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Beef Production in the New Economic Environment

Beef Production in the New Economic Environment. GEOFF BENSON, PhD Extension Economist Dept of Agricultural and Resource Economics North Carolina State University. Outline. Situation and Outlook Beef Production Sales Prices Forecasting prices Cost of production Weathering the Storm.

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Beef Production in the New Economic Environment

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  1. Beef Production in the New Economic Environment GEOFF BENSON, PhD Extension Economist Dept of Agricultural and Resource Economics North Carolina State University

  2. Outline • Situation and Outlook • Beef Production • Sales • Prices • Forecasting prices • Cost of production • Weathering the Storm GEOFF BENSON, ARE, NCSU

  3. Beef Production, 2001-09F Source: USDA, WASDE reports GEOFF BENSON, ARE, NCSU

  4. Meat Production, 2001-09F Source: USDA, WASDE reports GEOFF BENSON, ARE, NCSU

  5. Consumer Demand • At Home • Muscle Meats • Processed Meats • Prepared Foods • Meals Eaten Out GEOFF BENSON, ARE, NCSU

  6. Meat Demand Outlook • Economic Outlook for 2009 • Income: GNP down 2.0% from 2008 • Inflation: 1.2%, down from 2008 (~ 3.8%) • Unemployment: 8.4% up from 5.8% in 2008 • Population growth: Up ~ 0.9% • Other -- demographics, diet fads, etc. • Meat demand down ~ 1.1 lb./person • Beef down 0.6 lb. per person • Chicken down 1.1 lb. per person • Pork up 0.7 lb. per person GEOFF BENSON, ARE, NCSU

  7. . GEOFF BENSON, ARE, NCSU

  8. Prices, 2001-09F Source: USDA, WASDE reports GEOFF BENSON, ARE, NCSU

  9. 2009 Price Outlook • The futures market gives the best indication of what prices are likely to do because participants are putting their money where their mouths are • BUT, prices do move based on new information, both expected and unexpected • AND an individual producers cattle may not match the contract specifications, so projecting prices takes some extra effort GEOFF BENSON, ARE, NCSU

  10. Fat Cattle Futures, $/100 lb, 3/6/09 GEOFF BENSON, ARE, NCSU

  11. Feeder Cattle Futures, $/100 lb, 3/6/09 GEOFF BENSON, ARE, NCSU

  12. What does all this for me? • Cow-calf: • Value of your cattle – their particular characteristics • Time of year of sale • Cost of production • Stockers: • Buying price and selling price • Cost of gain GEOFF BENSON, ARE, NCSU

  13. Feeder Cattle Futures, $/100 lb, 3/6/09 GEOFF BENSON, ARE, NCSU

  14. Price Forecasting • Nearby Futures Contract Price for sale month • “Basis” = futures price – local cash market price for similar product • Use premiums & discounts to estimate the value of your cattle • Weight • Sex • Frame size • Muscling • Breed or cross • Other, e.g., market channel GEOFF BENSON, ARE, NCSU

  15. Price Forecasting • The most useful comparison for a cow-calf producer is the NC cash (spot) price and the feeder cattle futures price for the closest month past the intended sale month • But • CME feeder cattle futures contract is for 650-849 lb. M&L 1&2 steers in truckload lots • NC Auction Prices are for 600 to 799 lb. M&L1&2 steers • Contract months are Jan, Mar, Apr, May, Aug, Sept, Oct, & Nov. GEOFF BENSON, ARE, NCSU

  16. “BASIS” • Basis is the difference between the spot cattle price in North Carolina and the price for comparable cattle in the futures market • If basis is predictable, then we can use the futures market to project local North Carolina prices and use this to make business decisions • Some historic basis data are available at http://www.ncsu.edu/project/arepublication/AREno32.pdf GEOFF BENSON, ARE, NCSU

