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Risk Management Issues Facing Beef Cattle Production ERME Pre-Conference The Changing Role of Risk in Livestock Production Management April 2, 2013 Shannon.

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Presentation on theme: "Risk Management Issues Facing Beef Cattle Production ERME Pre-Conference The Changing Role of Risk in Livestock Production Management April 2, 2013 Shannon."— Presentation transcript:

1 Risk Management Issues Facing Beef Cattle Production ERME Pre-Conference The Changing Role of Risk in Livestock Production Management April 2, 2013 Shannon Neibergs Associate Professor Extension Economist, Director WCRME

2 Overview of Presentation Price variability and market risk in beef markets Cattle risk management options Production management risk issues Feed additives - Ractopamine New management tools

3 Monthly Meat Price Spreads http://www.ers.usda.gov/data-products/meat-price-spreads.aspx

4 Beef Price Spread Analysis Net Farm Value share of retail value increasing since 2010 Derived demand market is driven by the consumer (domestic and export) Beef demand continues to struggle in the start of 2013 First quarter beef production is lowest since 2006 down 3% from 2012 Beef production down due to decreased slaughter numbers – carcass weight increasing Composite cut-out value has an apparent price ceiling at $200 cwt Fed cattle trading to trend below $130 cwt Substitution effects between protein products limits price gains

5 Meat in cold storage is relatively high Source: DLR Vol. 11, No. 16 / January 23, 2013

6 Beef export trends Livestock Marketing Information Center Data Source: USDA-ERS & USDA-FAS

7 Cattle on Feed Profitability Livestock Marketing Information Center Data Source: USDA-AMS & USDA-NASS, Compiled & Analysis by LMIC

8 Negative profit pressure on feeder prices Livestock Marketing Information Center Data Source: USDA-AMS, Compiled & Analysis by LMIC

9 And calf price Livestock Marketing Information Center Data Source: USDA-AMS, Compiled & Analysis by LMIC

10 Cow – calf returns Livestock Marketing Information Center Data Source: USDA-AMS & USDA-NASS, Compiled & Analysis by LMIC

11 Cattle on Feed – will declining supply drive price? Livestock Marketing Information Center Data Source: USDA-NASS

12 Cattle Risk Management Options

13 Cow-Calf Market Risk Favorable calf prices have eased market risk management for cow-calf producers – given adequate forage availability.

14 Market Risk Management Options 1.Forward Contract Direct to feedlot Backgrounding operation 2.Hedging – risk transfer a.Offset futures market contract transaction with local cash market b.Futures Market Feeder Cattle Contract 50,000 lbs, 650-849 lbs Live (Fed) Contract 40,000 lbs, 55% Choice, YG 3 c.Options Market Put and call collar strategy

15 Basis – Price difference between Chicago and Toppenish 428 S. G Street Toppenish WA 98948

16 Market Risk Management - Basis www.BeefBasis.com

17 BeefBasis.com current hedge analysis

18 Market Risk Management Options 3.LRP (Livestock Risk Protection) insurance is an USDA RMA insurance policy intended to provide protection against a price decrease for feeder and fed cattle. If the Actual Ending Value is below the Expected “Insured” Ending Value a loss may be paid relative to the Producer’s chosen coverage level.

19 LRP Parameters

20 To Execute a LRP insurance policy When purchasing an Specific Coverage Endorsement (SCE) through an insurance agent (http://www3.rma.usda.gov/tools/agents/companies/indexLPI.cfm)http://www3.rma.usda.gov/tools/agents/companies/indexLPI.cfm Producer Determines: Number of head to insure Date and weight expects to market livestock Producer Selects: Coverage price Endorsement length Producer Pays premium: Endorsement in effect upon receipt of RMA approval number

21 LRP Purchase Coverage Prices, Rates http://www3.rma.usda.gov/apps/livestock_reports/main.aspx

22 LRP Actual Value Feeder Cattle Price Index http://www.cmegroup.com/market-data/datamine-historical-data/cash-settled-commodity-index-prices.html

