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August 26, 2016
Economic & Policy Update
Cow-Calf Profitability Expectations for Fall 2016
Volume 16, Issue 8 Edited by Will Snell & Phyllis Mattox
Cow-Calf Profitability Expectations for Fall 2016 - Kenny Burdine - Greg Halich
The drastic decline in calf prices from summer 2015 is having a major impact on cow-calf profits. In evaluating cow-calf profitability this year, it may prove useful to provide a longrun perspective on calf prices. The chart below shows historical April and October prices for a 550# steer in Kentucky from 2007 to 2015 (USDA-AMS). Part of our message to cow-calf operators as we traveled the state this past winter / spring was that our current market is not that far from the long-run “normal”. Current prices are not bad from a historical perspective. What does look bad are these prices compared to what we have had in the last two years. When you sold calves for $2.00-$2.50/lb just over a year ago, selling those same calves in the $1.35-$1.50/lb range is hard to swallow.
Figure 1: Kentucky Auction Prices – 550# Steers Weighted average basis
H2A Labor Audit - Michael Forsythe
What Impact Has Corn & Soybean Crops Had on Future Prices?
Source: USDA-AMS, author calculations
- Todd Davis Kentucky Produce Auction Impact on Kentucky Growers - Alex Butler - Tim Woods
The calf market that we enjoyed for much of 2014 and 2015 reached those unprecedented levels due to an extremely unique set of circumstances. A prolonged drought in the Southern Plains from 2011-2013 and the loss of significant pasture ground to row crop production extended the liquidation phase of the last cattle cycle. Had it not been for those two factors, herd expansion would have likely begun in 2011 or 2012, rather than 2014. The result was that we entered 2014 with a cow-herd about the same size as we had in the early 1960’s. As we began to grow the cow-herd in 2014 and 2015 (through reduced cow slaughter and increased heifer retention), we were also seeing sizeable production increases in pork and poultry. These factors, combined with reductions in exports, left considerably more meat available per capita in the US. This placed a great deal of pressure on cattle prices, which were further depressed as slaughter weights rose due to cheaper feed last fall. Regardless of the causes, the result was as significant a drop in calf prices as we have ever seen on a year-over-year basis. PAGE 2 Educational programs of Kentucky Cooperative Extension serve all people regardless of race, color, age, sex, religion, disability, or national origin. UNIVERSITY OF KENTUCKY, KENTUCKY STATE UNIVERSITY, U.S. DEPARTMENT OF AGRICULTURE, & KENTUCKY COUNTIES COOPERATING.
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For the first week of August 2016, 550 lb steer calves were selling around $1.45 per lb on a state average basis according to the weekly Kentucky Livestock and Grain Market Report. The same week in 2015, those same steer calves were selling for $2.44 per lb. This 41% price decline represents a difference of nearly $550 per steer in twelve months and that $550 decline was virtually all profit. Given this drastic drop in prices, it seems fitting to take a look at expected profitability for cow-calf operations in the current market. Table 1 estimates fall 2016 returns to a traditional spring-calving cow-calf operation. Every operation is different, so producers should modify these estimates to fit their situation. Average weaning weight is assumed to be 550 lbs and the steer / heifer average calf price is assumed to be $1.40 per pound, which is just an estimate for this fall. Weaning rate is assumed to be 90%. Using this weaning rate, we effectively convert revenues from a “per calf weaned” basis to a “per cow maintained” basis. It is worth noting that this is a relatively high weaning rate compared to the Kentucky average. Based on these assumptions, calf revenue per cow is $693.
Table 1: Estimated Returns to Cow-calf Operation: Fall 2016 Revenues Steer / Heifer Calf Average 550 Discount for Open Cows 10% Total Revenues per Cow
lbs open
$1.40
$770 $77 $693
acres ton
$25.00 $75.00
Breeding Stock Depreciation Other Total Expenses per Cow
$50 $188 $35 $25 $40 $27 $20 $10 $125 $15 $535
Return to Land, Labor, and Capital
$158
Expenses Pasture Maintenance Hay
2.0 2.5
Mineral Vet Breeding Marketing Machinery Trucking
The pasture stocking rate is assumed to be 2 acres per cow-calf unit and pasture maintenance costs are assumed to be relatively small. At $25 per acre, this would include one pasture clipping and seeding some legumes on a portion of the pastures acres each year. Producers who apply fertilizer to pasture ground would likely see much higher pasture maintenance costs. Cows are assumed to consume 2.5 tons of hay through the winter and that hay is valued at $75 per ton. In many cases hay can be purchased for less than this, but most operations produce their own hay and costs on many of these farms will be higher. Mineral cost is set at $35 per cow, veterinary / medicine costs $25, trucking costs $10, machinery costs $20 (primarily for feeding hay as this does not include machinery for hay production or pasture clipping as they are included in those respective costs), and other costs $15.
