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Price Risk Management in Extension Beef Carcass Evaluation Programs: The
Georgia Beef Challenge Experience
R. Curt Lacy, Patsie Cannon, Jim Collins, John C. McKissick, and Robert L. Stewart
Department of Agricultural & Applied Economics, UGA
Department of Animal & Dairy Sciences, UGA
Georgia Cattlemen’s Association
Thanks to our partners
Georgia Cattlemen’s Association Georgia Department of Agriculture Iowa State University Tri-County Steer Carcass Futurity (TCSCF) USDA – Agricultural Marketing Service
Highlights of the Georgia Beef Challenge
Began in 1991 as a way for producers to gather information regarding the type of cattle they produce
Partnership between UGA, GA Cattlemen’s Association, GA Department of Agriculture/USDA-AMS, and other industry partners
Goals of the GBC– Improve the marketability of Georgia-bred cattle by
establishing a database of feedlot performance and carcass information
– Provide educational information to Georgia cattlemen regarding the carcass merit of their genetics and explore the feasibility of retained ownership.
Growth of the Georgia Beef Challenge
0500
1000150020002500300035004000
91-92
92-93
93-94
94-95
95-96
98-99
99-00
00-01
01-02
02-03
03-04
Head Consigned
How Does it Work?
1. Producer completes and mails consignment form2. Producer is told when and where to deliver his calves3. At delivery cattle are weighed, graded, and assigned a
market price4. Calves are shipped to IA5. Members of the Tri-County Steer Futurity (TCSF) feed the
calves6. The animals are harvested and marketed on a carcass
basis7. Carcass and production data are returned to producers
along with a check (usually)
History of Risk Management in the GBC
In early years done on an ad-hoc basis As numbers grew so did the RM implications
county agent began doing projections and handling RM after consulting with GBC personnel & consignors
He soon realized there had to be a better way About 3 years ago a RM Committee was
formed to handle RM for the program
Georgia Beef Challenge Risk Management Plan
Risk Management Committee comprised of extension economists, beef specialists, and producers
Consignors approve pricing objectives at annual meeting
RMC implements the plan
Pricing Objectives for 2004-2005
1. Lock in a $50 profit when available
2. Buy enough protection to lock in value of cattle when they left GA
3. Do whatever is necessary to limit losses to $50/head
Making Decisions
1. Patsie Cannon sends a report on the numbers, weights, and sexes of cattle when they are shipped.
2. Curt Lacy uses UGA Custom Finishing Budgets to estimate breakevens and estimated profits.
3. Risk Management committee discusses and evaluates alternatives via phone or e-mail
4. A decision is made and implemented via our broker in Iowa
Caveats
1. Producers with a futures contract worth of cattle in the same pen can do their own risk management
2. They can consult with the risk management committee regarding alternatives
3. They can ask the risk management committee for assistance in implementing their plan
4. They can use our broker in IA
Alternatives Utilized
Hedge Put option Synthetic put Fence ½ hedge
Example Worksheets
Example Report 1 Breakeven Example Final Report
Profits From Feeding
01020304050607080
91-92
92-93
93-94
94-95
95-96
98-99
99-00
00-01
01-02
02-03
03-04
Profits per Head
$(50.00)
$-
$50.00
$100.00
$150.00
$200.00
$250.00
$300.00
$/H
ead
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Pen
Profits Per Head for 2003-2004
$47.76/head profit average
Lessons Learned – General
Our genetics are as good as any Preconditioning pays when it comes to
shipping cattle Price risk management is important
Lessons Learned - Risk Management
It is better to have a plan and to let “experts” implement the plan
Producers need to a have a clear understanding of what they are agreeing to
It is imperative that breakevens be calculated for every pen
Past feedlot and carcass performance do play a role in breakevens
Communications between feedlots, broker, and risk management committee are crucial
Lessons Learned – Risk Management
There is a HUGE difference between a textbook hedge/option and the real world
Managing price risk on the input side is less straightforward– Hard to estimate physical needs– Timing of feed needs is difficult– Some type of cash strategy probably works best
Lessons Learned – Risk Management
Live Cattle options are different from grains Often there is very little liquidity at the strike
price you want Sometimes delivery dates make you exit early Timing of sales can create “opportunities” for
hedging or options
Changes in Attitudes, Latitudes, and Behaviors
Some producers have: Learned that not everyone can be above
average Decided to focus on raising high quality feeder
calves Changed genetics Started preconditioning and vaccinating Developed their own risk management plans
Other Developments
Resulted in cattle marketing workshops Some collective feeder cattle sales now require
some form of carcass data Some producers raising discounted feeder
cattle have begun retaining ownership Cattle shipped in 2004-2005 have EID tags USDA-AMS FSMIP Grant
Summary
GBC has been a very educational program for beef cattle producers
Risk management makes the carcass information gathering process less expensive
There is considerable difference in teaching risk management and actually doing it!!