Empty meat counters and simultaneously plummeting cattle prices is an unsettling phenomenon for cattle producers and beef consumers alike.

Last week, agricultural economics specialists from across the state of Oklahoma gathered together by video conference to talk about the “why” of cattle market conundrums and the “how” for producers hoping to continue profitable cattle production moving forward.

Supply Chain Snags

The U.S. beef supply chain is a very complex system, with a diverse set of affecting factors. Although beef supplies dropping in tandem with cattle prices is an eerie phenomenon, it’s not necessarily an unnatural market response.

“When it became apparent that we were going to greatly restrict movement in most places and close down restaurants, folks began to behave a bit differently than normal,” said Oklahoma State University professor Derrel Peel. “We saw a surge in retail grocery demand for beef, which you have probably experienced.”

Peel said U.S. data shows household food expenditures are typically half and half, with of the budget attributed to food service or restaurant spending and half attributed to grocery spending. While empty shelves showed up in grocery stores across the country, the beef supply chain was already working on accommodating the purchasing shift.

“On very short notice, very abruptly, we took the vast majority of spending going through food service and shoved it into the grocery side,” Peel said. “Those are very different supply chains in the beef industry and its not possible to immediately shift between those two things, so what we’ve had is a surge in demand at the grocery side and at the same time a tremendous decrease in food service demand.”

The supply chain shift and ultimately the time it took to achieve that shift only illustrated that the beef industry is very complex and eventually the in-store situation overwhelmed the market. Grocery stores trying to procure additional product led to a pronounced spike in boxed beef prices — rising 24 percent over just two weeks, Peel said.

The story was different for fed cattle prices and at live markets, Peel said.

“Cattle markets have been a source of consternation for some folks,” Peel said. “The fed cattle markets, particularly futures and ultimately in the cash markets as well, really are typically very closely correlated with the general economy and the stock market.

“Back in late February when the stock market started to get nervous and decrease in anticipation of some of the things we are going through, live cattle futures dropped dramatically and eventually that led to pressure on cash cattle prices.”

For Peel, this scenario wasn’t extremely surprising, given that boxed beef and cash cattle prices are two markets that exist on completely different timelines. In the future, concerns over processing and marketing the record beef supplies predicted in 2020 are more pressing than empty store shelves.

“One of the continuing concerns we have — that is absolutely reflected in the futures prices — is the potential for labor disruption at the packing and processing level,” Peel said. “We have news that JBS has one of their predominately cow-killing plants shut down for the next two weeks.”

The biggest unknown in the cattle market scenario is timing, Peel said. Today, markets are volatile while buyers and sellers are trying to figure out all the factors affecting beef supply and demand, and that’s a situation that probably won’t go away in the near future. It’s time for livestock producers to do what they do best and quickly and efficiently adapt to change.

Financial Strategies

For OSU’s northwest area ag economics specialist, Trent Milacek, the best scenario to be in as a stocker operator is probably the one producers have heard economists warn against hundreds of times.

“Straight hedging would have worked really well in this situation where you have a hard falling market,” Milacek said. “In other years, we are always worried about leaving money on the table in a futures contract situation but in this case it would have worked out well.”

For stocker producers capable of fulfilling whole contracts, Milacek suggested using put options as price protection. For smaller producers, especially in the cow-calf sector, purchasing Livestock Risk Protection coverage could help alleviate some concerns during market volatility.

“Livestock Risk Protection is basically price insurance,” Milacek said. “It’s something we recommend a lot for smaller producers that maybe can’t fill an entire contract or have a small herd.”

LRP insurance can be purchased for up to 1,000 head of cattle and can be used to hedge prices similar to futures hedges or option contracts. In a stable market, similar to the period cattle markets have maintained since 2017, LRP may have been cost prohibitive for a lot of producers, but today any protection from marketing risk looks much more appealing.

When producers are strategizing and communicating with financial planners or lenders, northeast area ag economics specialist Scott Clawson said it is a good idea to put a number on potential price losses.

