Risk Management OverviewFebruary 2011

Difference between Cow/Calf Operation and Stocker/Grower &

Feedlot is….• Cow/calf enterprise is a fixed cost operation

• Stocker/Grower & Feedlot are margin operators (packer and retailer are also margin operators)

• Margin operators focus on the buy and sell

• Margin operators manage their inputs

Margins by Sector: Cost Structures

• Cow/calf: BUYS labor, fertilizer, fuel, equipment

• Genetics; SELLS calves

Bulk of costs are not linked to sales• Stocker / Feeder: BUYS cattle, feed, etc;

SELLS cattle

Costs are linked to sales, profit opportunities in high/low markets

What is “Risk Management”?

Risk ManagementCredit Availability & Worthiness & RatesPurchase and sale price riskBasis riskCorn and protein cost riskFuel, energy and fertilizer price riskAnimal HealthPerformance predictabilityCurrency riskGovernment Regulation and Policy

Stocker and Feedlot Risk Management• Develop marketing strategies with a “whole

operation” view, enterprise Risk Management and Margin analysis.

• Know the seasonal trends of market. Utilize seasonal marketing as part of Risk Management.

• Don’t deviate from plan. • Stay plugged in with your CattleFax analyst to

monitor trends, basis, and price expectations

Putting Together a SoundRisk Management Plan

Things to know:

Breakevens (Corn impact on breakeven)

Analyze cash fundamentals trend (up, down, sideways)

Analyze basis trend (strong, weak, sideways)

Analyze futures technical trends (up, down, sideways)

Set realistic profit objectives/narrow losses - ROI

Have flexibility to change

Key: Have the discipline to follow through and act on profitopportunities and trend changes

A Few Key Points• Per head P/L is NOT ROI – why?• Profitability varies WIDELY within sectors• Volatility is extreme and will increase as

market goes up.

Annualized Return on Equity (ROE) vs. Head Profit Given $150 per Head Collateral

Days

On

Feed

$10.00 $20.00 $30.00 $40.00 $50.00

100 24% 49% 73% 97% 122%

120 20% 41% 61% 81% 101%

140 17% 35% 52% 70% 87%

160 15% 30% 46% 61% 76%

180 14% 27% 41% 54% 68%

200 12% 24% 37% 49% 61%

Dollars per Head Profit

3035404550556065707580

88 90 92 94 96 98 00 02 04 06 08 10

Billi

on $

Years

U.S. Consumer Expenditures on Beef

Source: USDAProjected 2011U.S. net beef supply valued at all-fresh retail

LEVERAGE• Cattle/beef industry segments

remain largely independent of each other

• Equity, management, financially

• Markets allocate revenue – AND – LEVERAGE drives markets

How is the Money Allocated?

$0.40

$0.50

$0.60

$0.70

$0.80

$0.90

$1.00

$1.10

0%

5%

10%

15%

20%

25%

30%

35%

40%

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11F

COG

$/L

B

Etha

nol %

of U

sage

Years

Ethanol % of Usage vs Cost of GainEthanol % of Usage COG

0

10

20

30

40

50

60

70

80

90

100

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

$/CW

T

Years

Fed Steer Price Volatility -(cumulative change from week-to-week)

Annual Fed Price

21% PriceRange

High to Low $/Head

Variation

Increase in $/Head

$80 $72.50-87.50 $188 $0

$90 $81.50-98.50 $213 $25

$100 $90.50-109.50 $238 $50

$110 $99.50-120.50 $263 $75

Historically the average price range from high to low during the year is 21%

PRICE VARIABILITY INCREASES AS THE MARKET RISES

Assumes 1250 pound live weight

1300

$400

$500

$600

$700

$800

$900

$1,000

$1,100

$1,200

$1,300

$1,400

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11Years

Credit Needs SkyrocketAnnual Average Fed Steer Value ($/Head)

1995-2002 Avg$791 per head

It takes 64% morecapital/credit to operate in the current environment

Summary

•What is your Business?•Volatility•Capital•Plan

Risk Management for Cow/Calf and Stocker Operators

2011 and Beyond• Cow/calf Profits: Tighter supplies, good export

demand, improving domestic demand• Efficiency Growth: Fewer animals producing more

meat• Demand Driven Markets: Tightening supplies drive

prices higher; sharply higher with DEMAND improvement

• Commodity Volatility: Outside money will continue playing a bigger role in commodity pricing

• Will the U.S. Embrace Trade Again?: Critical to U.S. ag expansion

Marketing Calves• Seasonality: The biology of cattle and forage

lead to large seasonal supplies of calves• Marketing Mechanisms: Forward contracts

allow producers to price ahead of delivery• Pro’s / Cons: direct contract, video sales • Why not hedge using feeder futures?

