Marketing in the new conditions

I'm not sure the general public really appreciates how close this country was to an economic meltdown in September/October 2008. There's little doubt the economy is in a recession that will be felt in all sectors of the U.S. economy for some time.

That being said, I believe the aggregate balance sheet for agriculture is very favorable. Considerable asset wealth is in the hands of farmers and ranchers, and overall aggregate debt is very small. A ranch with little or no debt should be able to ride out about any economic storm that the national economy throws its way.

Even so, ranchers must do everything they can to protect their ranch businesses. It's important that ranchers perform a business analysis, preparing and studying their balance sheets, profit and loss statements, and source and use of cash flow funds. Following that, let your business numbers tell you how well you are — or are not — doing. Don't do as many did in the 1980s and wait for your banker to report your status to you. This single management error proved fatal for many in the 1980s.

While most farmers and ranchers have favorable debt structures, it will be harder and more expensive to borrow money. Farmers and ranchers will need ample business documentation of their ability to repay in order to borrow money. This isn't a situation unique to agriculture. (See my series of columns about preparing a business financial analysis in my section of www.beefmagazine.com [3].)

Keep your eyes open

Ranchers must become more business oriented and more alert to changing market conditions. Astute ranchers are already adjusting their production and marketing systems to fit the ever-changing marketing signals. The spread in generated ranch profits for the top one-third of the ranchers vs. the bottom one-third will undoubtedly widen over the next few years. The financial reward to added business management is projected to be high.

The financial crisis and the resulting recession will impact the demand for agricultural products, including beef. As consumer incomes drop, so will their spending on food and beef products. Beef, however, is still a preferred product.

As consumer incomes drop, consumers will eat less beef, but with the general downsizing of the beef industry that's currently underway, lower per capita consumption of beef shouldn't be a serious problem.

Over the last year or so, I've written a lot about how the rising costs of post-weaning gains in this emerging biofuels era was putting considerable economic pressure on buy/sell margins beyond the ranch gate.

Buy/sell margins can narrow from two different sources — decreasing feeder cattle prices and/or increasing slaughter cattle prices. Increasingly stronger slaughter cattle prices during the first three quarters of 2008 were generated by the weakening dollar's positive impact on beef exports.

This increasingly stronger slaughter cattle market ensured that the projected narrowing of buy/sell margins for 2008 post-weaning programs was coming primarily from projected increasing slaughter cattle prices, rather than from projected lower feeder cattle prices. Even so, I was still unable to project a profit for the cattle-feeding sector.

Clearly, the wide buy/sell margins for backgrounding 2005 calves (-$25), 2006 calves (-$13) and 2007 calves (-$28) could not be sustained as corn prices went up. I kept saying something had to change if profits were going to return to the cattle-feeding sector. The current financial crisis has now dramatically brought this change.

Changing marketing signals

As a result, the marketing signals for 2008 calves have clearly changed. My current projected buy/sell margin for backgrounding 2008 calves is -$9 (Table 1). While over-capacity in the feedlot sector prevented the needed price adjustment in the market price of feeder cattle during the first three quarters of 2008, the nation's financial crisis has now implemented that buy/sell margin adjustment. I'm currently projecting profits for the cattle-feeding sector.

The key management implication of the projections in Table 1 is that selling 2008 calves at weaning may not have been a profitable experience — depending on ranchers' unit costs of production (UCOP). (My projected UCOP is $112/cwt. of calf produced. This is up from $93 in 2005.) My economic analysis suggests 2008's beef-cow sector's profits have now been transferred to the cattle-feeding sector.

The backgrounding and grower programs summarized in Table 1 are traditional programs where the weaned calves are placed in a drylot at weaning with average daily gains slowed by feeding traditional hay/grain grower diets. These traditional grower programs, however, aren't projected to be profitable.

This implies that ranchers need to retain their calves beyond weaning only if they can put the gain on for less than the cost of gain in the feedlots. Non-traditional, low-cost grower programs need to surface.

Thus, my current projections suggest the profits from 2008 calves will now come from the finishing phase. The financial crisis has lowered the marketing losses on the initial feeder weights, and lower corn prices have increased the profits from pounds gained in the feedlot.

Lower buy/sell margins are going to put pressure on ranchers to own calves beyond weaning. The market is now placing a premium on low-cost, forage-based grower programs. A recent visit to Arkansas has convinced me that winter grazing stockers in that region is one of these profitable low-cost, forage-based grower programs.

Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701-238-9607 or [email protected] [4].

Table 1. Traditional marketing alternatives for 2008 calves

Marketing strategy Buy/sell margin Cost of gain Profit/head
Spring calving: ND-FBM-06
Sell at weaning xxxxxxx $112 -$44
Background high ADG -$9 $0.72 $9
Finish backgrounded steers -$6 $0.79 -$1
Grow & finish -$14 $0.71 $43
May/June '08 calving/Oct. wean xxxxxxx $1.20 -$43
Winter grow feeder into '09 -$3 $1.16 -$32
'08 steers on '09 grass -$7 $0.53 $42
Finish steers off '09 grass -$5 $0.73 -$51
Projected Oct. 15, 2008