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Evaluating Profitability in Livestock Marketing Strategies

Explore past profitability analysis, cost assumptions, risk reduction through futures hedging, and net benefits of different marketing options in livestock operations to make informed decisions for sustainable business growth.

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Evaluating Profitability in Livestock Marketing Strategies

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  1. Profitability of Selected Marketing Alternatives Todd D. Davis Extension Economist Clemson University

  2. Objective • Past Profitability from 1989 - 2005 • Ability to cover cash costs? • Does it Pay to Retain Ownership? • Fall Sales vs. Stockering • Fall Sales vs. Retained ownership in Kansas feedlots • Can Hedging with Futures Help Reduce Risk?

  3. Production Assumptions • Cow-calf • 100 cows, 85% calf crop, Selling 500 # steers & 450 # heifers on Sep. 10 • Preconditioning • 45 days, Gain 2 lbs/day (1.8 lbs/day), cost $60/hd • Stockering • Feed 150 days, Gain 2.00 lbs/day (1.85 lbs/day), Selling 890# steers & 810 # heifers on March 24 • Finishing • Feed 210 days, Gain 3 lbs/day, Sell 1250 # steer on May 23

  4. Cost Assumptions • Production costs based on Clemson Univ. Enterprise Budgets (Cow-calf, stockering, hay & forages) • Finishing costs based on Kansas State University Extension • Historical input costs from USDA

  5. Prices are from … • South Carolina weekly feeder cattle cash prices (by weight and sex) from 1989-2005 (USDA Livestock Market News) • Kansas weekly cash slaughter steers & heifers prices from 1989-2005 (Kansas State) • Daily feeder cattle and live cattle futures and options data from 1989-2005 (Commodity Research Bureau)

  6. Past Profitability-- Evaluating 1989-2005

  7. Revenues and Total Variable Costs – SC Cow-Calf Operation ($/hd) 1989-2005 Average Return over TVC= $150/hd

  8. Revenue and Total Variable Costs – SC Cow-Calf w/ Winter Stockering Operation ($/hd) 1990-2005 Average Return over TVC = $235/hd

  9. Revenue and Total Variable Costs – SC Cow-Calf and Finishing Operation ($/hd) 1990-2005 Average Return over TVC = $265 / hd

  10. Your labor and management skills are valuable! • While you may be profitable in covering your out-of-pocket expenses… • Budget a return to your labor and management skills – don’t work for free! (20% of Total Variable Costs) • Think about budgeting a profit margin to help finance future business investments and growth

  11. Does it pay to retain ownership every year?

  12. How do I know if I should retain ownership or sell now? • Compare what you gain from retained ownership to what it costs… • What you gain Increased Revenue • What it costs  Additional Cost of Gain + Lost Revenue (what you could get if you sell now)

  13. Net Increase in Returns from Stockering vs. Fall Sales ($/hd) 1990-2005 Average = $30/hd

  14. Net Increase in Returns from Finishing vs. Fall Sales ($/hd) 1990-2005 Average = -$7/hd

  15. Know your costs! • It pays to budget and to know and monitor your costs. • Take the time to evaluate if it is pays to retain ownership or sell it now. • The costs and benefits can differ greatly from year-to-year!

  16. Can Hedging with Futures Help With Reducing Risk?

  17. What are Futures? • They are contracts sold on the Chicago Mercantile Exchange that allows you … • “Lock in a price” – Losses in the cash market will be offset by gains in the futures market • This can be complicated – Let’s see if we can use futures/options to reduce risk • Learn mechanics at another meeting

  18. Hedging Assumptions • Cow-Calf – Sell October Feeder Cattle Contract on March 1, Offset Sep. 10 • Winter Stockering – Sell April Feeder Cattle Contract on Oct. 1, Offset March 24 • Finishing – Sell June Live Cattle Contract on Oct. 1, Offset May 24

  19. Net Benefit of Hedging Fall Feeder Calf Sales – October Feeder Futures *** ($/hd) 1989-2005 Avg. = -$30/hd 1989-2002 Avg. = -$8/hd Beneficial 30% of the time *** For Educational Purposes Only!

  20. Net Benefit of Hedging Fall Feeder Calf Sales & Stocker – October Feeder & March Feeder Futures *** ($/hd) 1989-2005 Avg = -$28/hd 1989-2003 Avg = -$5/hd Beneficial 40% of the time! *** For Educational Purposes Only!

  21. Net Benefit of Hedging Fall Feeder Calf Sales & Finishing – October Feeder & April Live Futures *** ($/hd) 1989-2003 Avg = -$5/hd 1989-2005 Avg = -$33/hd Beneficial 40% of the time! *** For Educational Purposes Only!

  22. Are Futures and Options Useful? • Sometimes… • Remember that you’re trying to protect against low prices • Futures and Options won’t “Pay” every year • Consider the revenue provided in a ‘worst case’ scenario • You can do better than the ‘naïve’ strategies used in this example!

  23. Thank you for your attention!I will be happy to answer any questions you may have.

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