• Poor basis predictability

Good marketing strategies require knowing your breakeven cost of production, ie: $95/cwt

94

96

98

100

102

104

106

J F M A M J J A S O N D

IND

EXSeasonal 750 lb and 550 lb Steer Price

20-Year550 lb Index

20-Year750 lb Index

WEEKSSource: CattleFax

95

96

97

98

99

100

101

102

103

104

105

J F M A M J J A S O N D

IND

EXSeasonal 550 lb Steer Price

WEEKSSource: CattleFax

1991-2010

5060708090

100110120130140150160

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 0910 11

$/cw

t550 lbs Steer Annual Price Range and Average

MIN MAX AVG

Source: CattleFax 2011 Forecast

95

96

97

98

99

100

101

102

103

104

J F M A M J J A S O N D

IND

EXSeasonal 750 lb Steer Price

WEEKSSource: CattleFax

1991-2010

45

55

65

75

85

95

105

115

125

135

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 0910 11

$/cw

t750 lbs Steer Annual Price Range and Average

MIN MAX AVG

YEARSSource: CattleFax 2011 Forecast

949596979899

100101102103104

J F M A M J J A S O N D

IND

EXSeasonal Fed Steer Prices

1991-2010 Index

WEEKSSource: CattleFax

89

91

93

95

97

99

101

103

105

107

J F M A M J J A S O N D

IND

EXSeasonal Utility Cow Price Price

WEEKSSource: CattleFax

1991-2010

Video Sales• Sign up and commit a commission premium to

list cattle on sale; typically a portion is refunded if you “pass” on the sale price

• Cattle are filmed in advance• Auction televised and/or on the internet• Buyer remits down payment on contract for later

delivery• Defaults are very rare• Opportunities for value-added cattle

Cow/Calf Risk Management• Buy: labor, fuel, fertilizer, diesel, equipment,

bulls, hay/forage• Sell: calves, feeder cattle, cull cows

While there are limited opportunities to manage input cost risk, this section will focus on the sell side of risk management

Difference between Cow/Calf Operation and Stocker/Grower &

Feedlot is….• Cow/calf enterprise is a fixed cost operation

• Stocker/Grower & Feedlot are margin operators (packer and retailer are also margin operators)

• Margin operators focus on the buy and sell

• Margin operators manage their inputs

Cow/Calf Risk Management:Retaining Ownership

Fall Weaned 550# Calf

Dry Lot Winter (Oct-Apr, 175 days)

725 lbs

Summer Grass(Apr-Sep, 160 days)

1,000 lbs

Feedlot(Oct-Dec, 100 days)

1,300 lbs

800 lbs

Background(Oct-Jan, 100 days)

Feedlot(Jan-Jun, 160 days)

1,300 lbs

Winter Grazing(Nov-Apr, 130 days)

Precondition(Oct-Nov, 35 days)

Feedlot(Nov-Jun, 230

days)

600 lbs

1,290 lbs

850 lbs

Feedlot(Apr-Aug, 150 days)

1,300 lbs

Hold for Summer Grazing• Balance ranch to keep 100% stocked (easier to

increase/decrease yearlings than cowherd; 80/20, 60/40 etc)

• Summer grazing gains are very competitive when corn is expensive

• Can I winter calves cheaply? Keep calves from getting too big

• Does it make sense to price my calves early and sell, THEN buy cheaper fall calves for grazing?

Feedyard QuestionsBefore you make the decision to send your cattle to a

feedyard, consider these questions:

• What type of cattle do they normally handle? • What type of marketing programs do they use? • What are the ration costs (as fed, dry, moisture content)? • How are they going to charge yardage? • Can they run a projected breakeven for you? • Will they partner on ownership of your cattle? • Can they help with grain and cattle risk management? • Is carcass information available? • Who are some previous customers I can talk to?

Putting Together a SoundRisk Management Plan

Things to know:

Cost of production

Breakevens (be conservative)

Analyze cash fundamentals trend (up, down, sideways)

Analyze basis trend (strong, weak, sideways)

Analyze futures technical trends (up, down, sideways)

Set realistic profit objectives/narrow losses

Have flexibility to change

Key: Have the discipline to follow through and act on profitopportunities and trend changes

Components of Cash PriceCASH PRICE equals FUTURES + BASIS

FUTURES Futures prices will make up the majority of cash price Live cattle and feeder cattle futures are trade at the Chicago Board of Trade

(CME Group). There are two types of factors that influence futures A: Fundamental B:

Technical. Fundamentally, futures are a reflection of domestic and global supply and

demand. Placements, growing/feeding conditions, fed cattle currentness, production

levels and export demand, are all examples of fundamental factors influencing the futures market.

