When Jason Johnson, AgriLife Extension economist from Stephenville, TX, showed a slide to several hundred cattle producers at the Blackland Income Growth Conference in Waco, it caused many to gasp and begin conversations about profit potential.

“I put this (slide) up there not to make you salivate, but to put things into perspective,” Johnson said. “You can get into a bind making certain decisions during prosperous times.”

He advises producers not to overstock due to the potential for continued drought conditions in Texas.

But if the dry weather patterns tend to alter from last year’s devastating drought, “if we get some rain, you’ve got a real good shot at making some good money here. The price outlook is really looking good,” he adds.

To play it safe, Johnson says producers might want to consider stocking at 75% of normal capacity.

“That way, if we get 80% to 90% normal rainfall, you won’t have to cut into the bone of the herd to destock. If we get normal rainfall or better, there are many alternatives available to harvesting excess forage.”

Target prices for the first quarter of 2012 for 500-lb. calves are $1.45, which has already been exceeded this year. That trend is likely to continue with a historic shortage of beef cows not seen in the U.S. since 1952.

Profitability for Texas ranchers relies on using the availability of forage and reducing the amount of purchased feed.

“The calf prices are there, the challenge for us is to produce a calf cheap enough,” he says.

The outlook for corn prices continues to be on the upswing, due to declining carryover stocks from last year. He expects feed prices to remain level or increase a bit “due to these supplies and the renewable fuel standard tapping into corn to make ethanol.”
Texas hay prices continue to be a threat to profit margins as well for ranchers.

“You can spend a lot of money raising that $1.50/lb. calf on hay. Cattle producers might want to consider storing hay supplies for up to two years if ample rainfall is received this spring and summer, and if enough hay is harvested. Saving two years’ worth of hay supplies allows you to sidestep a year like 2011 when hay prices were out of sight,” he explains.

Ranchers can also consider the many weather-related insurance products as a hedge against drought conditions.

With 2011 federal income tax returns set to be filed in mid-April, Johnson says cattle producers can consider deferring taxes on the sales of excess breeding livestock if the proceeds are used to purchase replacements within the next two years.

“You don’t have to pay tax on excess sales due to drought. If you normally sell one-fifth of your breeding animals, anything in excess of that one-fifth you can defer taxes on and use those proceeds for replacement.”

A second tax-management option applies to non-breeding livestock. Ranchers whose principal business is farming and ranching can defer taxes on sales proceeds resulting from disaster conditions for up to one year, Johnson says.