Category: Livestock Marketing

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

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

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

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

The latest estimates for meat trade were released last week by USDA FAS and ERS. These monthly estimates include export and import data for beef, pork, and other meats during April. We’ll focus on pork and beef in this article and the different trends of each sector.  

Pork exports were down nearly 20 percent both during April and year-to-date as compared to 2021. Declines in shipments to China are the biggest driver as U.S. pork exports to China are about 70 percent lower, so far in 2022, compared to 2021. Exports totaled 529 million pounds during April. Mexico and Japan were the largest volume destinations for U.S. pork and accounted for more than half of total pork exports.

Beef exports during April were up about 6 percent above April 2021 and totaled 304 million pounds for the month. Japan, South Korea, and China were again the largest volume destinations for U.S. beef during April and were each up about 8 percent compared to last year. Year-to-date, beef exports to China (up 43 percent) and Taiwan (up 44 percent) make up the largest increases compared to 2021. Beef exports to Mexico were about 24 percent lower during the first 4 months of 2022 as compared to 2021. 

On the import side, both pork and beef imports were higher than a year ago. Pork imports were up 49 percent in April and beef imports were 7 percent. On the beef side, imports from Mexico (up 19 percent) and Brazil (up 51 percent) showed the largest increases from a year ago. Pork imports from Canada are the primary contributor to the increase and made up more than half of the pork imports during April. 

Maples, Josh. “Pork and Beef International Trade“. Southern Ag Today 2(25.2). June 14, 2022. Permalink

Beef cow culling has been an important story this year and SAT has discussed it a couple of times, but last week beef cow slaughter topped 80 thousand head for the first time since 2012, making it worth looking at again.  So far in 2022, beef cow slaughter is 15 percent higher than the same period in 2021. This is equal to approximately 200 thousand more head of beef cows processed this year. Beef cow slaughter averaged about 65 thousand head per week in 2021, but is averaging about 75 thousand head per week in 2022.

 
Drought, higher feed and other input costs, and stronger cull cow prices continue to be the likely reasons behind the increase. Looking at the regional slaughter data, it appears that beef cow slaughter has increased more in areas with drought. Beef cow slaughter in Region 6 (AR, LA, NM, OK, and TX) is up 30 percent over 2021 and region 7 (IA, KS, MO, & NE) is up 29 percent. However, beef slaughter is also about 20 percent higher in Region 4 (AL, FL, GA, KY, MS, NC, SC & TN) where drought has not been an issue.  Beef cow slaughter continues to indicate contraction of the U.S. beef cow herd in 2022. 

Lightweight calf prices have dropped dramatically in recent weeks, responding to high feed costs and lower fed cattle futures prices.  In the Southern Plains, calf prices have fallen by more than the normal early summer seasonal decline and may reflect some more drought forced sales.  Heavy weight steers in the South have declined more than those in the Southern Plains, likely impacted by increased hauling costs as diesel fuel prices hit record highs.    

Anderson, David. “Large Cow Culling, Calf Prices Diving“. Southern Ag Today 2(24.2). June 7, 2022. Permalink

Hay production is one of the largest and most economically significant agricultural enterprises in Alabama with 700,000 acres farmed producing 2,170,000 tons of product valued at $217,000,000 (USDA-NASS).  Hay is used as livestock feed for cattle, horses, and small ruminants. Hay can also be used as bedding, mulch, decoration, and numerous other uses. Price ranges for hay sales often depend on variety baled, the size and structure of bales, and the quality of the bale. 

Prices of inputs used in agricultural production have increased in 2022 throughout the United States. Fertilizer, chemical, and fuel costs have increased significantly, leading to even more questions as to how producers should price hay to their hay consumers (and likewise what livestock producers should be willing to pay). The costs of nitrogen, phosphate, and potash used to produce a round bale of bermudagrass hay has increased 95% from May 2021 to May 2022. 

Know Cost of Production

Hay producers must know their cost of production, including both fixed and variable costs. They must also determine the minimum profit margin they are willing to accept for their product. Both cost of production and acceptable profit margin will vary greatly among producers and careful consideration should be given to both.

Cost of production can be broken down into two segments: variable costs and fixed costs. Variable costs are the costs that change as our production changes, such as fertilizer. Variable costs only occur if we produce.  However, as producers increase production, the amount of nutrients removed from the soil will also increase and therefore the cost of maintaining production and fertility will increase significantly.

Based on the ACES Enterprise Budgets for round bale bermudagrass hay, variable cost of production has increased 64% from May 2021 to May 2022.  While this is driven primarily from higher fertilizer prices, one can see that all other costs, except the price of the soil test, has increased.  We estimate the 2022 variable cost of production to be $71.88 per 1000-pound bale, up from $43.87 in 2021.

Fixed costs on the other hand will occur whether producers are actively farming or not. An easy example of fixed costs would be land taxes and depreciation – both of these happen whether the producer spreads fertilizer, cuts hay, or doesn’t do anything.  Producers should take into account all of the equipment, land, tax, insurance and other fixed costs that are often ignored when budgeting costs for hay production.

Consider Profit Margins

There are factors beyond the cost of production that also need to be considered when pricing hay. The profit margin that producers are willing to accept is a necessary consideration. Margins can be a percentage of costs or a dollar value per unit of production and is based on the amount of profit one expects or needs on a given enterprise unit. This will vary significantly by producer and situation. Ultimately each producer must assess his own cost of production and his own acceptable profit margin when pricing their hay – and each producer might be different than his neighbor. 

While a price should first consider the cost of production and profit margin, one must also consider what consumers will be willing to pay. Purchasers of hay are going to consider alternative feeds and the relative price of those alternatives. If the price of alternatives has not increased much, consumers may be willing to switch to other products. Calf prices will dictate what a buyer is willing to pay.  Competing products may also simply be hay from an alternative seller in a neighboring county or farther geographic location. Long-term relationships with buyers may also be circumstances where a producer may choose to limit their expected profit margin to keep current customers happy. Finally, dry weather that may reduce current or expected future supply of hay will lead to higher prices.

Kelley, Ken, Adam Rabinowitz, Max Runge, and Wendiam Sawadgo. “Pricing Hay for Profit.” Southern Ag Today 2(23.2). May 31, 2022. Permalink