| MMM 318 | December 14, 1996 |
Most forecasters are projecting that cow inventories will continue to remain high through 1996 and possibly 1997. Their expectations also call for an increased calf crop in both 1996 and 1997. If this forecast runs true then cow-calf producers in the Carolinas will see minimal profits at best and very possibly negative cashflows for the next two to three years. Many producers will be faced with the decision of liquidating all or part of their herd to counter this economic downturn and survive during this time period. But, it is a fact of life that only after breeding herd inventories are reduced will our cattle markets recover.
What can the cow-calf producer do today to offset the impact of this negative market outlook on his cattle operation? Are there positive actions that are available to cushion the economic downturn expected over the next two to three years? Those in the know suggest the following actions:
Cow-calf operations with above average cost levels will be the first and hardest hit during this down cycle. Losses of $50 to $100 per head will be common in this group in 1995 and 1996. These operations will benefit the most from a close and through examination of the farm's cost of production.
Cattle operations with costs that are directly related to the number of head of cattle produced will have the easiest adjustments. Operations that have most of their cost of production tied up in feeding the animal and only a small amount of their annual expenses in facilities or equipment fall in this category. Reducing the size of the herd will directly reduce operating expenses and improve cashflow.
Operations where overhead makes up a large portion of the total cost of production will find it more difficult to reduce these costs and impact the profitability of the farm. Overhead expenses include the costs associated with operating support items such as equipment, feed mills and facilities. These production expenses are not easily allocated to the cow herd. For example, one tractor can handle the haying needs of 100 brood cows. If half of the herd is sold the services and expenses of the tractor are still required to feed the remaining 50 brood cows. Hence, these costs are not evenly divisible across the cattle operation. And, the sale of cattle may not appreciably reduce the costs associated with their operation and maintenance.
In addition, a cattle operation with a large annual debt load may sell brood cows and still have a liquidity problem. A large debt load makes the reduction process more complicated. The sale of cattle not only reduces expenses but it also reduces income. Cattle farms with large debt loads (especially if the debt is associated with overhead items like facilities, land or equipment) will seldom generate sufficient income from the sale of cattle, in a depressed market, to offset required debt payments. Depressed market prices can reduce income to a point that it will marginally cover operating expense but there will be little left to service debt.
Potential new marketing strategies can be as simple as selling calves at the market's seasonal high, direct contracting the calf crop, or pooling cattle with your neighbors to deliver truck load lots. More sophisticated strategies might include participation in the futures market by hedging the calf crop or putting a floor on expected price by using options contracts.
Marketing strategies are developed for various reasons. Those strategies formulated during rough times may not have as a their objective the making a of profit but rather the goal of survival over a period of time. An operation strapped for cashflow may need to simply market additional cows this year. Another alternative might be to completely disperse the cow herd and stocker his neighbor's calves. Producers looking for a change or new opportunity might think about raising goats. The objective is to be there when the industry turns around.
Adjusting this rate up or down can have a significant impact on gross annual income. Adjusting this rate downward would allow the selling of more heifers generally held for replacement. Culling more cows from the herd would also add to the income level produced. Either way will add needed dollars to an operation that is strapped to cover its production costs. Depressed market prices over the next two to three years makes the culling option more important in formulating reasonable management tactics. Culling less productive cows in the herd cuts the overall cost of production and increases gross income.
A reasonable culling plan is not that difficult to develop. In general, a good, mature cow will wean more pounds of calf than a heifer, second-calf heifer or late calving cow. So, reasonable culling criteria could include removing: physically damaged cows, open cows, open yearlings, old cows, late bred animals or animals that have weaned a calf below the herd average. This criteria removes stock that probably won't cover their costs and does so while the stock still have a decent salvage value.
Culling cows and keeping heifers can also provide some different dimensions to your overall management strategy. Heifers consume less feed; helping to reduce feed expenses. In addition, heifers can mean an improved genetic base. A base that will position your operation to perform better as the markets turn around. Bred heifers will be in demand when cattle prices improve.
For example, suppose a producer sells half of his cow herd, then utilizes his grass and other resources to runs stocker calves. Stocker programs are likely to be more profitable than running cows during the next several years. But, don't just think calves as stockers. Herd liquidation means the opportunity to purchase and stocker culled cows. Therefore, redirecting a portion of the resource base toward stockers could have a positive impact on the overall business's profit picture.
Another strategy that is receiving a lot of attention this year is retained ownership. In this strategy the producer would keep direct ownership of his own calf crop through the stockering phase and possibly into the feedlot. Retained ownership allows the producer greater flexibility over his operation's resources. By keeping these calves the producer can utilize resources more efficiently thereby decreasing his cost of production. This, with a revitalized marketing plan, can help offset the downturn for many cattle producers.
1996 by Department of Agricultural and Applied Economics, Clemson
University
