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Managing For Margin More Important Today Than Ever

Managing For Margin More Important Today Than Ever

“Most of my life I made a living trying to figure out which way the markets would move and to what degree; and I was pretty successful at it,” John Rakestraw said at the recent Mid-South Stocker Conference.

Rakestraw is CEO of Colorado-based Agra Holdings, which feeds cattle, provides feedlot consulting, and manufactures feedlot nutritional supplements, among other feedlot-based activities. Between 1984 and 2003, he worked for ContiBeef LLC, serving as CEO and president from 1995 to 2003. ContiBeef was eventually sold to JBS and currently operates as Five Rivers Cattle Feeding, the largest cattle feeding organization in the world.

Rakestraw figures the markets changed around 2007. Markets that had previously operated independently and predictably, driven largely by market-specific fundamentals, began moving in tandem, driven more and more by macro-economics.

“There is no fundamental basis to determine prices today. Now, commodity prices are impacted greatly by the macroeconomic environment and local weather’s effect on international crops,” Rakestraw says. “The effectiveness of forecasting future prices based on underlying fundamentals has greatly decreased.”

All that takes on added significance for cow-calf producers plotting the potential return on heifers purchased and retained at prices and opportunity costs never before imagined.

For instance, there’s a canyon-wide difference in estimated cattle business size during the next decade, based on different assumptions and computer models. The recent Baseline Briefing Book from the Food and Agricultural Policy Institute (FAPRI) at the University of Missouri calls for a 4% increase in beef cow numbers from now until 2021. The same baseline estimates annual cow-calf returns as high as $157.54/head in 2013 ($134.90 this year), and as low as $6.03 in 2018.

On the other hand, recent 10-year projections from USDA’s Economic Research Service project a 14.3% increase in beef cow numbers. Estimated cow-calf returns range as high as $286.72/head in 2014 ($96.11 this year), and as low as $152.46/head in 2016.

For all practical purposes, since the historical peak in 1975, the beef cowherd has grown twice (6.5% and 7.4%), and contracted three times (18.5%, 14.7% and 17%). The beef cowherd has declined 17% since 1995, and there were 34.1% fewer beef cows when 2012 started than in 1975.

Such obscurity of future industry size, let alone current evolving market dynamics, is compounded by historically high input costs.

“You need about double the money to operate today than a few years ago,” Rakestraw says. “Your return on assets deployed has decreased and will continue to decrease unless net profits per unit of production also double.”

Taken together, Rakestraw believes, managing for a margin is much more important today than at any time in the past. Though he was addressing stocker operators, who are margin operators, the same lesson applies to cow-calf producers.

Managing the margin means recognizing and controlling components of production and marketing that can be controlled, while managing risk on the uncontrollable. Purchase price of cattle and feedstuffs, hedging and incremental selling prices are all aspects of marketing that can be controlled, Rakestraw says. Performance, consistency of performance, as well as production and operating costs, are production components that also can be controlled.

Consider an example from Rakestraw – a $230 ration and putting 300 lbs. on a 550-lb. steer – where apparently inconsequential gains can yield a staggering return. For instance, decrease purchase price by 50¢ and increase the sales price by 50¢; reduce feed costs by 5%; reduce mortality by just 0.25%; and make 50¢/cwt. by hedging. These small changes add up to $16.86/head or an additional 2.56% annualized return on investment.

One market paradigm remains unchanged and will likely stand the test of time. Rakestraw says: “Short-term volatility trumps trend every time.” ❚❚

TAGS: Marketing
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