Southern Ag Today

Author: Kenny Burdine

  • Price Risk Always Exists, Even in a Bull Market

    Price Risk Always Exists, Even in a Bull Market

    I doubt many would take issue with me calling the last couple of years a “bull market” for cattle. The combination of tight supplies and strong demand has resulted in cattle markets tracing an upward trajectory over the last couple of years. As an illustration, the chart below tracks the daily nearby CME© feeder cattle futures price over the last 26 months. In January 2023, the nearby feeder cattle futures price was in the $180’s. As I write this article, the nearby feeder cattle futures price is in the $260’s.

    While it is hard to dispute the overall strength of the recent cattle market, it is also important to note that during the last 26 months there have been multiple times when markets saw significant downward swings. The most recent of these occurred since the end of January and was likely sparked by the resumption of live cattle imports from Mexico, continued talk of trade disruptions, Avian Influenza, and any number of other factors. The market also fell by more than $40 per cwt from September to December 2023 and more than $30 per cwt from late May to early September 2024. For producers who sold cattle during those pullbacks, the impact on returns was significant.

    There are a lot of potential strategies to manage price risk, and the simplest one may be a forward contract. By forward contracting cattle, price risk is largely eliminated as the seller and buyer agree on a purchase price prior to delivery of the cattle. A similar strategy would be selling cattle through an internet auction and specifying delivery at a later time. In both cases, the seller entering the forward contract still has production risk as they must meet the specifications of the contract (weight, quality, etc.), but market swings are no longer a concern.

    Futures and options markets are also common tools for price risk management. Short futures positions allow producers to capitalize on the expectation of cattle prices in the future that are manifested in CME© futures prices. When utilizing a short futures position to offset potential decreases in cattle prices, farmers are essentially exchanging price risk for basis risk. Producers utilizing short futures positions also need to plan for potential margin calls if markets move substantially higher. Put options give producers the right to sell a future contract if they choose, and they pay a premium for this flexibility. This effectively sets a price floor for cattle as the strike price on the put option and the premium paid sets a minimum price for the cattle being sold.

    Finally, I have talked more about Livestock Risk Protection (LRP) insurance than any other risk management strategy recently. It works almost exactly like a put option but is much simpler and has the advantage of flexibility on scale. Unlike several other price risk management tools, LRP insurance can be purchased on any number of head, which is much easier for smaller operations to utilize. LRP has been made more attractive over the last several years through increased premium subsidies and allowing producers to pay premiums after the ending date of the policy.

    The specific tool or strategy that cattle producers utilize to manage price risk is less important than their overall risk management plan. I encourage producers to know what risk management tools are available to them, understand how changes in sale price impact their profits, and plan to cover themselves from downside price risk. I still feel good about the fundamentals of the cattle market, but I think the first couple weeks of February have been a good reminder that price risk always exists, even in a bull market!

    Burdine, Kenny. “Price Risk Always Exists, even in a Bull Market.” Southern Ag Today 5(11.1). March 10, 2025. Permalink

  • Placements Lower Than Expected in January Cattle-On-Feed Report

    Placements Lower Than Expected in January Cattle-On-Feed Report

    The January Cattle on Feed report was released on Friday afternoon. Total on-feed inventory to start the year was estimated at a little over 11.8 million head, which is down by just under 1% from January of 2024. Even though feeder cattle supplies have been lower, feedlot inventories ran above year-ago levels for eight of twelve months in 2024 as lower feed prices encouraged longer feeding times. While I don’t want to read too much into it, this was the largest year-over-year decline since May.

    Placements were once again the headliner of the report as they came in below, and outside the range of pre-report estimates. December 2024 placements were estimated at 1.64 million, which was 3.3% below December 2023. On the surface, this seemed logical as December represented a full month of not receiving live cattle imports from Mexico. This also marked the second month in a row with placement levels being more than 3% below year-ago.

    Friday’s report was also a quarterly cattle-on-feed report, which means it included an estimate of the steer/heifer breakdown. In the absence of a July cattle inventory report, this has been one of the main indicators economists have been tracking for evidence of heifer retention. Heifers accounted for 38.7% of the total on-feed inventory on January 1, 2025. While this doesn’t speak to retention, it is worth noting that this is about 1% lower than last January and 1% lower than October 2024. So, it does bear watching as we move further into 2025. Again, I think imports from Mexico had some impact here as heifers had represented a higher than usual share of imports prior to the ban in late November.

    Last week’s cattle on feed report will be overshadowed later this week as USDA-NASS will release their annual inventory estimates on the afternoon of January 31st. While beef cow slaughter was down sharply for 2024, most are still expecting continued decreases in beef cattle numbers at the national level. It will be interesting to see the state-by-state numbers and specifically to look at areas where heifer retention may have already begun. Given the favorable price outlook for calves, I think heifer retention is very possible in 2025 if weather is cooperative. But I also think this will be a relatively slow cow-herd expansion once retention does begin.

