1

Profitability of Selected Marketing Alternatives

Todd D. Davis

Extension Economist

Clemson University

2

Objective

• Past Profitability from 1989 - 2005– Ability to cover cash costs?

• Does it Pay to Retain Ownership?– Fall Sales vs. Stockering– Fall Sales vs. Retained ownership in Kansas feedlots

• Can Hedging with Futures Help Reduce Risk?

3

Production Assumptions

• Cow-calf – 100 cows, 85% calf crop, Selling 500 # steers & 450 # heifers on

Sep. 10

• Preconditioning– 45 days, Gain 2 lbs/day (1.8 lbs/day), cost $60/hd

• Stockering– Feed 150 days, Gain 2.00 lbs/day (1.85 lbs/day), Selling 890#

steers & 810 # heifers on March 24

• Finishing– Feed 210 days, Gain 3 lbs/day, Sell 1250 # steer on May 23

4

Cost Assumptions

• Production costs based on Clemson Univ. Enterprise Budgets (Cow-calf, stockering, hay & forages)

• Finishing costs based on Kansas State University Extension

• Historical input costs from USDA

5

Prices are from …

• South Carolina weekly feeder cattle cash prices (by weight and sex) from 1989-2005 (USDA Livestock Market News)

• Kansas weekly cash slaughter steers & heifers prices from 1989-2005 (Kansas State)

• Daily feeder cattle and live cattle futures and options data from 1989-2005 (Commodity Research Bureau)

6

Past Profitability-- Evaluating 1989-2005

7

Revenues and Total Variable Costs – SC Cow-Calf Operation ($/hd)

$-$50$100$150$200$250$300$350$400$450$500$550

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

1989-2005 Average Return over TVC= $150/hd

8

Revenue and Total Variable Costs – SC Cow-Calf w/ Winter Stockering Operation ($/hd)

$-$100$200$300$400$500

$600$700$800$900$1,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

1990-2005 Average Return over TVC = $235/hd

9

Revenue and Total Variable Costs – SC Cow-Calf and Finishing Operation ($/hd)

$-$100$200$300$400$500$600$700$800$900$1,000$1,100

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

1990-2005 Average Return over TVC = $265 / hd

10

Your labor and management skills are valuable!

• While you may be profitable in covering your out-of-pocket expenses…

• Budget a return to your labor and management skills – don’t work for free! (20% of Total Variable Costs)

• Think about budgeting a profit margin to help finance future business investments and growth

11

Does it pay to retain ownership every year?

12

How do I know if I should retain ownership or sell now?

• Compare what you gain from retained ownership to what it costs…

• What you gain Increased Revenue

• What it costs Additional Cost of Gain + Lost Revenue (what you could get if you sell now)

13

Net Increase in Returns from Stockering vs. Fall Sales ($/hd)

$40$86

$6

$75

$3

$33$79

$101

$13

$52

$125

$43

$37

$22 $19

$103

-$150-$125-$100-$75-$50-$25

$0$25$50$75

$100$125$150

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

1990-2005 Average = $30/hd

14

Net Increase in Returns from Finishing vs. Fall Sales ($/hd)

$42$19

$7

$44

$129$125

$88

$73

$28

$80

$29$22

$159

$43 $48$29

-$175

-$125

-$75

-$25

$25

$75

$125

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

1990-2005 Average = -$7/hd

15

Know your costs!

• It pays to budget and to know and monitor your costs.

• Take the time to evaluate if it is pays to retain ownership or sell it now.– The costs and benefits can differ greatly from

year-to-year!

16

Can Hedging with Futures Help With Reducing Risk?

17

What are Futures?

• They are contracts sold on the Chicago Mercantile Exchange that allows you …– “Lock in a price” – Losses in the cash market

will be offset by gains in the futures market

• This can be complicated – Let’s see if we can use futures/options to reduce risk– Learn mechanics at another meeting

18

Hedging Assumptions

• Cow-Calf – Sell October Feeder Cattle Contract on March 1, Offset Sep. 10

• Winter Stockering – Sell April Feeder Cattle Contract on Oct. 1, Offset March 24

• Finishing – Sell June Live Cattle Contract on Oct. 1, Offset May 24

19

Net Benefit of Hedging Fall Feeder Calf Sales – October Feeder Futures *** ($/hd)

$21$54

$13

$85

$41

$63

$31

$51 $46

$86

$22

$10

$17

$31

$139$154

$98

-$250

-$200

-$150

-$100

-$50

$0

$50

$100

$150

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

1989-2005 Avg. = -$30/hd

*** For Educational Purposes Only!

Beneficial30% of thetime

1989-2002 Avg. = -$8/hd

20

Net Benefit of Hedging Fall Feeder Calf Sales & Stocker –

October Feeder & March Feeder Futures *** ($/hd)

$38

$102

$48

$136

$38

$110 $71

$85

$10

$85

$44

$15$38

$24

$143

$205-$250

-$200

-$150

-$100

-$50

$0

$50

$100

$150

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

1989-2005 Avg = -$28/hd

*** For Educational Purposes Only!

Beneficial40% of thetime!

1989-2003 Avg = -$5/hd

21

Net Benefit of Hedging Fall Feeder Calf Sales & Finishing –

October Feeder & April Live Futures *** ($/hd)

$49$88

$7

$161

$62

$103

$58

$83

$6

$79

$18$34

$95

$45

$262

$185

-$275

-$225

-$175

-$125

-$75

-$25

$25

$75

$125

$175

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

1989-2005 Avg = -$33/hd

*** For Educational Purposes Only!

Beneficial40% of thetime!

1989-2003 Avg = -$5/hd

22

Are Futures and Options Useful?

• Sometimes…

• Remember that you’re trying to protect against low prices – Futures and Options won’t “Pay” every year– Consider the revenue provided in a ‘worst case’

scenario– You can do better than the ‘naïve’ strategies used in

this example!

23

Thank you for your attention!

I will be happy to answer any questions you may have.