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Industry At A Glance: How Do You Manage External Risk?

guarding against external risk in cattle industry

Commodity markets are inherently volatile and unpredictable. That’s especially true in the beef complex given the large number of external influences that move the market. Moreover, markets have become even more reactive in recent years with the growing prevalence of technology, as computer trading, online news and social media all possess the ability to move markets almost instantaneously.

That requires ever-more vigilance regarding the management of one’s business against the potential shocks from the outside. It’s no longer sufficient to just oversee the production side and hope that other risks to the business either don’t occur or move so slowly they don’t matter. In addition, the increasing capital associated with the business make managing risk more significant all the time.

Risk management is often thought of simply in terms of markets. However, there are other means to mitigate risk including increasing the amount of working capital in one’s operation, managing costs, paying down or restructuring debt, and locking in operating margins.

Several years ago during a Cattlemen’s College presentation, I asked the attendees to designate the primary means in which they’re buffering their business against external risk. Those results are presented here.guarding against external risks in cattle industry

Do these results surprise you, or do they correspond to how you perceive many producers trying to manage their businesses? What other important or key categories would you add in response to the question? Leave your thoughts below.

 

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What Do Carrie Underwood, HSUS & Obamacare Have In Common?

Shutterstock Photo

I was surprised to see a lot of buzz about Carrie Underwood on Facebook over the weekend. Of course, it’s not unusual for the country superstar to be on the cover of a magazine or at the top of country and pop music charts, but the conversation is once again turning to Underwood’s off-the-job hobbies like supporting the Humane Society of the United States (HSUS).

A blog post from 2009 about Underwood’s $200,000 donation to HSUS has resurfaced and gone viral once again.

Blogger Joe Scully wrote, “Miss Underwood just handed over a ton of coin to help the largest animal rights activist organization on earth fight farmers and ranchers and anyone else that has an interest in animals.”

 

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I was surprised to see this blog resurface and gain traction among my agricultural friends because I thought everyone was already aware of the fact that Underwood isn’t a fan of livestock production. 

Carrie Underwood supports HSUS
Shutterstock Photo

This notoriety all began in 2005 when Underwood wore a “V is for Vegetarian” t-shirt while competing on American Idol. She followed that up by speaking about her vegetarian lifestyle in every interview she gave, citing a “bad experience” on her parents’ Oklahoma cattle ranch as the reason she gave up meat. Since she has achieved stardom, she has helped top up the HSUS coffers both with her own donations and as a spokesperson for the organization. More recently, she has announced that she is now a vegan.

Seeing the blog post get shared once again is certainly a good thing. After all, if it helps inform more of us of where Underwood spends her money, then perhaps fewer people would pay for her concerts or buy her CDs. So even though I was surprised that this isn’t common knowledge yet, my personal five-year boycott of Underwood’s music is still going strong.

Admittedly, I did tune in to last week’s CMA Awards show, where Underwood and Brad Paisley were co-hosts. I was equally displeased with many in the agriculture community who posted positive comments and glowing reviews of Underwood’s hosting after her and Paisley sang a duet “Obamacare By Morning,” which was a parody of George Strait’s hit, “Amarillo By Morning.”

Don’t get me wrong. I appreciated the joke. In fact, I received a letter last week notifying me that because of the Affordable Health Care Act, I was being bumped from my previous health care insurance. The cherry on top was that my new plan under health.gov will cost me higher premiums and double my deductible. Thanks, Obama.

Though I appreciate Underwood and Paisley bringing awareness to the Obamacare debacle, I choose to support those who support my way of life. So when Underwood comes on the radio, I switch the channel. To me, Underwood has forgotten her country roots.

 

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Wheat-Pasture Calves Won’t Necessarily Fit In A Certain Weight Class

Winter wheat is improving in the Southern Plains, and the market for calves to graze on that wheat is heating up. That demands that wheat pasture operators look carefully at markets and value of gain for the different weight classes of cattle. Prices for feeder cattle in the region have moved up, as has the slide or roll-back for heavier cattle classes. Couple that with wheat that's somewhat delayed for its ability to provide pasture and you need to examine your options carefully for winter pasture, says Derrell Peel, Oklahoma State University Extension livestock marketing specialist.

To read more on managing wheat-pasture calves, click here.

