain soil fertility – pH, P, K, etc. n 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

60 GEOFF BENSON, ARE, NCSU60 Forage Production Costs, NCSU Enterprise Budgets, $/ton of DM Crop2008 Perennial cool season pasture86 Perennial grass - clover pasture64 Cool season grass hay, Lge Round Bale164 Warm season perennial for grazing90 Warm season perennial hay, LR Bale124 Summer annual101 Winter annual110 Corn silage101 Small grain silage137 GEOFF BENSON, ARE, NCSU60

61 GEOFF BENSON, ARE, NCSU61 Losses: Grazing Management n Use controlled grazing to reduce waste  Loss ~ 25% with strip or rotational grazing  Loss ~ 50% if cattle are grazed for, say, three weeks in the same pasture n Controlled Grazing Example  10 acres at 2 tons DM/acre  Permanent fencing & water exist  It costs $15 per move X 12 moves = $180  Cattle eat 15 tons v. 10 tons if set stocked  Cost of saved feed = $180/5 tons = $36/ton DM n Add any cost of transporting cattle, etc.

62 GEOFF BENSON, ARE, NCSU62GEOFF BENSON, ARE, NCSU62 Grazing Management Cost n 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 n Time & equipment to move livestock Example:  ¾ Ton $19.81 /hour  $ 9.40 /hour  Total = $29.21 /hour (4-wheeler cost is less than $10/hour)

63 GEOFF BENSON, ARE, NCSU63GEOFF BENSON, ARE, NCSU63 Hay Making Cost, DM basis n Small square bales -- $89/ton of DM ($76 as made) n Large round bales -- $78/ton of DM ($66 as made) è Add cost of growing the hay crop to this èHay costs $164/ton of DM for LRB ($139 as made) èAdd to this the risk of rain & losses in storage and feeding plus feeding costs n What are your hay costs? n 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?

64 GEOFF BENSON, ARE, NCSU64GEOFF BENSON, ARE, NCSU64 Bale Feeding Costs 2008 Tractor, 55 HP, + spear n Annual ownership cost n Operating cost n Total Machine cost n + Labor n Total cost $ 4.41/hr $ 11.95/hr $ 16.36/hr $ 9.40/hr $ 25.76/hr

65 GEOFF BENSON, ARE, NCSU65 Losses Add to Feed Costs n Harvest losses – range from 5% to 50% of harvestable production n Storage losses – 5% to 20% of feed made n Feeding losses – 5 to 15% of feed available n Combined losses – 15 to 50% Evaluate cost effective ways of trimming losses GEOFF BENSON, ARE, NCSU65 Source: Sustainable Dairy Systems Manual, UT & UK

66 GEOFF BENSON, ARE, NCSU66GEOFF BENSON, ARE, NCSU66 What is Your Total Ration Cost? n Yields & quality vary for different forages -- Figure the nutritional needs of the animal to achieve desired performance n Figure total ration cost when comparing alternative forages including:  Supplementary feeds, minerals, etc.  S torage and feeding losses  The cost of putting out feed(s) n If different rations produce different levels of in animal performance, figure both income and cost, e.g., income over feed cost

67 GEOFF BENSON, ARE, NCSU67 Drought (Risk) Management Drought (Risk) Management n Carry a hay reserve (made or bought) n Plan for more acres than needed normally  Harvest and store any surplus  Harvest and sell any surplus n Diversify  Grow more than one type of forage  Spread production geographically n 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? GEOFF BENSON, ARE, NCSU67

68 GEOFF BENSON, ARE, NCSU68 Cattle Options n Change cattle types, numbers, management practices  Cow numbers (fewer?), selling fewer calves taken to heavier weights?  Improving animal performance  Marketing -- prices & premiums related to sale weight, frame, breed/color, season, choice of market etc.  For stockers, buying and selling prices  Value-added, e.g., finishing cattle & direct marketing beef

69 GEOFF BENSON, ARE, NCSU69 MN Cow-calf Cost & Returns, 2007 Low Profit Avg. Profit High Profit 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

70 GEOFF BENSON, ARE, NCSU70 Beef Production Costs, NCSU Enterprise Budgets, 2008, $/head sold Enterprise2008 Cow-calf (88% calf crop)1,136 Back-grounding on winter annual pasture* 967 Summer grazing on spray field $0 fertilizer* 921 Finishing on grain*1,432 Finishing on pasture*1,168 * Includes cost of cattle

71 Whole Farm Issues n Financial decisions depend on the whole farm and family situation  Other farm enterprises, e.g., cattle on poultry and hog farms, supplementary enterprises on crop farms  Farm overhead costs  Farm tax benefits v Ag Use valuation for property taxes v Filing taxes as a farmer  Non-farm income and lifestyle GEOFF BENSON, ARE, NCSU71

72 GEOFF BENSON, ARE, NCSU72 Summary n Higher production costs will persist n Livestock production and prices will adjust eventually so the remaining producers can make adequate returns. Who will survive? n Livestock producers are a diverse group  Family goals differ  Type of operation, scale and production practices differ  Profitability and financial health varies among farms

73 GEOFF BENSON, ARE, NCSU73 Summary n 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? n Making adjustments  Know your cost of production and profit (loss) margin  Identify alternative production systems and practices  Evaluate the effects on income and/or costs

74 GEOFF BENSON, ARE, NCSU74 Summary n Evaluate forage options  Growing your own forages v Evaluate fertilizer sources and unit prices v 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 GEOFF BENSON, ARE, NCSU74

75 GEOFF BENSON, ARE, NCSU75 Summary n Estimate impact of forage choices on total feed cost, including supplements, year round n Evaluate cattle options -- Include the effects of changes in livestock type, numbers and performance on income n 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 GEOFF BENSON, ARE, NCSU75

76 GEOFF BENSON, ARE, NCSU76 Summary n No $ilver Bullet$ n No $imple an$wer$!! n Sometimes there are no solutions, just tough decisions n Seek help with the economics if you are not comfortable doing it = +

77 GEOFF BENSON, ARE, NCSU77GEOFF BENSON, ARE, NCSU77 Geoff Benson n Phone: (919) n Fax: (919) n n Web page: faculty/benson/benson.html n NCSU Enterprise Budgets web site: extension/Ag_budgets.html


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