Breeding costs are assumed to be $40 per cow and are one of the most misunderstood costs on a cow calf operation. Breeding cost on a per cow basis should include annual depreciation of the bull and bull maintenance costs, spread across the number of cows he services. For example, if a bull is purchased for $3,500 and is sold two years later for $2,500, the bull depreciated $500 each year. Then, if his maintenance costs were $500 per year (feed, pasture, vet / med, etc.), his ownerships costs are $1,000 per year. If that bull covers 25 cows, breeding cost per cow is $40. A similar approach can be used for AI, but producers should be careful to include multiple rounds of AI for some cows and the ownership costs of a cleanup bull, if one is used. Marketing costs (commission) are currently assumed to be $27 per cow. Larger operations may market cattle in larger groups and pay lower commission rates, but this assumes 2.5% of value, plus commission, checkoff, and insurance. Finally, breeding stock depreciation is another key cost that is often overlooked. For example, if the “typical” cow was valued at $1,800 when she entered the herd and a typical cull cow value was $800, then she would depreciate $1,000 over her productive lifetime. If we assume a typical cows has 8 productive years, then annual cow depreciation is $125. This is the assumption made in this analysis, but the actual depreciation will vary across farms. When buying replacement bred heifers, this cost is obvious. With farm-raised replacements, this cost should be the revenue foregone if the heifer had been sold with the other calves, plus all expenses incurred (feed, breeding, pasture rent, etc.) to reach the same stage as a purchased bred heifer. Continued on page 3
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While discussion of costs that are included is important, discussion of costs that are not included is just as crucial. Notice that no value is placed on the time spent working and managing the operation, no depreciation on facilities, equipment, fences, or other capital items is included, and no interest (opportunity cost) is charged on any capital investments including land, facilities, and the cattle themselves. So, the return needs to the thought of as a return to the operator’s time, equipment, facilities, land, and capital. Based on these assumptions, total expenses per cow are roughly $535 and revenues per cow are $693 for a return to land, labor, capital, and management of $158 per cow. Cow-calf operators should ask themselves if this return adequately compensates them for their time and provides them with a reasonable return on their investment in the operation. For example, if a cow-calf operator wanted to receive a $50 return for their labor and a $50 return on each acre of pasture (2 acres per cow or $100 total) utilized, our analysis would suggest that they would just reach that goal. However, it would leave almost nothing for depreciation /interest of equipment and facilities. As an example, $3000 yearly depreciation and interest on equipment/facilities for a 30 cow operation would be an additional $100 cost per cow. Using this example, the farm would have lost $92 per cow when accounting for all costs. A quick comparison of estimated 2015 and 2016 returns showcases how drastically profitability has changed. In the previous 2016 estimation, fall prices for 550 lb calves were assumed to be $1.40 this fall. Using the Kentucky Livestock and Grain Market Report for the week ending October 16, 2015, a 550 lb steer / heifer average price would have been around $1.81 per lb. Table 2 provides an estimate of 2015 profitability using this higher price level. Note that most costs are unaffected by the overall market level. Commission was adjusted upward to reflect the higher market prices, but other costs remain the same. One could argue that breeding stock depreciation should be adjusted upward as well, and clearly would be higher if a large number of bred heifers were purchased and added to the herd last year. But, if one takes a long term view and thinks about the average cow in their herd over time, breeding stock depreciation likely changes very little given the market. Note that estimated return to land, labor, and capital was $356 per cow in the fall of 2015. Using the costs for land, labor, and capital from the previous example ($250), this farm would have made a pure profit of $106 per cow. If our estimates for prices in fall 2016 are close to accurate, that would represent a 23% decrease in calf prices. However, return to land, labor, and capital is projected to decrease by more than 56%. Simply put, the decrease in calf prices since last year is almost 100% profit and this is probably a point that has not been made clear enough over the last 12 months. The profit picture for cow-calf operations has changed drastically in a very short amount of time.