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Successful Ranch Managers Need To Look Back To Go Forward

ranch management tips

I’ve been told that people tend to be on two extremes when utilizing their past. One faction focuses too much on the past and whatever negatives there may have been, and they blame their past for where they are today and where they are going. These folks end up putting way too much emphasis on the negative side of their past. The other faction totally ignores the past, saying it doesn’t matter and that one must just look ahead and charge on. That is how I have tended to be my whole life; I saw no value in looking back

From a management perspective, it is important to find a happy medium between these two extremes. Looking back is not about assigning blame, nor should past failures be used as an excuse to not pursue great successes in the future. Conversely, if you don’t take time to evaluate past performances and the causes for the results you received, you are likely to repeat the mistakes or fail to replicate the good things that brought about success. 

I’ve never been in therapy, but my understanding is that one important step is to really go back and look at your past, determine why you act the way you do so you can learn why you tend to respond in certain ways, and then correct the negative programming. Managers are tasked with the same responsibility, and I can say that while it may not be that the same mistake gets repeated, there are some mistakes that have the same root cause. Applying that personally, by looking back and analyzing some of these things, hopefully I can begin to eliminate the problems and multiply the successes. 

 

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Conversely, I have a good friend who is the opposite. Where I tend to think looking back is a waste of time, he says the first thing he does is over analyze every mistake. And it’s not necessarily to make the future better, but rather to assign blame. He says his employees got to the point where they won’t do anything in fear of making a mistake, and that he is missing opportunities because his thought process is such that he focused on the past. 

Looking back is a smart, productive process for a manager if it is done to honestly evaluate why you got the results you did in order to avoid repeating mistakes or to aid in replicating successes. I still struggle looking back, but in doing so I have learned to overcome some of my communication problems and tendencies that create problems for me. I will always want to focus on the future, but by taking a positive approach to analyzing the past, I think I will be better at capitalizing on the future.

 

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How much should you spend on advertising this holiday season?

Some businesses have already mapped out their advertising planning for the holiday season, but they may not have made all their media buys yet... and a lot of other businesses are busy trying to plan the best way to spend their advertising for the holiday season.

Some of the basic budget questions are...How much should you spend on advertising before Thanksgiving? How much should you spend on advertising before Christmas? How much should you spend on advertising immediately after Christmas? How much should you spend on January Clearance Sales and how should you spend all this advertising?

The answers may be different for each and every business, but now there is some easy-to-use advertising math that can help businesses of all kinds make a lot of those kinds of advertising decisions with a lot less risk.

The math is called "The Barrows Popularity Factor." It was developed by Robert Barrows, President of R.M. Barrows, Inc. Advertising & Public Relations in San Mateo, California. 

"The Barrows Popularity Factor is a very simple equation that actually lets you quantify the relationship between advertising and sales" says Barrows, and businesses of all kinds can use the math to help them make a lot more money." 

The reason the math works is very simple: 

The Barrows Popularity Factor reduces the relationship between advertising and sales to its lowest possible common denominator...namely: "How much did you sell? (divided by) How much did you advertise?" (But don't do the math in dollars, do it in units per gross impressions.) 

In mathematical terms, the formula looks like this:

The Barrows Popularity Factor=How much did you sell (in units) divided by/ How much did you advertise? (in gross impressions)

The answer you get is a rate of return on gross impressions. (Gross impressions is the number of ads multiplied by the audience per ad.)

"Once you quantify your rate of return on gross impressions, then you can start using some additional math to help you determine the best way to spend your advertising budget," according to Barrows. 

"The math will give you more of the information you need to make key marketing decisions with far less risk," he says, and businesses of all kinds can use the math to help them increase their sales, increase their profit and decrease their risk." 

"So, whether you are trying to plan your Holiday Season advertising, or whether you are trying to plan your advertising budget for the whole new year, the best place to start is to start analyzing the effectiveness of your past and current advertising with the math in 'The Barrows Popularity Factor,' says Barrows. It will give you objective answers as to which advertising copy and which advertising media are producing the most effective results." 

The math and how to use it are explained in a booklet called "The Barrows Popularity Factor" which you can download for $4.95 at www.barrows.com

"With the math in 'The Barrows Popularity Factor,' businesses can start taking a lot of the guesswork out of their advertising and they can use the math to help them make a lot more money," says Barrows. 