    Burdine, Kenny. “Placements Lower Than Expected in January Cattle-On-Feed Report.” Southern Ag Today 5(5.2). January 28, 2025. Permalink

  • Four Questions the 2025 Cattle Market Will Need to Answer

    Four Questions the 2025 Cattle Market Will Need to Answer

    Trends are always difficult to ascertain coming out of holiday periods as many markets are closed and volumes tend to be pretty light, but cattle prices have started 2025 very strong. While questions exist on the demand side, tight cattle supplies will remain the primary driver in the new year and should continue to support prices. And as always, weather will have a significant impact on feed and forage availability and cattle marketing patterns. As I write this article in early January, I want to discuss four questions that I think will be important for the 2025 cattle market to answer.

    Will we start to see significant heifer retention? – This question has been circulating for the better part of the last two years. There are a lot of reasons why retention has been delayed including weather, production costs and interest rates. But market conditions should be very favorable again and I do think heifer retention could be seen in 2025 if weather cooperates. When heifer retention does pick up, it will further tighten supplies of cattle as those females are held out of the marketing system. This will be the first stage of growing this cowherd, which is currently at a 60+ year low.

    Can slaughter weights keep increasing? – Most analysts are forecasting beef production to be lower in 2025. These forecasts are based on continued decreases in cattle numbers and the potential for decreased female harvest in response to high prices. In truth, I could have written this exact same thing last year. But with cattle supplies tight, beef prices high, and feed prices relatively low, cattle were fed longer and to heavier weights. This increase in pounds largely offset the decrease in female slaughter and resulted in steady beef production levels for 2024. I will readily admit that I don’t know how much further weights can be pushed, if at all, but those same factors are largely at play again this year. So, I will be watching harvest weight trends very closely.

    Will we see greater than expected growth in pork and poultry production? – Holding everything else constant, lower feed prices increase returns across all livestock species and lead to greater production levels. And production levels of competing meats do impact beef and cattle prices. Recent increases in pork production have been driven almost entirely by productivity, rather than increases in breeding inventory, and increases in broiler production have been running close to the long run trend. I just point this out because production increases can occur much faster in the hog sector than the cattle sector, and faster still in the poultry sector. While there aren’t many indications of expansion in other species currently, this was a factor in 2015, and I think it bears watching in 2025. It is important to remember that beef supplies are not the only factor that impacts beef prices. All proteins compete in the meat case.

    What will be the impact of any changes in trade policy? – Trade has been a major topic of discussion recently and I doubt that will change in 2025. Beef exports have been lower in recent years due to tight domestic supplies and high prices, but the US still exported the equivalent of roughly 11 percent of production last year. In the past, retaliatory tariffs have impacted beef and cattle prices, so it bears watching going forward. It is also important to remember that the nature of beef trade very much depends on the trading partner. For example, we export a lot of beef to Mexico and Canada, but we are also a significant import market for those two countries. And while trade discussions typically focus on beef, a significant number of live cattle enter the US from Mexico and Canada each year. Conversely, over half of US beef exports go to Japan, South Korea and China, but those are almost exclusively export markets. The complexity of each of these trading relationships makes discussion of trade impacts very complex and something that will be interesting to follow this year.

    Burdine, Kenny. “Four Questions the 2025 Cattle Market Will Need to Answer.” Southern Ag Today 5(2.2). January 7, 2025. Permalink

  • When is an Hour of Operator Labor, Not Just an Hour of Operator Labor?

    When is an Hour of Operator Labor, Not Just an Hour of Operator Labor?

    As an Extension Economist, I regularly have the opportunity to talk about cow-calf profitability. I usually start with revenues, talking about calf prices and making assumptions about weaning weight and weaning rate. Then I walk through costs like winter feed (hay), pasture maintenance, breeding, vet/medicine, trucking, sale expenses, etc. While there is always room for discussion, most of these expenses can be estimated on a “per cow” basis by making some reasonable assumptions. At some point in the discussion, I bring up the topic of labor. Some cow-calf operations hire a significant amount of labor, but for a lot of these operations, the majority of labor is unpaid operator labor.

    The classic economist approach to valuing unpaid labor is to value it at its opportunity cost. By that, I mean if the farmer could be making $20 per hour doing something else, their labor on the farm should be valued at $20 per hour and be treated as an expense. On the surface, it’s hard to argue with this logic, but it is also not the way that most farmers think about the value of their time. For this reason, I tend not to treat labor as an expense but instead make the point that any return must be sufficient to adequately compensate the operator for the time they spend. This allows each individual in the room to evaluate whether that return is sufficient and place whatever value they feel is appropriate on their time.

    One danger of this approach is that it may encourage ignoring other expenses that often accompany operator labor. To illustrate this, consider two very different operator labor hours – an hour spent manually clearing fence rows and an hour spent on a tractor baling hay. A producer clearing fence rows may be using a set of loppers to cut small saplings, they may have a smaller set of clippers for briars and weeds, and they may even have a chainsaw they use on occasion when needed. An overly eager economist could talk about depreciation on that chainsaw and the other equipment, as well as the fuel being used when the chainsaw is operating, but clearly, these costs are pretty minimal. The point here is that the vast majority of the cost associated with an hour clearing fence rows is time.