  17. NC Basis, Avg. 1990-2000 GEOFF BENSON, ARE, NCSU

  18. NC Basis, 1990-2000 • Negative • Seasonal: Smaller in spring, larger negative differences in the fall • Varied by market, west to east • Updated information is not available GEOFF BENSON, ARE, NCSU

  19. Price Forecasting • Futures Contract Price for sale month • “Basis” = futures price – local cash market price for similar product • Use premiums & discounts to estimate the value of your cattle • Weight • Sex • Frame • Muscle • Breed • Time of year/seasonality • Other, e.g., market channel GEOFF BENSON, ARE, NCSU

  20. Graded Sales, M1 Steers, 1991-2001 . GEOFF BENSON, ARE, NCSU

  21. Graded Sales, M1 Steers, 1991-2001 . GEOFF BENSON, ARE, NCSU

  22. Graded Sales, M1 Heifers v. Steers, 1990-2001 GEOFF BENSON, ARE, NCSU

  23. Graded Sales, 500-599 lb. Steers, 1990-2001 GEOFF BENSON, ARE, NCSU

  24. Angus Braford Brahman Brangus Braunveih Charolais Chianina Devon Galloway Gelbveih Red Poll Sahiwal Salers Santa Gertrudis Shorthorn (dual) Simmental South Devon Tarentais Zebu + Crosses & Composites Selected Breeds • Hereford • Holstein (dairy) • Jersey (dairy) • Limousin • Longhorn • Maine Anjou • Nellore • Piedmontese • Pinzgaur • Polled Hereford GEOFF BENSON, ARE, NCSU

  25. Graded Sales, 500-599 lb. M1 Steers, 1991-2001 GEOFF BENSON, ARE, NCSU

  26. Marketing Options • Regular auction = Base • Graded sale • Special programs, e.g., Southeast Pride, pre-conditioned sales • Direct sale • Truckload lots • Retained ownership GEOFF BENSON, ARE, NCSU

  27. Marketing Options • Choices are affected by • Number of cattle for sale • Uniformity of cattle • Market premiums vary with method of sale • Marketing cost varies with method of sale • Consider risk GEOFF BENSON, ARE, NCSU

  28. Price Outlook • Use futures price, basis, and information on premiums and discounts to estimate local prices as part of your production and marketing decisions • But what about cost of production… GEOFF BENSON, ARE, NCSU

  29. . Source: USDA, “World Agricultural Supply & Demand Situation GEOFF BENSON, ARE, NCSU

  30. Prices Paid Index for Selected Inputs Source: Agricultural Prices, NASS, USDA, January 2009 GEOFF BENSON, ARE, NCSU

  31. Forage Production Costs, NCSU Enterprise Budgets, $/ton of DM GEOFF BENSON, ARE, NCSU GEOFF BENSON, ARE, NCSU 31

  32. Beef Production Costs, NCSU Enterprise Budgets, 2008, $/head sold * Includes cost of cattle GEOFF BENSON, ARE, NCSU GEOFF BENSON, ARE, NCSU 32

  33. Outlook Summary • Outlook for US production, sales and prices is poor: • Production @ 26,110 mil. lb.  • Consumption @ 61.6 lb. per person  • Fed cattle prices @ $89.00/cwt. = • Feeder cattle prices at $102.00/cwt  • Feeder calf prices next fall are expected to be similar to 2008 and still good relative to historic prices • Higher cost of production • Stocker profits depend heavily on anticipating price movements correctly or hedging GEOFF BENSON, ARE, NCSU

  34. Where are Costs & Profits Headed? GEOFF BENSON, ARE, NCSU • Forage Production • Continued higher fertilizer prices and tight supplies • Temporary relief then higher fuel prices • Longer term, general cost increases resulting from higher energy costs • Cattle • Higher forage costs • Continued higher purchased feed prices • Longer term, general cost increases resulting from higher energy costs • Little change in cattle prices in 2009 • Losses for many producers in 2009 GEOFF BENSON, ARE, NCSU 34

