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Factoring Risk into the Equation

Article-Factoring Risk into the Equation

Factoring Risk into the Equation

I spent the last week attending bull sales and talking to commercial producers; the excitement in the marketplace is palpable. In view of historical relationships, if calves are going to bring $1,000 each, then prices of $1,500 for replacement females, $2,500 for bred heifers, and $5,000-$6,000 for bulls aren’t out of line.

Still, these are unchartered waters for anyone in the cattle industry. Everyone is quick to point out that inputs and land prices have accelerated at a rate that hasn’t really changed margins as much as one would think. So, everyone is trying to sort out the dilemma that today’s marketplace presents.

Fact is, record prices are likely to be replaced with even new records, as the data indicates that we’re looking at a minimum of 4-5 years in this environment, which is expected to yield unprecedented profits.

Of course, no one alive today has seen the supply-and-demand dynamics align this way in their lifetime. Thus, many people are relishing the prospect of being able to tell their grandchildren about the golden era of the cattle industry.

For that to materialize, it means building inventory and taking advantage of the record prices. Of course, the contributions to profitability of genetics and management have increased greatly in the past few years, so you can’t afford to skimp in these areas. Meanwhile, the pressure to produce the product as efficiently as possible is also increasing.

It raises a lot of perplexing questions and challenges, but they all seemingly pale in comparison to the additional risk that producers face today. One’s ability to mitigate that risk has never been more important. The investment in adding 100 cows is substantial, perhaps $200,000 for the cows, another $20,000 for bulls, and $65,000-$70,000 to run them.

Without question, outside money is flowing into agriculture, but mostly into land acquisition. While all commodities have benefited from the inflow of outside money, the experts don’t see outside investment money coming into production agriculture.

While the return on investment (ROI) in today’s market conditions looks pretty good, that’s a significant amount of dollars to invest and put at risk. At this point, it isn’t access to capital nor ROI that has limited investment, it’s the additional and substantial risk associated with expansion. As a result, this new pricing structure will demand significantly higher rates of return for expansion to begin with the fervor that we’ve seen in past cycles.

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