“I think we should try to sit down in our own operations and try to put a number on the impact of this price decline,” Clawson said. “I think that is something that will be important as we go in to discuss options for payment extensions and things like that with our lenders.”

Updating financial documents and evaluating assets can help producers get a visual on just what it will take to maintain through the coming downturn. A simple equation where current liabilities are subtracted from current assets to determine working capital, can be a good litmus test for financial stability.

“To me, if we want to look at how at-risk we are going to be financially in the coming months, assuming continued or new price declines, we need to take a look at our working capital right now,” Clawson said. “Working capital is a good measure of liquidity and it will let us know where we’re at in the short term.”

Positive working capital indicates operating room, while a negative number for operating capital indicates a highly leveraged situation. Producers marketing assets that aren’t current, like moving breeding stock or equipment to meet a cash flow need, would imply cash flow and working capital issues.

Calf Crop Strategies

For beef producers marketing, or in the case delaying marketing for calves born in the fall of 2019, Clawson said fluctuating grain markets, plant shutdowns and feed costs should all be contributing factors in developing a sales strategy.

“If you’re considering that with grass coming on cost of gain for calves will be minimal, and therefor holding on to some calves and seeing what happens, there are a few things to keep in mind,” Clawson said. “The first is that the dried distillers grains market is changing, and it is changing pretty fast.”

With ethanol plants slowing production or shutting down for a limited time due to gas demand and COVID-19 concerns, DDG availability could be limited in the coming months, with some outlets already limiting loads for pickup.

“The silver lining behind some of this is from a feed cost perspective,” Clawson said. “Roughly 40 percent of our corn crop has gone to fuel production in recent years and as we look at that decreased fuel demand, corn prices have started to fall.”

While ethanol plants in predicaments may limit corn demand for ethanol and therefore reduce feed costs, Clawson said improving existing forage would be another steadfast nutrition option for profit-savvy producers.

“Fortunately for us, the urea market has been fairly stable and so we are hoping for a continuation of that,” Clawson said. “We can combine that with the time of year we’re in with immature summer forages and we can really do some good with some extra fertility right now.”

Early spring is an efficient time period to produce gains in cattle in a bermudagrass and fescue based system, Clawson said. If producers plan to retain cattle longer, they need to keep in mind replacing the extra forage retained calves consume, especially if they typically rely on stockpiled forages or hay through the winter months.

For calves born in the current calving cycle, there are even more market unknowns and fewer solutions, other than to settle in for the long haul and be as cost cognizant as possible.

“The spring calving strategy is probably a little more internal than external, and what I mean by that is that we are probably going to look at our own cost management to make this difference on this set of calves,” Clawson said. “The market is going to fluctuate and if we want to limit our downside risk, LRP could be a good option for cow-calf producers because we can tailor it to our set of steers or heifers.”

Knowing costs can be a critical piece of the puzzle, even for producers utilizing price protection like LRP, Clawson said. In order to hit or exceed a break-even scenario in 2020, it’s important to know the limits.

“With two-thirds of our annual calf costs coming from nutrition, whether it is land costs or actual purchased feed, that’s obviously the area where we want to moderate costs immediately,” Clawson said. “We’re trying to meet the nutritional requirements of the cow more efficiently not cutting the nutritional side.”

Sacrificing nutrition is never a profitable business strategy for cattle producers relying on marketing a quality product, instead keying in on the most efficient route to the highest pounds of quality beef needs to be the focus.

“When it comes to the spring calves specifically, we need to decide what we are going to do with them a little earlier,” Clawson said. “We need to calculate our returns on the different management selections we can make on those calves, especially for strategies like creep feeding or implanting.”

While volatile markets are a challenge cattle producer have faced, can face and will face again, Clawson said the best battle plan in this go-round is simply to keep an eye on spending and invest wisely.

“Whatever you’re going to do, as far as calf marketing, you’re going to want to pencil it out,” Clawson. “Our margins are going to be small, and we need to be sure that our investments push us in the right direction.”

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