After the second-most-profitable year ever in 2017, cattle producers are wondering how long the good times will last. But with a growing global middle class that has a taste for red meat, it appears the long-term outlook is positive. According to the International Monetary Fund (IMF), by 2030 nearly 5 billion people will be in that category, up from 2 billion in 2014.
In fact, CattleFax forecasts that beef production will climb to the highest levels in history from 2018 to 2020. While this news should create optimism among producers, experts warn that volatility and uncertainty could disrupt the industry.
Anticipate challenges
Every production year is fraught with challenges, and 2018 will be no exception. A variable market is expected to produce price swings that could range from 20 to 30 percent, making economic certainty hard to come by. Broader factors, including trade policy, currency fluctuation, rising interest rates, unpredictable cattle prices and rising feed prices, could also affect cattle producers’ profitability. And that doesn’t include other potential issues, such as extreme weather and cattle health.
Government policies, specifically those covering trade, will likely affect the way cattle producers operate. Some ag economists estimate that approximately 20 percent of net farm income is attributed to exports, which means as U.S. cattle herds continue to grow, it will be critically important to keep export channels open and thriving. The North American Free Trade Agreement (NAFTA), the United States-Korea Free Trade Agreement (KORUS) and other bilateral trade agreements will all have a direct impact on producers’ bottom lines, while restrictive trade with China and a competitive disadvantage in Japan due to tariff rates will lead to even greater export challenges for U.S. producers.
Canada and Mexico are among the top destinations of U.S. ag exports; a breakdown in NAFTA negotiations would most certainly negatively affect U.S. cattle producers. In the past, the U.S. was a net exporter of beef into NAFTA countries, but that has changed. According to CattleFax, it’s estimated that the U.S. ran a negative beef trade balance with Canada and Mexico of nearly $1.8 billion in 2017. The bottom line is that the long-term growth and profitability in protein production for the U.S. is dependent on an increase in exports.
Measure to manage
What’s left is a cautiously optimistic future for the beef industry. The good news is that recent profitability and growing demand puts producers in a favorable position to safeguard their businesses against potentially tumultuous times ahead. Smart planning and decision-making will set the foundation for future success. But you can’t manage what you haven’t measured, and it’s impossible to develop a strategy if you don’t know what you’re starting from or where you’d like to go. With that in mind, here are a few recommendations to manage risk and help ensure more profitable outcomes:
• Know your production costs and breakevens.
Understanding your cost of doing business is essential, so consider both fixed and variable costs and keep accurate records. The key is using this data to reach a determination on capital expenditures and marketing decisions. You can also make your money work harder by locking in land rent for pasture, saving on feed costs by utilizing byproducts and other cost-efficient alternatives, or forward contracting feed while prices are low.
• Understand how much risk you can afford (and are willing) to take.
Every producer has different circumstances. Take the time to think through the short- and long-term goals of your operation. The level of risk you can afford to take today may be different from what it was even two or three years ago. Work with your trusted advisers to understand the implications of your risk management strategy and how it could affect your business in both the long- and short-term.
• Play the “what if” game.
Review your financial position to learn how potential market changes would affect your liquidity and profitability. Variables that are largely out of your control could have significant impacts on your bottom line. Simulate how market changes could affect the way you do business. It’s important to be proactive in monitoring your financial position early and often as the market changes to manage risk
• Stay the course with risk management.
Stick with your plan, even during tough times. A downturning market can cause people to make emotional, reactive decisions that aren’t good for their businesses in the long-term. Discipline is critical; focus on margin management rather than swinging for the fences.
• Manage your balance sheet
A healthy balance sheet is a key component to a successful risk management plan. Maintaining a sound working capital and owners’ equity position not only aids in withstanding adversity, but also positions the operation to take advantage of opportunities in the future. Be deliberate about where you spend money and consider the returns to the operation when making capital expenditure decisions.
The current year has the potential to be profitable for cattle producers, in spite of challenges that could disrupt the market. It’s a good time to reevaluate risk management strategies with trusted advisers to ensure you’re ready to ride the wave of uncertainty.
PHOTO: Recent profitability and growing beef demand will help producers safeguard their businesses against potentially tumultuous times ahead. Photo provided by Farm Credit Mid-America.
