Southern Ag Today

Author: Kenny Burdine

  • Estimate and Manage Your Largest Cost as a Cow-calf Operator

    Estimate and Manage Your Largest Cost as a Cow-calf Operator

    As we move further into fall, winter feeding will move into the forefront of cow-calf operators’ minds. Most cow-calf operations have already begun feeding hay or will do so very soon.  Winter feed costs are likely the largest cost for a cow-calf operation and are impacted by the number of days an operation feeds hay, the cost of the hay (or other feeds) that is fed, and the efficiency of the feeding program. 

    The number of winter feeding days is largely a function of stocking rate and pasture conditions throughout the grazing season. At the national level, the percentage of pasture rated poor and very poor has been lower than last year, but higher than the average of the previous 5-year period. In the Southeast, pastures are generally in worse condition than last year and considerably worse than the 2017-2021 average. In my home state of Kentucky, a lot of cow-calf operations have been feeding hay for a while and will see a higher than normal number of feeding days this winter.

    Hay values are not always easy to estimate because most operations produce their own hay. Much of the hay market consists of private transactions, so there is limited public data on market price. Hay is also unique in the sense that there can be wide ranges in quality, as well as, value across regions due to the high costs associated with moving hay from one area to another. For these reasons, producers really have to put a value on the hay they feed based on what it cost them to produce it or what they paid for it, if purchased.

    Finally, feeding efficiency is sometimes the forgotten factor in winter feed costs because it can be hard to observe and quantify. There is always a loss associated with feeding as cattle don’t utilize 100% of the hay that is produced or purchased. This is typically a function of hay storage and feeding method and there is merit in looking for economical ways to limit losses at these two points.

    I use the table below in Extension programs as a way to discuss the variation in winter feeding costs based on hay values and losses associated with storage and feeding. Costs are expressed on a daily basis with the assumption of a 1,300 lb cow consuming 2.25% of her body weight each day. The number of hay feeding days can be multiplied by the daily costs to estimate hay cost per cow through the winter. 

    Over the last couple of years, hay values in my area have seemed to shift from the left half of the table to the right half and that has had a significant impact on the cost of wintering cows. For illustration, a $20 per ton increase in hay value leads to an increase of $0.34 per day at the 15% loss level and increases at higher loss levels. Similarly reducing storage and feeding losses from 30% to 15% results in a savings of $0.37 per cow per day when hay is valued at $100 per ton and increases as hay becomes more valuable. Having a feel for winter feeding costs can be a crucial first step in understanding cow-calf profitability and is definitely something that cow-calf operators should seek to manage.

    Winter Hay Cost Per Cow Per Day

      Estimated Hay Cost Per Ton
      $60 per ton$80 per ton$100 per ton$120 per ton
    Storage and Feeding Losses15%$1.03$1.38$1.72$2.06
    30%$1.25$1.67$2.09$2.51
    45%$1.60$2.13$2.66$3.19
    Assumes 1300 lb cow consumes 2.25% BW per day

    Burdine, Kenny. “Estimate and Manage Your Largest Cost as a Cow-calf Operator.” Southern Ag Today 3(45.3). November 8, 2023. Permalink

  • Balance of Trade Has Shifted as Beef Production has Decreased

    Balance of Trade Has Shifted as Beef Production has Decreased

    While the vast majority of beef produced in the U.S. is consumed domestically, international markets are a significant piece of the U.S. beef system. For perspective, the U.S. exported the equivalent of about 12.5% of its beef production during 2022, while importing roughly 12%. This was a fairly typical balance of trade, especially for a year with high beef production levels like last year. However, as beef production is on track to see a significant drop in 2023, trade patterns are also being impacted.

    Through August, exports of U.S. beef are down by 14% from the first eight months of 2022. A drop of that magnitude certainly warrants some question but is largely a case of year-over-year comparison being a little misleading. For the first two quarters of 2023, beef production was about 4% lower than 2022. With lower production levels, a larger share of U.S. production will be consumed domestically. Additionally, high price levels are also making imports of U.S. beef less attractive in many countries. For example, exports to our three largest destinations (South Korea, Japan, and China) are all down sharply so far this year.

