Southern Ag Today

Category: Livestock Marketing

  • Between a Rock and a Dry Place: Culling Decisions

    Between a Rock and a Dry Place: Culling Decisions

    In drought-stricken areas, cattle producers are having to sell more cattle than normal because of the lack of grass and increased costs of production. While some producers are selling feeder calves earlier than they wanted, the number of cull cows going to the market creates multiple ways to look at the situation. This article covers the current cull cow market and some potential management strategies to think about moving forward. 

                Figure 1 contains the weekly slaughter cow prices for Southern Plains auctions (current drought-stricken areas). The red line represents the 5-year average from 2016-2020, and illustrates the normal seasonal pattern observed in cull cow markets. The dotted line represents the weekly prices for 2021. Prices in 2021 were below the average from January-June, and then stayed relatively true to seasonal expectations. So far in 2022, prices have been frequently above the 5-year average and 2021 prices. This has created higher salvage value for cattle that had to be culled this year. But prices are starting to trend down due to the increased cull cow supply entering the market. The downward trend is expected based on seasonal patterns, but the decrease will likely continue. In the coming weeks, drought and production costs are going to be major drivers of slaughter cow supply as the market tries to find a floor. 

                From a management strategy, producers often start with older cows first. After the older cows, producers get pickier on reasons to cull (bad feet, other non-ideal characteristics). These types of cows have probably been culled already, which leaves the producer with management decisions (cull bred females? Cull yearling females?, etc.). To help with that decision, identify inefficient females. If they are bred, analyze the females calving cycle. If they are yearling females, look at their pedigree, and identify any maternal reproduction issues. If a producer has already culled based on age, bad feet and other physical traits, and reproduction, then look for alternative marketing strategies such as selling females to another producer in a region that isn’t in drought. If a producer has superior genetically based cattle, they probably won’t find enough salvage value from sale barn prices and having a marketing strategy to find more value could be useful for not only increased salvage value, but also for cash flow reasons. 

    Source: Livestock Marketing Information Center

    Martinez, Charley . “Between a Rock and a Dry Place: Culling Decisions“. Southern Ag Today 2(30.2). July 19, 2022. Permalink

  • Falling Corn Prices and Cost of Gain

    Falling Corn Prices and Cost of Gain

    Cattle producers should see a bit of relief from high feed expenses over the next few months. The CME DEC ’22 Corn contract has fallen from a contract high of $7.64/bu. on May 16 to $6.23/bu. Some other commodities used in feed rations, such as distiller’s grains, have seen similar downward moves. These feed price changes can have a compounding impact on feeder cattle prices. As inputs become cheaper, feeder cattle become a relatively more profitable investment which lifts their value. It is common to see corn and feeder cattle prices move in opposite directions. 

    In the chart below, the CME DEC ’22 Corn price (black line) has declined significantly from mid-June to now. Corn is a significant input in feeding cattle and the CME OCT ’22 Feeder contract (green line) experienced a corresponding increase in value. 

    Since the contract high two months ago, cost of gain (COG) has fallen significantly while feeder cattle also became relatively more profitable. If COG is calculated: 

    then estimated COG, including yardage, fell from $1.11/lb. to $0.90/lb. from mid-May to the present, providing at least $0.20/lb. additional revenue before even considering the change in value of feeder and fed cattle. This also makes dry-lotting cows and placing lightweight cattle on feed a more feasible option given low pasture availability and historically high price of forage. 

    Benavidez, Justin. “Falling Corn Prices and Cost of Gain“. Southern Ag Today 2(29.2). July 12, 2022. Permalink

  • Net Farm Income Varies Widely in Commercial Broiler Production

    Commercial broiler chicken production is a staple of the farming community in the southeastern states, so much so that the area is often referred to as the “broiler belt.” Contract broiler growers have benefitted from the business arrangements between large poultry integrators, lending institutions and themselves for many decades. However, over the last decade or so, the investment cost of housing and the cost of utilities supplied by the growers has risen greatly, resulting in rapidly decreasing grower net incomes. Given the nature of most poultry contracts, growers only have a limited opportunity to positively affect revenues. Most profit improvement opportunities lie in lowering input costs, either by improving efficiency or simply by cutting back on inputs like heating fuel or electricity. However, choosing the latter has the potential to negatively affect the revenue side through bird performance losses, as well as negatively affect the competitive contract pay rate. As houses age, they typically become less efficient, requiring major house maintenance and equipment replacement or upgrade, adding to the cost of operation. The variable cost for a poultry farm is made up mostly of utility costs. On new farms, variable cost can be as low as 20% of revenue, while older farms can see as high as 40% or more. Therefore, a contract grower could be faced with shortages on the revenue side caused by lowered bird performance possibly linked to housing deficiencies, coupled with increased input costs stemming from the same deficiencies – all resulting in a fast drop in net farm income.

    By surveying southeastern poultry financing institutions for averages across farms, we see what seems like a tight range of revenue per square foot of broiler grow out space per year. However, when you apply these numbers to the thousands of square feet on a typical broiler farm, then apply known ranges for variable costs, the resulting spread in net incomes can be significant.