Table 2: Estimated Returns to Cow-calf Operation: Fall 2015 Revenues Steer / Heifer Calf Average 550 Discount for Open Cows 10% Total Revenues per Cow
lbs open
$1.81
$996 $100 $896
acres ton
$25.00 $75.00
Breeding Stock Depreciation Other Total Expenses per Cow
$50 $188 $35 $25 $40 $32 $20 $10 $125 $15 $540
Return to Land, Labor, and Capital
$356
Expenses Pasture Maintenance Hay
2.0 2.5
Mineral Vet Breeding Marketing Machinery Trucking
Continued on page 4
PAGE 4 We encourage you to go through and modify the above analysis for your situation. However, if you are honest about your costs and have reasonable expectations for what you need for your labor, paying off depreciation and interest on equipment/facilities, a return for pasture rent, etc., we don’t see how anyone is making much or any true profit at current calf prices. There was a Progressive Farmer article that came out about a half-year ago where the beef producer interviewed said they still saw good profit potential with the current market at the time and that they planned to continue expanding their cow herd. While we certainly don’t see those profits, particularly at the slightly lower prices of late summer 2016, if enough cow calf operators think profits are still there and continue to expand the national herd, calf prices will continue to drop further. Trying to improve profitability in 2016 by expanding the cow herd is akin to trying to put out a brush fire with gasoline. Hopefully producers realize this and the current phase of cow expansion has already ended.
Kenny Burdine, kburdine@uky.edu Greg Halich, greg.halich@uky.edu
H2A Labor Audit As the tobacco harvesting season begins for Kentucky tobacco farmers, it’s also the season for H2A labor audits. All tobacco farmers cringe at even the thought of this, but it is something that everyone needs to be prepared for. Below are several observations from recent audits that farmers with H2A workers should be aware of. Paycheck deductions, such as providing uniforms, must be specified and approved in the H2A contract and it must be clearly explained to the H2A workers that this is being done and why it is being done. Work hours offered must be included on each paystub or the worker must be given a copy of the timesheet or other document that has them listed on it. All vehicles H2A workers have access to must be in good working order. Any repairs, such as broken windshield wipers, busted or broken lights, balding tires, etc. must be fixed immediately. The farmer can still be fined even if they have taken that vehicle outPAGE of service 8 until the needed repairs can be completed. There cannot be any holes in window/door screens or 5broken glass in the H2A housing. PAGE H2A workers must have a bed and a mattress for sleeping. They are not allowed to sleep on the floor or put their mattress directly on the floor even if it is of their own choosing to do so. It is the farmer’s responsibility to fix any and all plumbing issues and properly train their employees on how to prevent future plumbing issues. A non-H2A worker hired to do the same task as an H-2A worker, such as cutting tobacco, must be treated the same as an H2A worker. This includes providing him with a time sheet, being covered under worker’s comp insurance, and providing housing if that non-H-2A worker lives approximately 50 miles away from the work site. Employment posters must be clearly posted for everyone to see. OSHA’s Field Sanitation Guidelines are applicable to “any agricultural establishment where eleven or more employees are engaged on any given day in hand-labor operations in the field”, not just to H-2A employers. The Field Sanitation Guidelines provide specific regulations regarding availability of handwashing facilities, potable water, and toilet facilities to your workers. Please go to www.osha.gov and search on “Field Sanitation Guidelines” for specific guidelines. Examples include: One toilet facility and handwashing facility per each 20 employees (or fraction thereof) Separate handwashing facility and potable (drinking) water stations available while workers are in the field Employer must allow for reasonable use of sanitation and hydration facilities. These are just some of the issues that have been discussed during labor audits, but there are many others that farmers also need to be aware of. One good resource to keep up-to-date on the code of federal regulations is www.ecfr.gov. The Employees’ Benefits section is listed under Title 20. Michael C. Forsythe, Michael.forsythe@uky.edu Area Extension Specialist, Farm Business Management, Pennyroyal Farm Analysis Group
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What Impact Has Potential Record Corn & Soybean Crops Had on Future Prices? The August Crop Production is the first survey of farmers and first in-field measurements of the growing crops to project yield and production. The August WASDE incorporates the August Crop Production projections into the supply/demand forecasts. USDA surprised the corn and soybean markets by projecting record yields and production for both crops. The August Crop Production report projects the US yields at 175.1 and 48.9 bushels per acre, respectively, for corn and soybeans. Similarly, the report projects the US corn and soybean crops at 15.15 and 4.06 billion bushels, respectively. These record production estimates are bearish fundamentals for both markets. What is the outlook for both markets and how did the commodity futures market react to such bearish information? If a record corn crop is harvested, total corn supplies for 2016-17 are projected to be 16.91 billion bushels which is 1.51 billion bushels more than last year. Demand is projected to be strong with feed demand and exports projected to increase 475 and 250 million bushels, respectively, over the 2015-16 marketing-year. The U.S. is benefiting from production problems in Argentina and Brazil which is effectively removing both countries from the corn and soybean export market until they harvest crops in Spring 2017.