    The same factors that have led to lower export levels have also led to an increase in U.S. beef imports. Through the first eight months of the year, U.S. beef imports are up by a little over 5%. The largest percentage increases are in beef imports from Australia, New Zealand, and Uruguay, which are primarily sources of lean trim to go into ground beef. Unlike 2022 when the U.S. was a slight net exporter of beef, we are very much on track to be a significant net importer in 2023. Through August, U.S. beef imports have exceeded exports by more than 20%.

    This trend towards increased imports and decreased exports is likely to continue for the next few years. Given that this calf crop is smaller than last year’s calf crop, beef production is likely to decrease in 2024. And given expectations for lower beef cow inventory next year, I would expect beef production to be lower again in 2025. The same supply fundamentals supporting strong cattle prices are resulting in a significant shift in the balance of trade for beef. And as beef supplies get increasingly tighter over the next couple of years, we are likely to see an ever greater divergence between imports and exports.

    Burdine, Kenny. “Balance of Trade Has Shifted as Beef Production has Decreased.” Southern Ag Today 3(42.2). October 17, 2023. Permalink

  • Dairy Margin Coverage Provides Some Help in Challenging Milk Market

    Dairy Margin Coverage Provides Some Help in Challenging Milk Market

    Dairy producers continue to struggle with decreasing farm level milk prices and high feed costs. For the first five months of 2023, the US All Milk price averaged $21.16 per hundredweight (cwt), which was more than $4 per cwt lower than the first five months of 2022. In fact, the US All Milk dropped below $20 per cwt in May for the first time since October 2021. Lower milk prices are never a welcome change, but they are especially problematic in the current feed price environment. While farm level milk prices were considerably lower for the January-May time period this year compared to last year, feed prices were actually higher. Using the Dairy Margin Coverage (DMC) feed ration as a proxy for feed cost to produce a cwt of milk, feed costs were almost $1 per cwt higher during the first five months of this year. Needless to say, this combination puts a serious squeeze on dairy producers. The figure below shows both US All Milk Price and Dairy Margin Coverage (DMC) feed costs since January of 2014 and the recent convergence of the two lines is very obvious. (Note: Dairy-DMC did not exist for this entire time period, but the chart was intended to give historical perspective).

    While I would prefer market conditions be different, times like this are good opportunities to discuss risk management strategies. Dairy producers should consider all risk management opportunities available to them including Dairy Revenue Protection, Livestock Gross Margin (LGM) for Dairy, forward contracts, futures and options, etc. But the Dairy Margin Protection (DMC) program is a relatively inexpensive way to get some margin protection, especially on an operation’s first 5 million lbs of milk production history. Because it is readily available and inexpensive, I suggest to producers that DMC should be their first layer of risk protection. In fact, producers that enrolled in the DMC program at the highest level ($9.50 per cwt) have received a payment in each of the first five months of 2023. 

    The chart below tracks DMC margin back to January of 2014 and one can easily see decline in margins over the last several months. The last point on that chart is May of 2023 for which the DMC actual margin was $4.83. While it can’t be seen in the chart, one would have to go back to 2012 to find a lower DMC margin than that, had the program existed back then. In terms of the payment level for May 2023, participating producers received a payment of $4.67 for that month’s share (1/12) of the production history they chose to cover. While a dairy producer would be better off if prices were such that a DCM payment was not triggered, a payment of this magnitude absolutely makes a difference. 

    Many risk management tools today are market based. By that, I mean that available coverage levels and costs evolve with market conditions. Examples of this would include Livestock Risk Protection and Livestock Gross Margin Insurance, as well as crop insurance for which reference prices are determined by February futures. But DMC really is a countercyclical tool. The margin levels that can be purchased are available regardless of market conditions. In fact, producers may enroll in DMC at times when the likelihood of payouts is extremely high. There is considerable price and cost risk going forward this year.  Historically large corn acres planted, 94 million, combined with trend yields would produce a record large corn crop and lower prices.  But drought worries may cut into those yields, substantially boosting prices. Today’s futures market indicates some slightly higher Class III milk prices in the coming months.  Every operation should consider all available tools when putting together their risk management plan, but it’s hard to imagine that DMC-Dairy would not be one of the tools in their risk management toolbox.

  • April Cattle on Feed – What to Make of March Placements

    April Cattle on Feed – What to Make of March Placements

    USDA released the April Cattle on Feed report on Friday, April 21st. This monthly publication estimates the number of cattle on feed at feedlots with a capacity of over 1,000 head and serves as a measure of likely beef production over the next several months. While the cow herd has been decreasing in size for several years, an increase in the number of heifers in the beef system kept on-feed numbers running relatively high for much of 2022. Finally in the fall, the long-expected shift occurred, and on-feed numbers have been running below year-ago levels since then.