23 LRP Coverage Prices, Rates and Actual Ending Values http://www3.rma.usda.gov/apps/livestock_reports/main.aspx

24 RLRP Coverage Prices, Rates and Actual Ending Values Risk Averse Scenario - choosing highest coverage available Endorsement Length 13 weeksNotes Expected end value$159.739From RMA Table Coverage Level0.9629Producer Choosen Coverage Price$153.813From RMA Table Cost / cwt$2.644From RMA Table Assume 100 600 lb Feeders 600Cwt insured Insured Value$92,288Insure coverage price Premium Payment$1,586Cost * insured weight Subsidy 13%$20613% subsidy Net Premium Payment$1,380Net premium payment Actual End Value$138.83CME price index Indemnity Payment$8,989.61(Coverage-end)*cwts Gain/(loss) in expected market value($12,545.40)ROUGH estimate of market loss Gain/(loss) in LRP investiment$7,609.44Indemity - net premium payment ROI on LRP551%Gain / net premium payment

25 Market Risk Management Options 3.LGM Cattle (Livestock Gross Margin Cattle) insurance is an USDA RMA insurance policy intended to provide gross margin protection between fed cattle price and (cattle feeder cost and feed cost).

26 LGM Cattle  LGM for Cattle is different from traditional options in that LGM for Cattle is a bundled option that covers both the cost of feeder cattle and the cost of feed. This bundle of options effectively insures the producer’s gross margin (cattle price minus feeder cattle and feed costs) over the insurance period.  Indemnity at end of 11-month insurance period is the difference, if positive, between gross margin guarantee and actual gross margin  Does not insure against loss due to death or damage to cattle

27 LGM Cattle  Expected/Actual gross margin per head of cattle for a yearling finishing operation = (12.50 * Live Cattle t ) – (7.50 * Feeder Cattle t-5 ) – (50 * Corn t-2 )  Gross Margin Guarantee = Expected gross margin – deductible  Deductibles from $0 to $150 per head  The premium is calculated by a determinant Monte Carlo simulation procedure  Indemnity payment = Gross margin guarantee – actual gross margin if greater than zero

28 U.S. LRP and LGM Summery of Use

29 2012 LRP by State Use

30 AGR – Lite Revenue Insurance Adjusted Gross Revenue (AGR) –Lite is a whole-farm/ranch revenue protection plan of insurance. Uses a Producer’s 5 year historical farm average revenue as reported to IRS on Schedule F. Provides insurance for multiple commodities in one insurance product. Widely available (WA, ID, OR and several others). Subsidized premium: Insurance based on revenue but Schedule F expenses are reviewed. March 15 purchase deadline.

31 Market Risk No matter what market risk tool you chose to use, you still need to market the cattle and deliver them to a sale point. http://texashistory.unt.edu/ark:/67531/metapth43358/

32 Production Management Risk – Feed additive Change in beef production management due to ractopamine hydrochloride Very effective feed additive to promote lean muscle growth FDA approved and commercially available since 2004 Optaflex and Zilmax for beef, Paylean for swine Partitions nutrients from fat growth to lean growth through increased protein synthesis Trials show 17 to 21 lbs increased gain and increased dressing percent with limited impact on quality grade

33 Production Management Risk – Feed additive Impacts in beef production management due to ractopamine hydrochloride Cattle can be placed in feedlots heavier but are on feed relatively longer to increase lean carcass weight Packaging issues Larger rib eyes increases ability for thin cut steaks and maintain adequate portion size Traditional grilling steaks are larger and priced on weight are expensive Changing how families eat steak as they are passed around the dinner table, or will consumers accept steaks cut in half Increased size of roasts are not as much an issue and increased trim is beneficial in the hamburger production chain

34 Production Management Risk – Feed additive Market risk due to ractopamine hydrochloride FDA approval does not ensure consumer acceptance bST and fluid milk Ammonium hydroxide treatment of Lean Finely Textured Beef Trade restrictions on ractopamine Russia, China, European Union Separate production / processing systems if packer wants to serve those markets Differential demand across the carcass cuts Agreeing to ship ractopamine free pork and beef to these markets could lead other countries to introduce similar restrictions If producers stop using ractopamine at a time of record-high feed prices, they will see their losses increase

35 Production Management Risk – Marker assisted selection Examples of genetic markers under investigation Disease susceptibility to BRD Feed efficiency Meat quality Grazing tendency Reproductive efficiency Marker assisted selection Marker assisted selection effective for individual trait phenotypes Work needed on determining the co-variance between genetic markers Positively or negatively correlated Heritability of traits Economic importance Marker assisted selection implemented at cow-calf level Extract market value of improved genetics at weaning Value of preconditioned calves Retained ownership

36 Summary and Questions Thank you Shannon Neibergs sneibergs@wsu.edu 509 335 6360


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