Managing the Highs and Lows

By John Cowan

As an agricultural lender and a smallscale beef cattle producer, I continually work to gain knowledge on updated production and management practices and marketing opportunities. How do we minimize costs and maximize profits each year, while balancing herd health and body condition, along with being good stewards of the land and resources?

Whether you are financing breeding stock, borrowing for stockers and operating capital or simply operating out of cash, effectively managing the financial aspect of the operation through the ebbs and flows of the cattle market has become a focus for sustainability.

Experienced producers are aware of cattle cycles, either successfully navigating them or managing to get by. For new producers, understanding the cycle is key to growth through the expansion and contraction of the livestock market. This expansion and contraction cycle typically span a period from seven to 12 years, where changes in cattle inventories affect prices based upon the supply and demand of beef.

When prices are high or rising, producers typically will hold or purchase additional heifers and retain producing cows beyond their normal culling age, leading to herd expansions. These decisions capitalize on additional production availability and future revenues while prices remain strong. Over time, growth in production results in increases in cattle population, cattle on feed and marketings; giving way to a decline in prices due to over-supply – or the start of a contraction.

Conversely, as production levels rise during the expansion period and supplies exceed timely demand, prices fall, and producers tend to market additional heifers and cows due to concerns of future profitability. The move towards liquidation is referred to as the contraction period. These additional liquidations, over time, complete the cycle of supply, demand and resulting price fluctuations.

The full cycle typically transpires over several years due to the time required for production and marketing to the applicable supply/demand points. However, mini cycles may also occur on a local or regional basis due to extreme weather events such as drought, which affect available grazing and/or feed costs.

Producers who understand and manage the cyclical nature of the beef cattle industry are typically able to position the operation for continued, healthy growth; allowing for additional leased or purchased acreage and increased herd size. Proper financial position starts with analyzing the needs of the business in both the expansion and contraction periods of the cycle.

During expansion, when inventories are increasing and corresponding market prices and values rise, the cycle becomes easier to manage. With strong calf prices, the operation can market calves normally, liquidate unproductive breeding stock in favor of retaining heifers, and purchase bred heifers to improve the annual revenues and overall age of the herd. Additional livestock purchases, and in some cases equipment upgrades, provide for future revenues as well as management of future depreciation costs through proper tax planning.

It is in periods of contraction where prior planning can pay dividends. As prices retreat, production revenues decline, and producers liquidate non-producing cows and heifers in an effort to cover essential fixed and variable costs. While a single year may be mitigated to a break-even scenario in contraction, future periods can suffer from reduced production and sales due to smaller herd sizes.

Producers who purchase cattle annually, either for summer grazing or winter carry, must prepare for periods when a mini cycle occurs or when expansion converts to contraction and prices fall. In these scenarios, price volatility occurs when prices decline from purchase to sale without some type of forward contracting or hedge positions.

Operations positioned to sustain through the “bad years” are those that proactively manage the financial aspect in the “good years” through:

• Building cash reserves to improve liquidity

• Boosting equity in assets through cash purchases or accelerated debt repayment

• Mitigating costs with forward priced inputs or bulk purchase agreements, and/or

• Enacting a well-implemented marketing plan to provide for premium pricing in subsequent years.

Each business operation is different, be it size, location, or ownership structure. Whether your goal is to expand herd size, maximize profits or position the operation for transition to future generations; understanding the beef cycle and how it impacts your operation’s overall finances is key to weathering the expansion and contraction of cattle markets. As you navigate the cycle, building a team of trusted advisors, through neighbors, family or an experienced agricultural lender can als0o aid in making profitability a priority through strategic planning.

The views and opinions expressed in this article are those of John Cowan and are not endorsed by, and do not necessarily reflect the views of, Simmons Bank. Simmons Bank does not provide tax, accounting or legal advice.