Planted Area (million) Harvested Area (million) Yield (bushels/acre) Beginning Stocks Production Imports Total Supply
Table 1. U.S. Corn Supply and Use 2013-14 2014-15 2015-16 2016-17 Change from Estimated Projected 15-16 95.4 90.6 88.0 94.1 +6.1 87.5 83.1 80.7 86.6 +5.9 158.1 171 168.4 175.1 +6.7 ------------------- Million Bushels ------------------821 1,232 1,731 1,706 -25 13,829 14,216 13,601 15,153 +1,552 36 32 65 50 -15 14,686 15,479 15,397 16,909 +1,512
Feed and Residual Food, Seed & Industrial Ethanol and by-products Exports Total Use
PAGE 85,323 5,040 PAGE 56,560 6,493 5,124 5,200 1,920 1,864 13,454 13,748
5,200 6,567 5,200 1,925 13,692
5,675 6,650 5,275 2,175 14,500
+475 +83 +75 +250 +808
Ending Stocks Stocks/Use Days of Stocks U.S. Marketing-Year Average Price ($/bu)
1,232 9.2% 33 $4.46
1,706 12.5% 45 $3.60
2,409 16.6% 61 $3.15
+703 +4.2% +15 -$0.45
1,731 12.6% 46 $3.70
Source:August 2016 WASDE - USDA: WAOB.
Ending corn stocks are projected to increase to 2.409 billion bushels which would be a stocks-use ratio of 16.6%, if realized. This abundance of corn will pressure prices lower to stimulate use. The projected U.S. marketing-year average (MYA) farm price is $3.15/bushel which is $0.45/bushel lower than the 2015-16 price (Table 1). A potential record soybean crop does not have the same impact in ballooning ending soybean stocks as it did for the corn market. The 2016-17 soybean supply is projected to increase by 201 million bushels with use increasing by 127 million. Ending stocks are projected to increase to 330 million bushels which would be 75 million bushels more than in 2015 (Table 2). Given the strong use projections, 330 million bushels is not a significant cushion to absorb any production problems in the US or in South America. As a result, the 2016-17 US MYA farm price is projected at $9.10/bushel which would be a $0.15/bushel increase over the 2015-16 MYA price, if realized (Table 2).
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Planted Area (million) Harvested Area (million) Yield (bushels/acre) Beginning Stocks Production Imports Total Supply
Table 2. U.S. Soybean Supply and Use 2013-14 2014-15 2015-16 2016-17 Change from Estimated Projected 15-16 76.8 83.3 82.7 83.7 +1.0 76.3 82.6 81.8 83.0 +1.2 44 47.5 48.0 48.9 +0.9 ------------------- Million Bushels ------------------141 92 191 255 +64 3,358 3,927 3,929 4,060 +131 72 33 25 30 +5 3,570 4,052 4,145 4,346 +201
Crushings Exports Seed Residual Total Use
1,734 1,638 97 10 3,478
1,873 1,843 96 49 3,862
1,900 1,880 97 12 3,889
1,940 1,950 95 31 4,016
+40 +70 -2 +19 +127
Ending Stocks Stocks/Use Days of Stocks U.S. Marketing-Year Average Price ($/bu)
92 2.6% 10 $13.00
191 4.9% 18 $10.10
255 6.6% 24 $8.95
330 8.2% 30 $9.10
+75 +1.7% +6.1 +$0.15
Source:August 2016 WASDE - USDA: WAOB.
