Source: The Cow/Calf Corner newsletter from the Oklahoma Cooperative Extension Service
Aug. 11, 2014
Optimal risk and production management with record high cattle prices
by Derrell S. Peel, Oklahoma State University Extension livestock marketing specialist
Record high cattle prices leads to new questions about risk and production management. Actually, the questions are the same but the answers may be slightly different. High cattle prices have significantly increased capital requirements for stocker cattle, feeder cattle in feedlots or breeding animals for cow-calf production. The large dollar requirement means that overall financial risk is higher now in the cattle business. Market (price) risk and production risk are both important components of financial risk.
High cattle prices lead naturally to concerns about market price risk. The need for price risk management depends on several factors, including the producer’s financial vulnerability and capacity to handle price volatility. Overall market outlook is also an important consideration. Short run market volatility is always a concern and, at current market levels, a modest market correction could mean price changes of $10 to $30/cwt. depending on animal class. However, underlying market fundamentals suggest that prices are likely to generally stay strong or move higher for the next couple of years and downside market risk as a trend will be generally low. In this environment, minimum price tools, such as Put options or Livestock Risk Protection (LRP) contracts, are likely more preferred to fixed price tools, such as futures hedging or forward contracting. However, adding a call option to a short hedge or forward cash contract will also maintain upside market potential while providing minimum price protection. Price volatility is likely to be short lived in the current market and production agility which provides flexibility in marketing animals can also be an important means to counter short term price volatility. At some point, markets will top and market price risk management with more downside risk will take on renewed importance but that time appears to be many months away at this point.
A relatively bigger concern today than protecting market price is making sure that you have something to sell. Production risk is a big part of financial risk at this time as things like death loss and reduced productivity have significantly larger financial impacts. Though death loss always causes loss, there is an optimal level of death loss which is not zero because the marginal benefit of reducing (or attempting to reduce) death loss below a certain point is less that the marginal cost. However, high animal values today suggest that additional measures to reduce death loss (or at least reduce the probability of animal death) are warranted. For example, enhanced use of metaphylactic treatment of animals in some situations or additional labor to detect sick animals and treat more aggressively may be worth the additional cost. Generally, higher animal values suggest that increased marginal expenditures on inputs to ensure animal health and productivity may be economical. Also animal theft is on the rise because of high animal values and additional expenditures on security measures are warranted. Perhaps additional means of animal identification or security should be used or more frequent checking of animals can reduce the risk of theft or increase the chances of recovering stolen animals. One stolen calf would buy a nice security camera.
Likewise, for the cow-calf herd, additional measures to enhance reproductive productivity are justified by high animal values. For example, additional expenditure to ensure cow body condition at breeding resulting in some increase in pregnancy rate and calving percentage may be worth evaluating. There are many other examples of adjustments in production that can increase benefits or reduce the risk of losses. For example, the value of fertility testing bulls, or stated another way, the cost of not fertility testing bulls is much higher today than with lower calf prices.
There are a multitude of marginal adjustments in production practices to take advantage of high animal values or reduce the risk of losses or lost opportunities. This is not time to operate with old rules of thumb. Economic theory is clear; when the value of the output increases, more use of inputs is consistent with profit maximization. Producers need to evaluate all aspects of production systems to identify ways to tweak their production system to enhance profitability.
Prepare a “calving kit” before fall calving season begins
by Glenn Selk, Oklahoma State University Emeritus Extension animal scientist
More and more Oklahoma producers are breeding cattle to calve in the fall. Some producers are planning to “calve out” more replacement heifers than normal to take advantage of high cattle prices. Before the hustle and bustle of the fall calving season, now is a good time to put together the supplies and equipment that will be needed to assist heifers and cows that need help at calving time.
Equipment: Before calving season starts, do a “walk-through” of pens, chutes, and calving stalls. Make sure that all are clean dry, strong, safe, and functioning correctly. This is a lot easier to do on a sunny afternoon than a dark night when you need them.
Protocol: Before calving season starts develop a plan of what to do, when to do it, who to call for help (along with phone numbers), and how to know when you need help. Make sure all family members or helpers are familiar with the plan. It may help to write it out and post copies in convenient places. Talk to your local veterinarian about your protocol and incorporate his/her suggestions. Encourage everyone that will be watching and helping cows and heifers this calving season to read Oklahoma State University Extension Circular E-1006, “Calving Time Management for Beef Cows and Heifers”.
Lubrication: Many lubricants have been used and one of the best lubricants is probably the simplest: non detergent soap and warm water.
Supplies: The stockmen should always have in their medicine chest the following: disposable obstetrical sleeves, non- irritant antiseptic, lubricant, obstetrical chains (60 inch and/or two 30 inch chains), two obstetrical handles, mechanical calf pullers and injectable antibiotics. Don’t forget the simple things like a good flashlight and extra batteries and some old towels or a roll of paper towels.
It may be helpful for you to have all these things and other items you may want to include packed into a 5 gallon bucket to make up a “calving kit” so you can grab everything at once. Place that bucket in a location that can be found and reached by everyone in the operation.
“Cow/calf Corner” is a weekly newsletter edited by Dr. Glenn Selk, Extension cattle specialist emeritus at Oklahoma State University with contributions from additional OSU Extension specialists.