Risk. Some people thrive on it, while others struggle with it. It’s been said that “all life is a management of risk, not its elimination.” So what can beef producers do to manage risk in such a risky business?
At the Idaho Young Cattle Producer Conference in June, Ben Eborn, an economist with the University of Idaho, reminded producers to focus on things that can be controlled and offered ways to plan and prepare to manage those types of risks.
Looking at CattleFax data depicting the dollar per head change from the cycle highs in 2014 to the cycle lows two years later in 2016, Eborn noted a value decrease of $900 on average for a 550-pound steer.
“You can’t even sell 550-pound steers for 900 dollars nowadays,” Eborn said. “It’s kind of crazy how fast things can change. We have to figure out ways to hold the line, even when prices are volatile and markets swing that wide. There has to be a way to stay profitable.”
Below are a few key takeaways from his presentation:
Average producers don’t make any money
Again, looking at CattleFax data, Eborn pointed out the differences between a low-cost producer and a high-cost producer in 2019:
- A low-cost, high-return producer’s cash cow costs were $550 per head, with total cow cost (including labor and depreciation) at $725 per head. Their breakeven was around $120 to $140 per hundredweight.
- The average producer’s cash cow cost was $600, with their total cow costs at $800 and their breakeven around $135 to $155 per hundredweight.
- A high-cost, low-return producer’s cash cow cost was $700, with their total cow costs at $925 and their breakeven around $160 to $180 per hundredweight.
“If your costs are around 800 dollars per cow, is that a good thing or a bad thing? It’s average, right?” Eborn said. “You’re not going to survive. You’ve got to figure out a way to get those costs below 800 dollars. You might say ‘well, I live above 6,000 feet; we have to feed our cows six months out of the year. There’s no other way to do it.’ I guarantee there is another way. You just might have to get super creative. Feed is only one of the costs.”
Eborn also reminded attendees that cutting corners is not the same thing as cutting costs. He encouraged them to find small ways to increase efficiency, whether that’s figuring out a way to extend the grazing season; buying replacement heifers instead of feeding them through the winter; taking a good, hard look at family living expenses and if that number is where it should be; stock up on fuel when it is cheaper; or even something as simple as driving a car around instead of a pickup.
Expansion may not be the best way to improve profitability
Expansion may be a good way for some, but probably not the best way, Eborn told attendees. He encouraged producers to focus on decreasing costs first and tabling the thought of expanding until they have a good positive gross margin.
Improve your timing
Danny Klinefelter, a retired extension specialist at Texas A&M said this about good managers: “The main difference between the top 10 percent and the rest of the top 25 percent is their timing.” They do everything the same, except for their timing, Eborn explained.
As an example, Eborn noted the feeder cattle futures chart for August. The 12-month high was $156 and the $12-month low right after the coronavirus was $110; that’s a $46 difference in feeder cattle. That’s a lot of price variation.
“Knowing when to the pull the trigger and sell your calves will easily make up 5 percent or 10 percent of your net profit,” Eborn said. “Especially on year like this when there is so much volatility.”
Also, it is important to note that about 20% of cow-calf returns come from cull cows. Producers should know when the best time and the worst time to sell cull cows is and spend time marketing them. The same can be said for the seasonality in feeder cattle, he said.
Leave emotion out
What’s so bad about a little fear and greed? It messes up our timing, Eborn said. Fear blinds us to opportunities, and greed blinds us to danger. “I know every time I sell my calves, I feel sick inside,” Eborn said. “Having a solid marketing plan will take almost all of that emotion out. It will keep us from hanging onto those calves hoping the prices will go higher when they are already 2 dollars, and it’ll keep us from panicking as the prices start to go down and panic selling at the bottom of the market.”
Wrapping up his presentation, Eborn offered the next generation of producers some advice. He said, “The only reason average producers are still in business is their dad or grandpa sweat, worked their butts off, so they could pass this down for the next generation, and what does the next generation do? They are really just bleeding the operation to death, and some day, they will run out. Those of you that were handed an operation or went back to an operation or inherited an operation, make that thing make money like your grandparents did. Manage it like they had to manage it to survive.”
To listen to a similar presentation, watch this YouTube video on marketing plans.