Some of the questions that every business looks at regarding advertising are as follows:

1) How much should you spend on advertising?

2) How should you spend it?

3) What should you say?

4) What is the best media mix for your company and your advertising budget?

5) Which ads and which media are producing the best results?

6) Which media should you increase and by how much?

7) Which media can you decrease and by how much?

8) How is your competition spending their advertising budget?

9) How is your competition affecting the sales of your product and services?

 ...and a lot of other questions along these same lines.

"The answers to these questions are very complex and there is no way to quantify all of the intangibles that affect the sales of a product...intangibles like the demand for a product, the availability of product, the consumer's propensity to spend, whether you had a good sales force or a great sales force during the period of time of a specific promotion, your competition, and even the weather can't be quantified with cold, hard numbers, and all of these factors are intertwined," says Barrows.

"Plus, everything about the product and everything that you do to promote a product, and everything in the marketplace that affects the sales of a product will be reflected in the 'Popularity' of your product...and that is the essence of 'The Barrows Popularity Factor.'" It measures the "popularity of a product and its promotion," and it lets you quantify the relationship between your advertising and sales," says Barrows.

"In short, the easy-to-use math in 'The Barrows Popularity Factor' will allow you to test and compare your advertising copy and media, better, faster and less expensively. Plus, it will give you more of the information you need to make key marketing decisions with far less risk," says Barrows. The math in The Barrows Popularity Factor can help you fine-tune your entire marketing program to help produce much higher sales and profit."

"So, before you try to decide the best way to allocate the rest of your advertising budget, take about an hour to read a booklet called 'The Barrows Popularity Factor,' says Barrows. The math is extremely easy to use and all of the calculations can be done by one person, in moments, with just a simple calculator."

"Plus, the math in 'The Barrows Popularity Factor' is universal and effective...and it's not just marketing man's mumbo-jumbo, it's cold hard math that can help businesses make a lot more money. The Barrows Popularity Factor math is essential business information for every business in every industry, he says, and anyone who spends any money on any advertising anywhere, should read this booklet immediately."

"So, any business that is currently trying to figure out the best way to spend their advertising during the Holiday Season, and all throughout the year, should take a look at this math immediately," says Barrows. You can read the whole booklet in about an hour and you can download the booklet for only $4.95 at www.barrows.com . It will be the best $4.95 you will ever spend on advertising, says Barrows, and it can help your company make a lot more money starting right now."

Heifer Retention Remains Cautious

heifer retention remains cautious

Mom Nature is cooperating, for the most part. Feed prices, forage availability and calf prices make it possible. There are indications it could be in its nascent stage, but no one knows when herd expansion will begin in earnest, much less how long it will last and how many cows will ultimately be added.

“Cow-calf producers appear to have a growing incentive for herd expansion with strong profit prospects and improved forage conditions,” says Lee Schulz, Iowa State University Extension livestock economist, in the latest Iowa Farm Outlook. “Though 2013 is likely another year of herd liquidation, improving forward returns may provide the period of herd stabilization (with little or no growth) that often occurs in the first year of herd expansion. The ultimate question becomes, given the uncertainty experienced the last several years, what level of return will be required to encourage producers to begin rebuilding the cowherd? In other words, what level of annual return would motivate producers to assume risk in retaining more heifers and/or investing in additional cows?”

Schulz notes that the Livestock Marketing Information Center estimates cow-calf returns over cash costs at more than $300/head next year.

On the other hand, Nevil Speer at Western Kentucky University explains in this week’s BEEF Cow-Calf Weekly, “Early indications are that the heifer portion of the feeder cattle mix has remained relatively steady. In other words, producers don’t appear to be showing much proclivity toward retaining heifers either off the cow or grass during the early part of the marketing season.”

Speer explains the mix of heifers on feed—36% in the most recent Cattle on Feed report—has been steady for the past six quarters.

“There continues to be lots of discussion around higher prices and the apparent incentive to rebuild the cowherd. However, early indicators suggest that doesn’t appear to be the case,” Speer says. “Producers don’t appear to be settling into the commitment associated with heifer development.” He adds that could change as marketing season continues.

In the meantime, Glynn Tonsor, Kansas State University (KSU) livestock economist, encourages folks contemplating expansion to make full use of the tools available to analyze the possibilities.