Why the bullish response to bearish news? There’s the rub. There is a saying in the grain markets that “Big Crops get Bigger” meaning that production estimates tend to increase throughout the fall into the final report. The 2016 corn crop is definitely a big crop. With the August corn yield estimate 7.1 bushels/acre greater than the statistical model projections in the July WASDE, there is some sentiment in the market that this is the biggest production estimate for 2016 and further estimates will show a smaller sized corn crop. The memory of the 2010 corn crop is still fresh as that corn crop was rated 70% good or excellent most of the year. For comparison, the US corn crop has been rated at 7475% good or excellent throughout 2016. The 2010 corn harvest revealed a light test weight crop causing USDA to reduce the 2010 yield by 9.2 bushels from the August estimate to the October production estimate. Will this happen in 2016? The farm press is already reporting the anecdotal evidence of ears not filled completely (tip back) and that the stands are not nearly as even when walking in the field as compared to viewing from the road. The other driver of the bullish reaction is the much better than expected demand for both corn and soybeans. Exports for both crops are much stronger than what was projected by USDA last February in their Agricultural Outlook forum. As stated several times before, the soybean market does not have much cushion to absorb any lower projected yield for the 2016 US crop or any production problems with the upcoming South American crop. By the way, the USDA projections of the corn crop has increased 66% of the years (1965 to 2015) from the August report to the final projections in January. Will there be enough yield and harvested area adjustments in upcoming reports to make 2016 a year that is in the 34% of big crops becoming smaller? For more information about the August 12th reports and a discussion of risk management alternatives for the corn and soybean markets, download the August Crops Marketing and Management Update from the Department of Agricultural Economics’ website: http://www.uky.edu/Ag/AgEcon/extmkt.php Todd D. Davis, todd.davis@uky.edu Assistant Extension Professor
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Precision Conservation Management Program Announced Kentucky Produce Auction Impact on Kentucky Growers Kentucky’s Produce Auctions offer local farmers access to a reliable and efficient wholesale market designed as a means to aggregate and distribute horticulture products. They are located in Christian County, Lincoln County, Hart County, Bath County and Casey County. The aggregation of product within the produce auctions allows some Kentucky producers the opportunity to participate in a wholesale market typically inaccessible to small scale operations. Producers from a variety of backgrounds participate in the auctions including flower growers, ornamental growers and fruit and vegetable growers. Farmers utilize several different market strategies when participating in produce auctions including as a primary marketing channel, as a piece of the overall marketing strategy or as an outlet for unmarketable No. 2 grade products. In its first season of the Fairview Produce Auction, located in Christian County, it saw sales of $100,000 flow through the auction floor. The following year, the complete season total sales increased by 150% to $250,000 and in 1999, total sales were just under $330,000. Now, almost 20 years from their opening, Fairview has approximately 200 producers distributing their products through the auction with roughly 50 growers producing close to 90% of their total volume. Although the number of producers has decreased slightly over the last 4 years, as shown in the table below, the total sales revenue generated by the auction continues to increase. This follows the same trend as most states within the Ohio Valley Region that have their own produce auctions. Lincoln County Produce Auction continues to adopt new enterprises to better suit local farmers, while increasing sales by offering packaging to producers. Just in the past year they have seen this contribute to approximately 15% of their total revenue with around 70% of those packages sold coming back through the auction. Year Number of Kentucky Vendors Core Growers
2008
2012
2016
350
700
500-600
-
-
110
This table shows the total number of Kentucky producers participating in the Produce Auctions from 2008, 2012, and 2016. It also displays the total number of core growers for all auctions.
* Core Growers represent 75% of the total volume of horticulture products distributed through the auction.
The Center for Crop Diversification has been working with the produce auctions for the past several years to provide a price report consisting of the products sold at market, the quantity, unit size, low price, high price, and the average. These price reports have the ability to assist horticulture producers of a diverse production range statewide by giving them a resource to monitor wholesale market prices. Additionally, the reports can be used by producers to make assumptions on the market and adjust their marketing strategies based on the evidence they have collected. Alex Butler, alex.butler@uky.edu Tim Woods, tim.woods@uky.edu
University of Kentucky Department of Agricultural Economics 315 Charles E. Barnhart Bldg. Lexington, KY 40546-0276 Phone: 859-257-7288 Fax: 859-257-7290 http://www.uky.edu/Ag/AgEcon/extbluesheet.php
Economic & Policy Update View all issues online at http://www.uky.edu/Ag/AgEcon/extbluesheet.php
Educational programs of Kentucky Cooperative Extension serve all people regardless of race, color, age, sex, religion, disability, or national origin. UNIVERSITY OF KENTUCKY, KENTUCKY STATE UNIVERSITY, U.S. DEPARTMENT OF AGRICULTURE, & KENTJCKY COUNTIES, COOPERATING.