Let the good times roll: Capitalizing on high beef markets1 Let the good times roll: Capitalizing on high beef markets Nebraska LEAD Alumni Association Annual Conference Kearney, NE

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Let the good times roll: Capitalizing on high beef markets

Nebraska LEAD Alumni Association Annual Conference

Kearney, NE

January 17th, 2015

Kate Brooks, Ph.D.

Extension Livestock Marketing Specialist

Department of Agricultural Economics

University of Nebraska-Lincoln

[email protected]

Feeder Cattle Weekly Futures Price Average

Live Cattle Weekly Futures Price Average

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2014 Recap

• Improvement in drought conditions• Herd rebuilding

• Record high cattle prices• Increased cow-calf profitability potential

• Record high wholesale and retail prices• Beef demand domestically & export markets

Economic Considerations for 2015

• Supply• Numbers are down

• January 1 Cattle Inventory Report

• Continued expansion – cow costs

• Demand• Key player • Quality is important with rising prices

• Other Considerations• Excess capacity in feedlots• Political & regulatory issues

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% Chg. Average % Chg. Comm'l % Chg.

Year Comm'l from Dressed from Beef from

Quarter Slaughter Year Ago Weight Year Ago Production Year Ago

(1,000 Head) (Lbs.) (Mil. Lbs.)

2013

I 7781 -3.1 794 1.4 6175 -1.7

II 8325 0.2 782 0.4 6513 0.6

III 8321 -0.1 794 0.5 6609 0.4

IV 8035 -3.0 799 0.7 6423 -2.3

Year 32462 -1.5 792 0.7 25720 -0.7

2014

I 7375 -5.2 796 0.3 5868 -5.0

II 7836 -5.9 789 0.9 6183 -5.1

III 7630 -8.3 810 1.9 6178 -6.5

IVb

7508 -6.6 820 2.6 6157 -4.1

Year 30349 -6.5 804 1.4 24386 -5.2

2015

Ic

7135 -3.3 816 2.5 5819 -0.8

II 7602 -3.0 803 1.7 6103 -1.3

III 7447 -2.4 818 1.0 6088 -1.5

IV 7407 -1.3 823 0.4 6097 -1.0

Year 29591 -2.5 815 1.4 24107 -1.1

2016

I 7145 0.1 821 0.6 5865 0.8

II 7325 -3.6 808 0.7 5920 -3.0

III 7579 1.8 825 0.9 6252 2.7

IV 7316 -1.2 828 0.6 6059 -0.6

Year 29365 -0.8 821 0.7 24096 -0.0

Quarterly Forecasts (LMIC: 11/11/14)

Sources: Livestock Slaughter - USDA/NASS; Steer Prices - USDA/AMS Livestock Market News;

Projections and Forecasts by LMIC

Projected Beef Cow Inventoryhttp://www.usda.gov/oce/commodity/projections/index.htm

http://www.fapri.missouri.edu/outreach/publications/2014/FAPRI_MU_Report_02_14.pdf

30,158

29,29529,050

29,34929,678

30,734

31,558

31,95332,300

32,739

33,29333,668

30,158

29,300

28,900

29,400

30,000

30,60030,900 30,900 30,800

30,50030,300

30,100

26,000

27,000

28,000

29,000

30,000

31,000

32,000

33,000

34,000

35,000

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

ERS (Feb. 2014 Projections) FAPRI (Mar. 2014 Projections)

2023 vs. 2014

ERS: +16%

FAPRI: +4%

http://www.usda.gov/oce/commodity/projections/index.htm

http://www.fapri.missouri.edu/outreach/publications/2014/FAPRI_MU_Report_02_14.pdf

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10

15

20

25

30

35

40

May Jul Sep

Percent

US RANGE AND PASTURE CONDITIONPercent Poor and Very Poor, Weekly

Avg. 2008-12 2013 2014

Data Source: USDA-NASS, Compiled & Analysis by LMIC

Livestock Marketing Information Center

G-NP-30

10/27/14

Cows % of Total

10/21/12 21284 70.77%

Last year

10/20/13 2603 8.91%

10/27/13 4408 15.08%

This Year

10/12/14 1346 4.65%

10/19/14 1346 4.65%

10/26/14 830 2.87%

Beef Cows in states

with 40% Poor to Very Poor

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G-NP-32

10/27/14



(CO, KS, MT, NE,

ND, SD, WY)

January 2014

29.9% of Cows

Cow-Calf Industry

• Improved margins • Improved pasture conditions, declining input

prices, record calf prices

• Continued Expansion?