    On the contrary, time is a much smaller portion of the total cost of an hour spent baling hay. Beyond the hour of labor, the producer baling hay is running both a tractor and hay baler. Fuel costs are much more significant, as is depreciation on both pieces of equipment. The same can be said of maintenance and repairs associated with the additional use of the equipment. Choosing not to place a value on an hour spent clearing fences is one thing, but not placing a value on time spent baling hay is very different. Obviously, I am describing two extremes here, but hopefully, it helps to illustrate the point I am making. Sometimes an hour of operator labor is not just an hour of operator labor, especially if there are a lot of other expenses being incurred during that hour.

    My experience has been that most farmers prefer time spent running machinery over time spent doing more manual labor. In fact, many producers would readily trade manual labor hours for more machinery hours. Cleaning out fence rows on a hot day is tough work, but the expense beyond the value of the time spent is minimal. Conversely, that same hour spent baling hay comes with a lot of additional expenses beyond the value of that time. The point is that choosing not to value operator labor is the choice of the farmer, but that farmer still needs to make sure they are valuing other costs incurred during those operator labor hours. Failing to do so has the potential to greatly underestimate the total costs for the operation.

    Burdine, Kenny. “When is an Hour of Operator Labor, Not Just an Hour of Operator Labor?” Southern Ag Today 4(42.1). October 14, 2024. Permalink

  • The Three Ps of Herd Expansion: Profit, Pasture and Patience

    The Three Ps of Herd Expansion: Profit, Pasture and Patience

    The beef cow inventory is at a sixty-three-year low. Tight supplies have driven cattle markets and calf prices have increased by roughly $1 per lb over the last two years. Limited heifer retention and beef cow slaughter exceeding 10 percent of beef cow inventory for the year indicate that beef cow numbers will be even lower in 2025. Cowherd expansion will happen eventually but, there appears to be little evidence that producers have an appetite for that currently. For the cow herd to grow, we need to have the 3 Ps of herd expansion at the cow-calf level: profit, pasture, and patience.

    The first P is probably the most obvious – profit. There will be no interest in cowherd expansion without money being made at the cow-calf level. While profit has been there recently, it is important to remember that these strong calf price levels are relatively new. We actually went from November 2015 to February 2023 (7 years and 4 months) with the state average price of a 550 lb medium / large frame #1-2 steer in Kentucky being under $2 per lb. Coming out of that challenging 7-year period, I think a lot of cow-calf operators have been cautious and guarded. Just as importantly, a lot of costs are substantially higher now than they were ten years ago, so comparing current calf prices to historical calf prices is misleading. Still, I think current returns at the cow-calf level are sufficient to see heifer retention if the other two Ps fall into place.

    The second P is pasture, and I am using pasture broadly to describe forage/feed availability. While profit may be the first driver of expansion, no level of profit can make it rain, and limited pasture and hay supplies can nix any interest in expansion. As a recent example, drought was so widespread in the US during 2022 that expansion would have been highly unlikely, regardless of calf price levels. Both hay supplies and pasture and range conditions have improved since 2022, but a lot of areas have been dry this year, including my home state of Kentucky. 

    The final P is patience, and I think this may be the one that is most lacking in the cattle industry right now. When a farmer decides to expand the size of their cowherd, they are trading income from the sale of heifers today for a stream of income from additional calf sales in the future. Weaned heifers are valuable in 2024 and passing up that income in the short run is difficult. Developing heifers is also costly and is an expense that is incurred well before additional calves can be sold. These same factors were largely present when our last expansion began in 2015, but interest rates were considerably lower than they are today. Higher interest rates increase the cost of production and also increase the preference for income today, rather than in the future. Put another way, patience is at a premium in higher interest rate environments like the present.

    At some point, the three Ps will line up and herd expansion will start. When that will happen is a difficult question to answer, but it is safe to say there are no signs of heifer retention right now. Limited heifer retention, combined with cow slaughter levels, suggest that another decrease in beef cow inventory is almost certain when the January 2025 estimates are released. So, supply fundamentals are encouraging and should continue to support calf prices next year. Many are also expecting some reductions in interest rates over the several months, which may factor into this decision at the producer level. 

    If weather cooperates, I do think increased heifer retention could be seen in 2025, but it is important to remember that this would just be the first step towards expansion. And the initial impact of heifer retention is actually a tightening of calf markets as those heifers are held back. There are always risk factors out there, but I remain optimistic about the next couple of years largely because cattle supplies are tight and likely to get tighter. We are not seeing signs up expansion yet, so all we can do is watch for the 3 Ps!

    Burdine, Kenny. “The Three Ps of Herd Expansion: Profit, Pasture, and Patience.” Southern Ag Today 4(41.2). October 8, 2024. Permalink