  35. Economics works! • When production costs increase • Producers’ profits shrink • Producers respond by buying and using less and/or looking for alternatives • If adjustments in production practices fail to return the business to profitability producers cut back and some quit entirely • Reduced supplies tighten up the market and prices increase to the point where producers can make adequate returns • A new market balance is achieved GEOFF BENSON, ARE, NCSU 35

  36. Economics works! When demand falls Markets are oversupplied, prices fall Buyers respond to lower prices by buying more and by switching away from substitutes or alternatives, which lowers their prices too Producers respond to lower prices by producing less, which helps moderate the price reductions long term A new market balance is achieved GEOFF BENSON, ARE, NCSU 36

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  40. Cattle Cycles • Low prices force liquidation of breeding stock, adding to beef supplies and reducing prices further • Reduced production leads to higher prices encouraging heifer retention for breeding, reducing beef supplies and raising prices further • Lags causing the 10 to 12 year cycle • Decision making • 15 months to raise a heifer to breeding age • Breeding seasonality & 9-month gestation • 14-18 month birth to slaughter GEOFF BENSON, ARE, NCSU

  41. $ CONSUMER $ Beef Product & $$ Flows RETAILER PROCESSOR WHOLESALER FINISHING PACKER COW-CALF STOCKER GEOFF BENSON, ARE, NCSU

  42. The Big Picture Message In the near term, the US meats sector – poultry, pork and beef – must shrink so meat prices can increase. “Shrink” = fewer livestock marketed and, probably, fewer producers The cow-calf producer takes more of a hit in a downturn and gets more of the gravy on the upswing An unanswered question is how the new cost structure affects regional competitiveness Eventually, prices must adjust to higher costs of production so that enough producers can make an acceptable profit to stay in business There is wide variation in financial performance among farms GEOFF BENSON, ARE, NCSU 42

  43. Cow-calf returns over operating expense, US & regions, 2006-7 +$62 N/A +$153 -$111 -$70 N/A -$169 +$55 +$1 US avg. net income over operating expense/cow for 2006-7 =-$/10/cwt. Regional differences from US average are shown GEOFF BENSON, ARE, NCSU

  44. MN Cow-calf Cost & Returns, 2007 Source: MN Farm Business Management database GEOFF BENSON, ARE, NCSU 44

  45. MN Stocker Cost & Returns, 2007 Source: MN Farm Business Management database GEOFF BENSON, ARE, NCSU 45

  46. Two Issues NC Producers Face • All producers are not alike & affect longer term financial prospects for each individual producer – i.e., competitiveness • Can you survive? • If so, do you want to? • Short term survival strategies GEOFF BENSON, ARE, NCSU

  47. 1. Long term: Why do you have Cattle? OR FUN OR MONEY? GEOFF BENSON, ARE, NCSU GEOFF BENSON, ARE, NCSU 47

  48. Do you know your production cost? • Operating cost - out of pocket expenses, e.g. forage production, other feed, vet, fuel, repairs • Fixed/Ownership/Investment costs • Depreciation • Interest • Taxes & insurance • Labor cost or charge for the value of your time GEOFF BENSON, ARE, NCSU GEOFF BENSON, ARE, NCSU 48

  49. Are You Financially Healthy? Farm is profitable most years by return on investment & to management Producer has cash flow to meet operating expenses, debt service, family living needs in a timely manner Business is solvent – has low debt load and high equity as collateral for loans and as a reserve Financial performance cannot be predicted from farm performance There are relatively few practices that can be recommended in all situations GEOFF BENSON, ARE, NCSU

  50. 2. Short-term: Coping with Higher Costs GEOFF BENSON, ARE, NCSU • Forage production costs • Fertilization • Choice of forage crop • Renovation • Forage utilization costs • Pasture management • Stored forages • Risk (drought) management • Cattle options

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