• Market signals vs. mother nature

• Capital Costs

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Land use conversion from range to corn-soy 2006-2011

Wimberly and Wright, 2013

1.3 million acres converted

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Average Cash Rental Rate for Pasture: (Cow-Calf Pair / Month)

0

5

10

15

20

25

30

35

40

45

50

1981 1985 1989 1993 1997 2001 2005 2009 2013

$/C

ow

-Calf P

air

2014 Nebraska Farm Real Estate Market Highlights

C-P-66

12/19/14

-100

0

100

200

300

400

500

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

$ Per Cow

ESTIMATED AVERAGE COW CALF RETURNSReturns Over Cash Cost (Includes Pasture Rent), Annual

Data Source: USDA-AMS, Compiled and Analysis by LMIC


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+ 53%

+ 47%

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12/29/14

85

95

105

115

125

135

145

155

165

175

185

JAN APR JUL OCT

$ Per Cwt.

SLAUGHTER STEER PRICES5 Market Weighted Average, Weekly

Avg. 2008-12 2013 2014

Data Source: USDA-AMS


↑ 24.6%

Feedlot Sector

• Significant improvements in returns

• Capacity issues still a concern

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M-S-01

10/29/14

2015: -1.1%

2016: -0.05%

2015: +2.5%

2016: +3.2%

2015: +4.0%

2016: +1.9%

Demand

Photo taken by Troy Waltz

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M-P-05

10/26/14

Data Source: Bureau of Labor Statistics & USDA-ERS


100 99

91 89 86 84

75 73 75 7782 82 83 85

9287

83 8378

74 75 76 78 7987

0

20

40

60

80

100

120

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Index Value

RETAIL ALL FRESH BEEF DEMAND INDEXThird Quarter, Using CPI 1990=100

Data Source: Bureau of Labor Statistics, USDA-ERS, Compiled & Analysis

by LMIC


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I-N-16

01/08/15

150

170

190

210

230

250

270

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC

Mil. Pounds

US BEEF AND VEAL EXPORTSCarcass Weight, Monthly

Avg. 2008-12 2013 2014

Data Source: USDA-ERS & USDA-FAS


2014 Beef Exports up 0.0%

I-N-35

01/08/15

0

10

20

30

40

50

60

70

80

90

2006 2007 2008 2009 2010 2011 2012 2013 2014

Mil. Pounds

US BEEF EXPORTS TO MAJOR MARKETSCarcass Weight, Monthly

Japan Canada Mexico South Korea

Data Source: USDA-ERS & USDA-FAS


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Objectively capitalizing on market “Opportunity”

• What resources do you have available?• Excess pasture/land?

• Knowledge/Management?

• Quality genetics?

• Money?

• Time?

• What will it cost you?• All of the above

Thoughts/Comments

• Expected potential profits• Total costs per cow are also increasing

• Price variability…profit risk

• Political & regulatory uncertainty

• Sound management will be key

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Analyzing your Decision

• Net present value of bought bred cow/heifer

• How much can I afford to pay

• If I pay X will I breakeven

• Calculation• All revenues over life of the animal

• All costs over life of the animal

• Adjust for discount rate - NPV

Longevity

• Assumed 25% replacement rate• Implies

• 25% of our cows that are older are replaced by 2 year old cows

• Due to death, lameness, pregnancy issues, etc

• Average cow in herd is roughly 5 years old• Has 5 years to pay herself back

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Heifer Cost

• Purchase price of heifer• or opportunity cost of retained heifer

Revenue

• Price cycle– future prices

• Weaning weights

High Low High Low

210 200 92.4 88

208 200 91.52 88

200 196 88 86.24

203 199 89.32 87.56

203 199 89.32 87.56

203 199 89.32 87.56

203 199 89.32 87.56

203 199 89.32 87.56

204 200 89.76 88

204 200 89.76 88

205 200 90.2 88

Cull Cow Value ($/cwt)Calf Value ($/cwt)