    Estimated Broiler Farm Income, 4-40’x500’ Houses

    Broiler Farm income Estimate 4-40’x500Square Feet “Old/Less Efficient”“New/More Efficient”
    80,000
    Gross Revenue per SF Range$2.75$3.25
    Gross Revenue$220,000.00$260,000.00
    Variable Expenses (High 35%, Low 25%)$(77,000.00)$(65,000.00)
    Income Before Debt Service$143,000.00$195,000.00
    Debt Service Assignement (50%)$(110,000.00)$(130,000.00)
    Net Farm Income$33,000.00$65,000.00
    Net Income per SF$0.79$1.55

    Sometimes growers face unforeseen risks from market changes and other outside forces, like the recent HPAI outbreaks, and COVID19 before that. Instances where fewer birds are placed or when out times increase between flocks negatively affect revenue. Some contracts have provisions that help mitigate these risks for the grower; however, some contracts have no such provisions and growers can suffer greatly. Poultry companies absorb much of the normal risks from changing markets and volatile feed prices. However, for the individual grower, a small change in bird density or placement schedule, for example, can have great impact on their individual farm operation which typically operates on a much tighter margin with little working capital to buffer the impact. Current proposed changes to the GIPSA (Grain Inspection, Packers and Stockyards Administration) regulations may offer some mitigation of these and other areas of risk, as well as provide for greater financial disclosures related to the tournament system. Growers should carefully read the proposal and offer comments at:  

    https://www.federalregister.gov/documents/2022/06/08/2022-11997/transparency-in-poultry-grower-contracting-and-tournaments

    Brothers, Dennis, and Paul Georinger. “Net Farm Income Varies Widely in Commercial Broiler Production.” Southern Ag Today 2(28.2). July 5, 2022. Permalink

  • Hedging Opportunities for Managing Price Risk for Cattle

    Hedging Opportunities for Managing Price Risk for Cattle

    Uncertainty and volatility are dominating most commodity markets given the current environment, which includes increasing inflation and interest rates. Despite the cash price of many goods escalating rapidly, cash cattle prices have done no such thing as can be confirmed by the CME feeder cattle index and the 5-area weighted average price for live cattle. However, the futures market, options market, and Livestock Risk Protection insurance (LRP) have been offering several opportunities to hedge cattle prices at much higher prices than have been physically experienced for several months. For instance, the August feeder cattle contract has traded between $163.93 and $186.65 per hundredweight over the life of the contract. During that time, the August futures price has held a $10.53 to $27.29 per hundredweight premium to the CME Feeder cattle index. These premiums appear to encourage hedging cattle, but convergence has been an issue with cash prices and the futures market. This is where LRP has an advantage in that it is indemnified based on the CME feeder cattle index and the 5-area weighted average price for live cattle. Figure 1 illustrates the number of days the daily settlement price for each feeder cattle contract exceeded the final settlement price from 2015 through 2020. The point of this figure is that the futures market often offers opportunities to benefit from hedging.

    Figure 1. Number of days the daily settlement price of feeder cattle futures contracts exceeded the final contract close price during the life of the contract (2015-2020). (LMIC, 2021; Griffith and Boyer, 2022)

    Griffith, A.P., C.N. Boyer, I. Kane. 2022. Producer Focus Groups: Price Risk Management Contributions to Economic Sustainability in the Cattle Industry. University of Tennessee Extension publication. In Press.

    Livestock Marketing Information Center (LMIC). 2021. Historic CME Feeder Cattle Futures Prices.

    Griffith, Andrew P. . “Hedging Opportunities for Managing Price Risk for Cattle“. Southern Ag Today 2(27.2). June 28, 2022. Permalink

  • Farm Level Milk Prices Set Record in Back-to-Back Months

    Farm Level Milk Prices Set Record in Back-to-Back Months

    After dealing with incredible volatility for much of 2020 and 2021, dairy producers are benefiting from a sharply stronger milk market in 2022. Prices for cheese, butter, and nonfat dry milk are running significantly higher than last year and are fueling farm level milk prices. The US All Milk price set a record in March of 2022, then exceeded that level to set a new record the following month. From March to April, prices rose by $1.20 to a record level of $27.10 per cwt. Prior to March of this year, the record high milk price was set in September of 2014.

    US All Milk Price

    January 2014 to April 2022, $ per cwt

    Source: USDA-NASS

    Like most all commodities, milk prices only tell part of the story this year. Dairy producers are dealing with higher production costs as feed, fuel, fertilizer, and other inputs are also much higher. While feed rations differ across all operations, the assumed ration for the Dairy Margin Coverage (DMC) program has become a common metric to estimate feed costs for dairy operations. DMC feed cost includes assumed quantities of corn, soybean meal, and alfalfa hay for a representative dairy operation. 

    From April 2021 to April 2022, the estimated cost of the DMC ration has increased by $2.28 per cwt or 18%. The US All Milk price has increased by more than enough offset that increase over the last year, but considering the increase in feed costs does put the historical price levels in a slightly different perspective. While milk prices are setting record highs, estimated returns above feed costs have reached levels comparable to what was seen at times in 2019 and 2020. And, they are not at the levels that were seen during 2014.

    DMC Margin – US All Milk Price Minus DMC Feed Cost

    January 2014 to April 2022, $ per cwt

    Source: USDA-FSA

    Burdine, Kenny. “Farm Level Milk Prices Set Record in Back-to-Back Months“. Southern Ag Today 2(26.2). June 21, 2022. Permalink