Take steps to prepare for downturn in cattle market

CAMBRIDGE, Ill. — Taking steps now can help cattlemen prepare for changes in the market.

“We are still in the tail end of the liquidation phase, but it seems to be slowing down,” said Ross Bronson, agricultural risk consultant with Redd Summit Advisors.

“People are still selling cows and heifers are still a large part of what’s going into feedlots,” said Bronson during a presentation at the Cattlemen Connect Education Series, hosted by the Illinois Beef Association.

“But I anticipate that changing soon, but I don’t know if that’s this summer or next summer — it depends on how the weather plays out,” the risk consultant said.

“This cattle cycle is going to run its course and the market is going to come back down,” he said. “There have been 12 peaks and 11 troughs in the cattle cycle since 1890.”

Bronson encourages cattlemen to prepare not just for a declining market, but to also be better prepared to take advantage of the next upswing.

“There’s a bunch of stuff that causes wide swings in farm income,” he said. “Management involves choosing alternatives that reduce financial effects that can result from all of things like yield, price, policy, etcetera.”

Plans are vital for cattle operations.

“If you don’t have a plan, the more likely decision-makers will base their decision on emotion or instinct rather than fact or analysis,” he said. “Don’t let emotions play in — make sure you’re being methodical and systematic with your approach.”

Bronson talked about several areas of risk for those involved in the agricultural industry. Contracts fall into the legal risk area.

“If you’re expecting a downturn, you probably want to contract cattle for a better price,” Bronson said. “But don’t get yourself into a contract you’re tempted to pull out of later because prices shifted.”

The farm bill has been extended for one year, which means legislators will be working on the new measure during an election year.

“I’m a little concerned what type of leverage they’ll have, especially when the cattle market is up,” Bronson said. “Cattlemen are on the radar now.”

Human risk includes the retention or replacement of employees.

Bronson questioned: “If there’s a downturn in the cattle market, can you sustain the employees you have or are you going to have to lay somebody off?”

Mental health is also included in the human risk category.

“Your mental health will need to sustain the emotion you’re putting into the markets Bronson said.

Cattlemen deal with production risks such as weaning weights, mortality rates, replacement availability and genetics on a day-to-day basis.

“Replacement costs are a big area of production risk and just because you’re making good money on calves doesn’t mean you want to pay top dollar for replacements,” Bronson said.

Cost of capital is in the financial risk category.

“The cost of capital is a big deal now with the rate on operating loans, equipment loans and the return on investments for operational shifts,” Bronson said. “You need good financial records because shoebox accounting will not get us where we need to be moving forward.”

Knowing breakevens is important for cattlemen.

“That should include owner labor,” Bronson said. “My wish is that producers can come out of this high market with a little more leverage, but in order to do that you have to know your breakeven.”

Making a plan will help cattlemen as markets fluctuate.

“If you’re selling calves at twice what you did two years ago, your accountant will tell you to go buy something because you’re going to pay a bunch of taxes,” Bronson said. “But if you don’t need a new truck, don’t buy one just to get your tax bill down.”

Cattlemen can use forward contracting as a risk management strategy.

“Think through who you are selling to, when you are selling and the price you are agreeing on,” Bronson said. “If you’re happy with the price, lock it in.”

One of the less obvious risk management strategies is to sell the females this summer and then wait.

“The market is going to come back down and then you’ll be able to buy twice as many females with the same money you got for the females at the top of the market,” Bronson said.

“With end-user marketing, you can hold onto more of the dollar, but there’s risk,” he said. “However, your retail risk is not near as bad in a downturn as your live animal risk.”

Improving weaning weights can result in increased revenue for cattlemen.

“In today’s market, an increase of 5% in weaning weights on a 200-cow herd can lead to $5,500 increased revenue,” Bronson said.

“Next fall, we’re going to have an uptick in prices and they will probably be higher than they were this year,” he said. “Because even if this is a retention year, calf prices are going to be higher because there will be fewer heifers on the market.”

Since the high cattle prices won’t last, Bronson advises cattlemen to think about options outside of what they might normally consider.

“You don’t have to do them, but pencil them out,” he said. “We’re in a position now where we can take these increased revenues and make some changes like paying down notes, improving infrastructure or buying better equipment.”

Develop a risk-management strategy, Bronson said.

“You’ll find you’re more ready when you take the emotion out of the downturn in the market,” he said.