Risk Management and the Cost of Production Curt Lacy Extension Economist-Livestock University of Georgia
Overview Recent trends and projected profits for 2007 Ways to manage risk in 2007
Fertilizer Prices 1997-2006 $450 Nitrogen prices have increased 76% since 2002 $/ton $400 $350 $300 $250 $200 $150 $100 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Nitrogen (AN) Phosphorous (DAP) Potash (Muriate)
Fuel Prices 1997-2006 $2.50 Diesel prices are up 145% since 2002 $2.00 $/Gallon $1.50 $1.00 $0.50 $0.00 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Diesel (bulk)
Impact of Fuel & Fertilizer Prices on Cost of Production $110 $100 $90 $80 $70 $60 $50 $40 $30 $20 2002 2007 500# Calf ($/Cwt.) Hay ($/ton)
Projected Profits for 2007 Revenues Costs
Item Projected Profits for 2007 Returns Over Variable Costs (ROVC) Returns Over Total Costs (ROVC) Expected Net Returns ($/cow) ($0.63) ($90.94) Chance for Positive Returns 49% 6% Returns to Land, Labor, Capital and Management ($/cow) $59.50 $59.50 Cost/cow ($/Cow) $390.65 $481.09 Breakeven Price ($/cwt.) $97.61 $120.57 Assumes 500 cows, 85% calf crop, 523# calf marketed in Aug-Sep
High Return Producers Don t Cheat On: 1. Animal health 2. Nutrition 3. Genetics Source: Cattle-Fax
Managing Risk in 2007 and the Future 1. Determine your cost 2. Increase Calf Value (Revenue) 1. Higher price 2. More production 3. Reduce Cow Cost 1. Cull open cows 2. Cull unproductive cows 3. Examine replacement heifer alternatives 4. Reduce the Cost of Production 1. Evaluate economics of hay production 2. Evaluate economics of annual forages 3. Consider alternative feeds
Know Your Cost 1. $/Cwt. Produced $/Cwt. Variable Costs TotalCosts Total Production 2. $/Calf Marketed $/Calf Variable Costs TotalCosts TotalCalves Weaned 3. $/Cow Variable Costs TotalCosts $/Cow Females Exposed
Increase Revenue Calf Value Forward price part of your production Short-term backgrounding/creep feeding Retained ownership Stockering Custom-finishing
What You Can Sell for Today-Futures Based Price Projections $120.00 $/cwt. $110.00 $100.00 $90.00 $80.00 May Jul Jul Aug Sep Oct Nov Dec Basis Ocala, FL Source: CME & www.beefbasis.com 500# steer 750# Steer
What You Can Sell for Today-Futures Based Price Projections $900.00 $800.00 $/Head $700.00 $600.00 $500.00 $400.00 May Jun Jul Aug Sep Oct Nov Dec 500# steer 750# Steer
Creep-feeding or Short-term Backgrounding Sell 500# Calf in July vs. 650 or 750 August Weight Value ($/Head) Additional Weight Additional Value Breakeven COG 500 $541.08 650 $661.02 150 $119.84 $79.95 750 $746.63 250 $205.55 $82.22
Reducing Cow Cost 1. Cull open cows 2. Cull unproductive cows 3. Evaluate replacement female economics
Cull Unproductive Cows Annual Cow Profit Calf Value - TotalCow Cost Annual Cow Profit (Calf Weight x Calf Price) - TotalCow Cost Yeah Buts: Must be able to match cows and calves Based on average cow cost Borderline young cows may get a pass
Replacement Female Economics Compare alternatives Include the opportunity cost of heifers Do whatever it takes to get second calf heifers bred
Replacement Female Economics Value of Getting 2 nd Calf Heifers % of 2 nd Calf Heifers Calving Current Economic Value Bred Rate of Return Breakeven Purchase Price 100% ($162) 3.30% $919 85% (Base) ($222) 1.96% $859 75% ($262) 1.06% $819 50% ($362) -1.13% $718 $1,080 initial value, 7 years useful life, 7% interest
Reducing the Cost of Production Allocation of Expenses Labor 13% R&M 4% Interest 5% Mktng + Other 5% Pasture and feed cost make up 63% of Variable Expenses Pasture 34% Minerals + Vet 10% Feed 11% Hay 18%
Reducing the Cost of Production 1. Reduce pasture cost 2. Hay production economics 3. Reduce feed costs
Reducing Pasture Costs 1. Reduce pasture cost 1. Soil test 2. Alternative fertilizers 3. Legumes? 4. Rotational grazing? 5. Economics of annuals
Forage Production Risk Dry Matter Yield of Marshall Ryegrass at Tifton 2000-2006 12,000 10,000 Average Yield Lbs. DM/Ac. 8,000 6,000 4,000 00-01 01-02 02-03 03-04 04-05 05-06 Marshall
Annual Economics Grazing Days Required to Breakeven at Various Dollars Per Day Drylot Cost & Per Acre Cost $/Day Drylot Costs $ 100 $ 125 $ 150 $ 175 $ 200 $ 0.50 200 250 300 350 400 $ 0.75 133 167 200 233 267 $ 1.00 100 125 150 175 200 $ 1.25 80 100 120 140 160 $ 1.50 67 83 100 117 133
Annual Economics Grazing DaysRequired Forage Cost Replacement Feed Cost Replacemen t Feed Cost Forage Cost Grazing Days
Reducing Pasture Costs 2. Hay production 1. What are your costs? 2. Buy hay/reduce stocking rate? 3. Corn silage? 4. Baleage? 5. Irrigation?
Costs of Producing Hay 150 Actual Production Costs for Hay ($/Ton) Southwest Georgia Experiment Station (Plains, GA) 2000-2006 140 130 120 110 $/ton 100 90 80 70 60 50 2000 2001 2002 2003 2004 2005 2006 $/ton
Cost Comparison of Hay and Silage Item Bermuda hay Dryland Bermuda hay Irrigated Corn silage Dryland Corn Silage Irrigated VC ($/ac.) AF/VC ($/ton) DM/VC ($/ton) AF/TC ($/ton) DM/TC ($/ton) 413.19 56.37 66.32 74.74 87.73 512.28 51.23 62.27 65.32 76.67 491.93 32.80 93.72 35.61 101.74 693.37 31.52 90.05 37.98 108.51 85% DM Hay, 35% DM Silage
Reducing Feed Costs 3. Reduce feed costs 1. Forage test 2. Consider alternative feeds 1. Crop by-products 1. Cottonseed 2. Soy hulls 3. Molasses 4. DDG 2. Commodity feeds 1. Bakery products 2. Other manufactured products 3. CONFIRM INGREDIENTS OF BY-PRODUCTS
Alternative Feedstuffs Economics Excel spreadsheet Calculator Users enter current or base feeding scenario and alternative feeding scenario Users also enter cost info for additional facilities or equipment Net returns for the alternative feeding scenario are calculated on per herd and per cow basis
Decision-aids Replacement Female Calculator Marketing Alternatives Calculator Alternative Feedstuffs Calculator WWW.UGABEEF.ORG
Summary 2007 and the next few years will be challenging for beef cattle producers. Don t cheat on the important things Health Nutrition Genetics Marketing High feed prices create economic incentives for grassweight on calves and feeders. Retaining ownership MAY be an alternative
Cows Summary Cull open and unproductive cows. Compare replacement female alternatives. Production Costs Examine your pasture costs. Revisit hay costs. Consider other forage alternatives. Look at alternative feedstuffs.
QUESTIONS?