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Costs

• High cost vs. Low cost producer

• Permanent cost vs. Temporary cost

• Lagged effect

Year High Low

1 800.00 750.00

2 808.00 757.50

3 816.08 765.08

4 824.24 772.73

5 832.48 780.45

6 840.81 788.26

7 849.22 796.14

8 857.71 804.10

9 866.29 812.14

10 874.95 820.26

11 883.70 828.47

Annual Cost ($/head)

Breakeven Value of Replacement Heifers• Cornhusker Economics Article

• “Buyer Beware: What is the Breakeven Value of Beef Replacement Heifers?”

• http://agecon.unl.edu/cornhuskereconomics

• 5 Price Cycles: Historical & Simulated

• Three Cost Levels (KSU Data)• Purchase price heifers

• Randomly $1500 to $2200 (avg $1850)

• Calf Prices• Current USDA reported value 500 lbs

• No gender or weight adjustments

http://agecon.unl.edu/cornhuskereconomics

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Prices of 500 Pound Calves, By Scenario, Initiated on

the 34 Month of a 126 Month Price Cycle

Table 1. Average break even points calculated using 5 simulated price scenarios. Values

are designated by scenario, cost level and month of when the price series was initiated

(when heifer was purchased).

Scenario

#

Average

Cost Month 10 Month 34 Month 70 Month 94

1 $ 595.83 $ 3,729.11 $ 2,915.23 $ 3,306.55 $ 2,866.09

2 $ 595.83 $ 3,057.89 $ 3,673.82 $ 2,077.83 $ 1,617.89

3 $ 595.83 $ 2,661.66 $ 2,818.32 $ 1,867.04 $ 1,645.56

4 $ 595.83 $ 2,538.37 $ 2,525.19 $ 1,604.31 $ 1,449.47

5 $ 595.83 $ 2,348.36 $ 2,348.36 $ 2,348.36 $ 2,348.36

1 $ 722.61 $ 3,295.50 $ 2,481.62 $ 2,872.94 $ 2,432.48

2 $ 722.61 $ 2,635.00 $ 3,250.93 $ 1,654.94 $ 1,195.00

3 $ 722.61 $ 2,264.50 $ 2,421.16 $ 1,469.88 $ 1,248.40

4 $ 722.61 $ 2,120.70 $ 2,107.52 $ 1,186.64 $ 1,031.80

5 $ 722.61 $ 1,917.00 $ 1,917.00 $ 1,917.00 $ 1,917.00

1 $ 935.05 $ 2,598.14 $ 1,784.26 $ 2,175.58 $ 1,735.12

2 $ 935.05 $ 1,951.50 $ 2,567.43 $ 971.44 $ 511.50

3 $ 935.05 $ 1,557.34 $ 1,714.00 $ 762.72 $ 541.24

4 $ 935.05 $ 1,406.48 $ 1,393.30 $ 472.42 $ 317.58

5 $ 935.05 $ 1,215.53 $ 1,215.53 $ 1,215.53 $ 1,215.53

Numbers in italics represent the lowest breakeven point for each cost level and price initiation point.

Numbers in BOLD represent the highest breakeven point for each cost level and price initiation

point.

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Results

• Breakeven Values vary depending on future prices as shown in the following graph

• The low is near $700, the high $4,000

Values based on the historical cycle

$0.00

$500.00

$1,000.00

$1,500.00

$2,000.00

$2,500.00

$3,000.00

$3,500.00

$4,000.00

$4,500.00

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

Avera

ge B

reakeven

Year

Heifer Breakeven Values in Todays's Dollars

$ Values Per Head

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Overall Thoughts/Comments

• Market signals for expansion

• Available resources: Think outside the box

• Consider all your costs (cash and opportunity) in making expansion decisions

• Cost efficiencies & sound management key for profitability

Photo taken by Troy Waltz

Thank You!

[email protected]

Documents

Let the good times roll: Capitalizing on high beef markets1 Let the good times roll: Capitalizing on high beef markets Nebraska LEAD Alumni Association Annual Conference Kearney, NE