Surviving the Beef Cattle Market Crisis
Farm Management Update, June 1996
Dave Vaden and Jack Dunford
Winning The War
Current market forces (both long and short run), are sending beef producers clear signals to re-evaluate their business management plans. Early herd liquidation or major downsizing may prove to be a good long run management decision for many producers. Others will and should stay in for the long haul. However, those beef producers willing to ride out this period of unprofitable prices, must look carefully at every aspect of their farming operation to avoid becoming a casualty of the market. Surviving this downturn with 100 cows but going broke in the process is a classic case of winning the battle but losing the war.
Basic Economic Principles
Agriculture by nature tends to be a cyclical business. Beef producers will see prices return to more profitable levels at some point in the future. It is a basic economic principle that a business must be profitable over the long run to survive. Profit is defined as a return above all costs (most farmers factor in appreciated real estate and life style benefits as a return to all costs). Expenses fall into two categories: cash or variable expenses (feed, fertilizer, fuel, seed, etc.) which increase as production units increase; and fixed or ownership expenses (buildings, debt payments, taxes, insurance) which are incurred regardless of the level of output. Most farmers will continue to farm in the short run as long as income exceeds cash expenses because any income above cash expenses can be applied toward some of the fixed costs. The bottom line is that each beef cattle producer must decide when the long run has caught up with his cattle operation. The lower cost producer will likely make it to the profitable phase of the cattle cycle.
Although few people like keeping or using them, records are the basis for good management decisions. Records tell where you have been, where you are now, and where you are headed. They help you identify our business strengths and weaknesses and may help you make critical decisions during periods of uncertainty and financial stress.
An extremely useful herd analysis computer program available through Virginia Tech is called SPA-EZ. Being able to compare your operation to other Virginia cattle producers provides valuable management information. SPA-EZ provides an analysis of expenses, including cost per cow, cost per pound of calf raised, and a comparison of production and financial information with other Virginia cattle producers. To get an analysis of your beef operation contact Bill McKinnon, Extension Beef Specialist, at Virginia Tech (540-231-9160).
Thanks to the IRS you all keep some form of financial records. Although records kept for tax purposes can be misleading, they do provide a reasonable method of making year to year comparisons, and also help you identify major expense categories. Virginia Cooperative Extension is providing educational assistance in establishing a record keeping system to farmers willing to invest in computer technology and accounting software. The goal is to produce management information which can generate not only tax records but also detailed analysis of the farm operation. Contact your local Extension Agent or Farm Management Agent for information on computer classes or for record keeping assistance.
In most farming operations there are 5 or 6 major cash expenses that account for 60 to 80 percent of total expenses. If a goal is established to reduce total expenses by 10 percent, good business managers concentrate their efforts on reducing these major categories. The following top five expenses were reported in a 1983 survey of Virginia beef producers:
These expenses are likely to be the top five expenses for Virginia herds in 1996 with the possible substitution of repairs for one of the above items. Since the majority of these expenses are associated with the production of stored feeds, minimizing the need for stored feed will go a long way toward becoming a low-cost beef producer.
The following practices maximize grazing efficiency and increase the feeding efficiency:
Year-end tax management will be more important to beef producers with little off-farm income. Net operating losses (NOL) should be avoided if at all possible. NOL rules are complex and do not allow for standard deductions, exemptions, credits, and other tax benefits. For cash basis farmers, delay major purchases until October or November to match expenses to estimated income. Utilize the Section 179 Expensing Election to accelerate depreciation or use longer write-off periods to spread depreciation over more profitable years. Make sure all cull cow sales are reported on form 4797 and not Schedule F. Delay capital purchases as long as possible, since additional depreciation expense is probably not needed.
Produce Heavier Calves
An analysis of costs associated with cow-calf production by Henry Snodgrass in the April-May 1996 Farm Management Update graphically shows the impact of marketing heavier calves on the required breakeven price to cover cash costs. Assuming the annual cash cost for a cow-calf unit is $300 per year, $67 per hundredweight for a 450 pound calf will be needed to breakeven; whereas, if the calf weighed 550 pounds, the breakeven price would be reduced to $55 per hundredweight. In these times, every effort must be made to not market three- and four-weight feeder cattle if you expect to survive the next couple of years in the cow-calf business.
Make a Shift in Your Paradigm
Profitability for the cow-calf producer looks bleak for the next couple of years -- even for the best of managers. When cattle are cheap and feed is high, lighter weight cattle are many times less valuable on a per hundred weight basis than heavy feeders. Some producers should consider culling less productive cows and replacing them with either raised or purchased stockers to graze this summer. In late April four- weight steers were selling for $58 per hundredweight and four-weight heifers were bringing $33 per hundredweight. Breakevens for these cattle to be grazed 180 days were calculated to be $48 per hundredweight and $33 per hundredweight, respectively, for the steers and heifers in the fall of 1996. Seventy to 80 dollars of out-of-pocket costs, interest, death loss, and marketing costs were charged to these stockers which were sold in the six-weight range.
It appears that in many instances beef producers could reduce cow numbers and utilize the available pasture to generate additional cash- flow by grazing three- and four-weight cattle (either raised or purchased) to heavier weights.
Consider the Market Alternatives
Be creative! The futures and options markets do not suit the majority of Virginia cow-calf producers, but there are other alternatives. Study the markets in your area. Choose the location that has historically done well in selling the type cattle you produce (color, size, sex, etc.) You may consider a split marketing approach as the season progresses. As the better end of your calf crop reaches appropriate weights, market them a time or two throughout the grazing season. This option spreads your price risk and frees up additional pasture for late summer grazing when grass is historically in shorter supply. For some, a retained- ownership agreement with another farmer backgrounding or finishing the cattle may be appropriate.
Tighten Up Cow Management Practices
Most of these alternatives have already been discussed, but here are a few other ideas that may help your cash-flow situation over the next year or two:
Now is not the time to liquidate good breeding herds. There is a future in the cattle business! Ike Eller says, "It's the time to cut out the niceties and keep the necessities which means prioritizing dollars." He goes on, "Use it up, wear it out, make do or do without." Consider using some of these ideas in putting together a plan to survive the current cattle market crisis.
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