For example, in this week’s In the Cattle Markets, Tonsor mentions a spreadsheet, KSU Beef Replacement, developed by KSU colleague, Kevin Dhuyvetter.

“Using what currently appears to be fairly conservative calf prices over upcoming years (averaging $169/cwt. for 562 lbs. calves) and a base for cow costs of $700/year, the spreadsheet suggests purchasing a replacement for $1,420 in anticipation of her producing calves for the next five years would provide an expected return on investment of 7.5%,” Tonsor says. “Similarly, if a replacement was purchased for $1,522, where 10 years of production were expected, the estimated return on investment would be 7.5%. Any purchases at levels lower (higher) than these price level levels would provide better (worse) expected returns. Similarly, producers with lower (higher) annual cow costs can pay significantly higher (lower) prices for replacements to achieve the same expected rate of return. Stated differently, producers with lower annual cow costs or expectations of a given replacement producing for longer periods will see higher economic value in replacements available for purchase.”

Tonsor explains the spreadsheet can be adjusted easily for a given producer’s situation regarding costs and production along with expectations of cattle prices over upcoming years and targeted rates of return.

 

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On the other end of the spectrum, Glenn Selk, Oklahoma State University emeritus Extension beef cattle specialist, reminded producers earlier this week that adding weight to cull cows can represent one of those rare opportunities in the cattle business to increase both weight and the selling price per pound.

“Producers that sell cull cows should pay close attention to the market news reports about the price differentials of the cows in these classes (Breakers, Boners, Leans, Lights),” Selk explained. “Cull cows that can be fed enough to gain body condition to improve from the Lean class to Boner class can gain weight and gain in value per pound at the same time. Seldom, if ever, does this situation exist elsewhere in the beef business.”

One thing’s for sure. Too few cattle for too long has already taken some capacity from cattle feeding and packing, and likely only a hint of what will exit the business over the next 12-18 months.

 


 

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Corn Crop Projected Record-Large

corn crop could be largest recorded

Friday’s USDA Crop Production report and the November World Agriculture Supply and Demand Estimates (WASDE) confirmed what futures prices have suggested in recent months: Corn production is record large, and more plentiful than previously estimated.

WASDE pegs this year’s corn crop at a record-large 14.0 billion bu., 1% more than the previous forecast. That would make the crop a staggering 30% larger than last year. Though estimates for the area harvested declined 2% to 87.2 million acres, average yield estimates increased 5.1 bu./acre from the previous forecast to a near-record 160.4 bu./acre. That’s 37.0 bu./acre more than last year.

Total projected corn use is projected 275 million bu. higher, offsetting much of the estimated increase in supplies. But, the season-average corn price was lowered 30¢ at both ends of the range to $4.10-$4.90/bu.

 

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Beef production for next year is estimated to be slightly lower than the September forecast due to lower placements of cattle on feed in 2014.

The annual average steer price for this year is estimated at $125.69/cwt. The annual average for next year is estimated at $126-$137/cwt., $1 higher on the upper end of the range compared to the September estimate.

 

 

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Spotty Softness Surfaces In Calf And Feeder Markets

cattle prices

Calf and feeder prices continued their counter-seasonal glide this week, but yearling prices edged lower this week for the first time since May.

“Tight supplies of true yearling feeders continued mostly steady but there was some weakness noted mid-to-late week,” say analysts with the Agricultural Marketing Service (AMS). “The bulk of the feeder supply is now fully made up of calves which sold very uneven this past week with the best demand noted for stocker calves to turn out on wheat pasture. Southeastern calves headed for the Southern Plains traded steady to $5 higher, while native calves in and around Oklahoma were $1-$3 higher as turn-out dates are upon us for most rented pastures.” 

Cash fed cattle lost some luster this week, too, selling $1-$2 lower at mostly $131-$132/cwt. on a live basis.

“Fed cattle prices the previous two weeks traded about 11% higher than the summer low,” says Andrew P. Griffith, University of Tennessee agricultural economist, in his weekly comments. “This 11% increase from summer low to fall high is similar to increases experienced in fed cattle prices the past several years which may be an indication that it will be difficult for fed cattle to push higher.”

 

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John Otte, Penton market analyst, noted earlier this week that boxed beef prices are not high enough to sustain the recent record prices for cash fed cattle.