Stochastics, support and resistance, trends and moving averages are examples of technical factors influencing the futures market.

BASIS Basis = Cash – Futures Once hedged, your risk shifts to the basis. Basis risk can be avoided by establishing a basis contract.

Decision Tree

1. PROFIT OBJECTIVE****

2. Cash Trend

3. Futures Trend (Technical)

4. Basis Opportunity

*Most important overrides all others

4/13/2010, 114.10

8/27/2010, 115.04

10/15/2010, 107.48

1/21/11,127.64

$90$93$96$99

$102$105$108$111$114$117$120$123$126$129

$/C

WT

Daily Price

CME Feeder Index

Utilizing Historical Basis Projecting basis for the respective delivery period Key to estimating your breakeven Premiums/discounts need to be accounted for

5-Yr. Avg 10-Yr. Avg.December -6.59 -5.26January -6.87 -6.06

850# Oregon Steer Basis - January Futures Contract

5-Yr. Avg 10-Yr. Avg.December 0.56 0.97January -0.12 -0.12

850# Nebraska Steer Basis - January Futures Contract

Example: January 2011 futures trading at $119/cwt, historical basis equal -$7.00,Then your projected cash price equals $119+(-$7) = $112/cwt

Cow/Calf and Stocker Risk Management• Develop marketing strategies with a “whole

operation” view• Analyze costs on a breakeven ($/cwt) basis; run

the numbers• Know the long-term, annual, and short-term

seasonal trends; utilize seasonal marketing• Stay plugged in with your CattleFax analyst to

monitor trends, basis, and price expectations

Bottom Line

Thank Youwww.cattlefax.com

800-825-7525

Strategy: Maximization of ResourcesFebruary 2011

What Is Your Ultimate Strategy/Goal?Long-term sustainability:

• Profitability / Asset appreciation• Growth• Resource preservation• Succession planning

Short-term Capital Gain:• Asset appreciation• Buy/sell strategy

Peak Efficiency and Profitability Requires Maximization of Resources:

• Forage• Equipment• Land Base • Equity: Access to Capital• Knowledge / Skills• Business Relationships

Maximization Strategies: Forage• Consider all options for utilizing forage:

• Cows• Stockers• Wildlife• Harvest• Recreation• Leasing strategies (swap for more

advantageous forage)

Maximization Strategies: Equipment• New paint is expensive! Consider all options

• Leasing (seasonal needs)• Sharing (I buy a swather, you buy a baler)

• Be careful here: communicate usage, repairs, hour allocation, etc!

• Is custom harvesting an option?• Hire out your services and equipment• Hire someone for your harvest needs

Bottom Line: Consider all equipment costs in your calcs(depreciation, interest, repairs, maintenance)

Example: annual baler cost ÷ bales harvested = $__/bale

Maximization Strategies: Land Base• Land is more than just land!

• Mineral rights?• Wind resources?• Water resources?• Hunting?• Recreation?• Swap land through leases or deeds?

Maximization Strategies: Equity / Access to Capital• What does your balance sheet show? Net worth• What is your borrowing capacity and interest

rate? • Think of your equity as a separate profit-center;

how do you put your equity to work, earning a greater rate of return than your interest rate?

• Ag or non-ag based; leverage land to buy and apartment complex in town that cash flows and pays for itself?

Maximization Strategies: Knowledge/Skills• What are you good at? Passionate about? What

do you do better than most? • Can you get certified/licensed for a skill? • What are your time constraints? Seasonality?• What about other family members on the

operation?

Maximization Strategies: Business Relationships• Are there additional resources in your

“network”?• Expanding your network beyond the cattle worldExamples:• Does your doctor need a place to hunt?• Do you have a relative or friend who would like

to invest in land (and lease it to you)?• Can you custom precondition calves for a

feedyard?

Summary• Sustainability = Long Term Profitability• The cattle business is no longer just about cattle• Higher costs of land, cattle, and equipment

necessitates “thinking outside the box”• Get comfortable running numbers, spreadsheets, and

projected financials

Are your resources maximized?

Thank Youwww.cattlefax.com

800-825-7525