    In Friday’s report, April 1, 2023, on-feed inventory was estimated to be down about 4.5% from April 1, 2022. While this might not immediately raise any eyebrows from casual observers, this on feed number was higher than expected and really came down to March placements being greater than most pre-report estimates. The net effect was that total on-feed inventory was virtually unchanged from March 1 to April 1, which was counter to what many expected. 

    Heifers continue to make up a historically large proportion of cattle on feed.  Fewer heifers were reported on feed than on April 1, 2022.  While steers on feed declined by 6 percent, heifers on feed were only down about 1.7 percent from last year.  That indicates that there has not been a large movement in holding back heifers yet. 

    There are some possible explanations for the larger-than-expected March placements number. First, March is a month when cattle are often moved off wheat pasture and continued dry weather combined with high wheat prices, likely impacted movement of feeders. Secondly, live cattle imports from Mexico were higher in March. So far this year, feeder cattle imports from Mexico are up about 95,000 head from last year.  But it’s worth remembering that feeder cattle imports in 2022 were the fewest since 2008.  Finally, there is still a lot of carry on the feeder cattle board, meaning that feedlots have been aggressively buying feeders ahead, in anticipation of the rising price levels suggested by deferred live cattle futures. Put simply, I absolutely think that feedlot placements bears watching in the coming months, but I suspect the larger placement number last month has more to do with timing than a major shift in market fundamentals. 

  • Dairy Margin Coverage Program Begins 2023 with Payment

    Dairy Margin Coverage Program Begins 2023 with Payment

    Last summer, I wrote a Southern Ag Today article about the strength of dairy prices. After a great deal of volatility during 2020 and 2021, prices for cheese, butter, and nonfat dry milk pushed farm level milk prices beyond what was seen in 2014. The US All Milk price actually exceeded $27 per cwt last April and May and just missed that level in June. Increases in feed cost definitely bit into those price levels, but margins were as attractive as they had been in several years. Since that time, milk price has fallen by about $4 per cwt. Feed costs have also decreased, but not by as much proportionally. The figure below shows both US All Milk Price and Dairy Margin Coverage (DMC) feed costs since January of 2014. (Note: Dairy-DMC did not exist for this entire time period, but the chart was intended to give historical perspective).

    US All Milk Price and DMC Feed Cost

    January 2014 to January 2023, $ per cwt

    Source: USDA-NASS, USDA-FSA

    The last data point in the chart above is for January of 2023 and that is where I want to focus this discussion. Dairy margins have shifted in recent months such that the DMC margin for January of this year was $7.94, so payments will be made at the $9.50 coverage level. This is the highest level of coverage available to producers covering up to 5 million pounds of annual milk production history. This means that a payment of $1.56 will be made on one-twelfth of the year’s covered production. The January payment alone will cover over 80% of the total premium cost for 2023 and coverage is still in place for the remaining 11 months for which margins are not yet known.

    The figure below shows the DMC Margin from January 2014 to January 2023. This is just the difference in the two series shown in the previous graph and tells the story very well. One can see the $2.96 decrease in margin from November of 2022 to January 2023 as well as the overall volatility in milk price over DMC feed costs had the program been in existence since 2014. Had DMC been around in 2009 and 2012, the margin would have been below $4 at times.

    DMC is similar to many other risk management tools in that producers are typically better off if they don’t receive payments from it. Ideally, market conditions are such that the difference between milk price and feed costs allow for acceptable returns. But in times when that is not the case, DMC can provide solid risk protection. Dairy producers should consider all risk management opportunities available to them including Dairy Revenue Protection, Livestock Gross Margin for Dairy, forward contracts, futures and options. But because DMC is a relatively inexpensive form of margin protection on coverage up to 5 million lbs of production history, I typically view it as the first layer of risk protection in a dairy farm’s risk management plan.

    DMC Margin – US All Milk Price Minus DMC Feed Cost

    January 2014 to January 2023, $ per cwt

    Source: USDA-NASS, USDA-FSA, author calculations

    Burdine, Kenny. “Dairy Margin Coverage Program Begins 2023 with Payment.” Southern Ag Today 3(11.2). March 14, 2023. Permalink