Week-to-week, Choice boxed beef cutout values declined $1.81/cwt. to $202.79/cwt. while Select increased 60¢/cwt. to $189.74, dragging the Choice-Select spread $2.40 lower to $13.06/cwt.

“After a couple of really strong weeks by both the Choice and Select beef cutouts, price gains have slowed and even retracted some for Choice beef,” Griffith explains. “The Choice cutout found resistance this week around the $205 mark. Beef prices generally do not peak this early as many restaurants and retailers have not got in the full swing of purchasing beef for the holiday season. However, if this week is any indication, it may be difficult for Choice beef to push past the $205 price point. Part of the struggle may be due to the fact that a higher percentage of beef is grading Choice compared to a year ago … This same reasoning can be applied to the narrowing of the Choice-Select spread that is generally widening this time of year.”

 

 

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Politics: Perhaps It’s A Good Thing We’re Not Good At It

Politics: Perhaps It’s A Good Thing We’re Not Good At It

The wisest thing cattlemen have ever done is hire professional lobbyists to help them play the political game. That’s because cattlemen tend to see the world as pragmatic ideologues. We pretty much let people do what they may, unless they cross a line; then we go from pragmatic to hard-nosed in a flash.

We saw that pragmatism vs. politics interplay come to life the last several weeks, which has been a glorious time for us political junkies. Elections, partisan battles, scandals, and the like have all surfaced, lending a unique atmosphere to the pre-holiday preparations.

At the center of the country’s political disparity is the Tea Party, which seems to have become the enemy of both parties. Despite the ever-so-frequent references to the Tea Party, it appears that it doesn’t really exist, at least not in terms we have come to associate with political parties. Instead it is a faction of largely fiscal conservatives within the Republican Party. Regardless, both sides are attributing any defeat to their influence. 

The Tea Party and cattlemen have a lot in common. I’m not talking ideology, but rather that we have shown a propensity to cut our noses off to despite our faces.

Sadly, it appears the cattle industry is following the same trends we see in the national political environment. It can no longer be two good people with different views of what is best debating the merits of their opinions. Instead, the attitude is you are either with us or against us and there is no compromise.

 

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As a result, instead of fixing mandatory county-of-origin labeling (mCOOL), we passed a law that neither side like, but neither side is willing to fix.  Differences in opinion are morphing into non-negotiable, never-ending battles that are used to gain or maintain political power. Instead of debating and finding solutions, we are creating causes and movements that actually count on not finding a resolution. 

I love the story I heard about two ranchers in South Dakota who had been lifelong friends. They ended up on opposite sides of the mCOOL debate and went from friends to enemies. The wives thought it was ridiculous and created a plan to work on their men. Both started out by mentioning the fact that mCOOL, regardless of how it was decided or implemented, wasn’t expected to have a big impact on their operations. In fact, it was so insignificant in the big picture that it was ludicrous to spend any time worrying about it.

Both wives got the same response from their husbands; both knew that mCOOL wouldn’t make a big impact on their lives, but both men said it was important because they never would have known their lifetime neighbor and friend was a “SOB” if it wasn’t for mCOOL. The wives still socialize, the kids play ball and rodeo together, but the two ranchers to this day are no longer friends. From that standpoint, they are probably the two biggest losers I know in the whole debate.

 

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Russia: The Great Bear Is Getting Ready To Growl

I just returned from a trip to Russia, and the experience was truly eye-opening. There has been a lot of talk about Russia’s efforts to grow and expand its cattle industry. Russians have been big players procuring both commercial and seedstock genetics from the U.S. and it is a country with vast potential. They are utilizing our best genetics, equipment and technology, and they have our lessons to draw from which allows them to skyrocket forward. At the same time, it is little like the Old West in some regards. The potential to build great empires is there, but there are also significant challenges that must be overcome.

Russia is uniquely positioned to compete in the European and Asian markets, and has tremendous natural resources. The potential is great and there are well funded/capitalized players that are aggressively trying to grow and modernize their industry. We have been trained in the cattle industry to think in terms of having only three major competitors:  North America (Canada and Mexico), South America (primarily Brazil and Argentina) and Australia. In the short-term, Russia will continue to be a great customer, but I suspect at some point we will be adding competitor number 4.

 

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