Cattle marketing during an economic downturn

Beef prices have ridden a world-class roller coaster in recent years, making profitable cattle marketing an enormous challenge. Prices peaked in 2014, going as high as they’d been in recent memory. However, they began a downward slide in mid-2015 before tanking through most of 2016.

cattle marketing

Troy Hadrick, pictured with wife Stacy, recently began doing things different when it came to his cattle marketing efforts. Those efforts helped him and other producers get through a recent run of the worst cattle prices the industry has seen in some time. (photo courtesy of advocatesforag.com)

Troy Hadrick is a producer from Faulkton, South Dakota, who rode the highs and lows in beef cattle prices, experiencing firsthand the challenges that low prices present. While fed cattle prices had rallied from October of 2016 into early this year, the business is cyclical and low prices will come around again. Hadrick said it is possible for beef cattle producers to make it through the down times, provided they’re willing to try new things.

There are a lot of theories as to why prices began a free-fall in 2015, falling at an unprecedented pace. Before prices got to that point, Hadrick says beef saw a perfect storm of conditions that drove prices to record highs in 2014. A large number of pigs in the U.S. had died of PED so pork production was way down. An Avian Influenza outbreak had pushed chicken and poultry production lower as well. Combine those facts with the lowest cattle numbers America had seen since the 1940s and you have the recipe for high beef prices.

“There wasn’t enough beef and protein to go around,” Hadrick said, “so our industry did what it always does. It responds and makes a bunch more of the product.”

But the number of cattle head in the herd doesn’t paint the full picture. It’s more about the pounds of product the industry produces. High prices meant producers were getting cattle as fat as possible to produce as many pounds as possible. The industry was at record carcass weight during the boom.

“We were producing carcass weights of approximately 850 pounds at that time,” he said. “Our recent carcass weights were around 814 pounds. So if we kill approximately 500,000 head a week, take that times 30 pounds a head, and look at the difference. The population stays the same as we’re killing the same number of head but the amount of product we’re producing is different.”

Needless to say, prices going from record highs to unbelievably low prices came down hard on the beef industry. There’s no doubt producers were pushed out of business as profits margins shrank to razor-thin levels. Theories ranging from oversupply to market manipulation abounded as the industry was under stress. Hadrick is very sympathetic to the plight of his fellow producers, having gone through the downturn himself. He does want to point out that if producers are willing to try new things, it’s possible to weather the downturns more efficiently.

Back in 2012, the Hadricks began changing their breeding and marketing programs for their cattle. There are different grades of beef and those grades are priced differently.

 

 

Higher quality beef demands a higher price because there’s less of it available. There’s a good demand for higher quality beef because it tastes better.

“We started shooting to produce cattle that would give us the beef that would qualify for these premium programs, such as Certified Angus Beef and USDA Prime,” he said. “If you produce cattle that fit into those categories then you get a nice premium price for your product.”

They did a couple of different things to try to speed up the process of producing premium beef. The family implemented an AI program on the ranch that covered the entire herd, using the best genetics they could find on the market to help them produce the highest quality beef. There’s a lot of data being collected on sires and they looked for the bulls that could get the job done.

So, with that as their focus, here’s where they did something different from what might be considered the ‘norm’ in beef production. Their cattle go down south to be finished but the Hadricks retain ownership.

 

 

“Those cattle are then marketed on a grid,” Troy said. “They harvest those cattle, they hang on the rail, and they’re graded by a USDA Inspector. Based off of that grade and the weight, that’s how the price we receive is calculated. We don’t know the final value of the cattle until they’re hanging on the rail as meat.”

Obviously, there’s a risk of being discounted when you market on a grid. The actual grid is just like other grids you may have seen. For example, if a particular animal graded Prime and was a Yield Grade 3, you follow those two columns and where they meet, that’s what the price was that week for that animal and that’s what we’re paid.

“We started our program with AI and then combined it with genomic testing,” Hadrick said. “We would take DNA samples from some of our cattle, get it analyzed, and that would give us an indicator as far as which cattle would perform well on the grid. We’d also keep back those females that would produce the best calves.”

Between those two technologies, Hadrick said their production went from grading 90 percent Choice, 35 percent Certified Angus Beef, and no Prime, to cattle that finished 57 percent prime, and 100 percent Choice. Hadrick said producers get really good premiums for numbers like that.

“The nice part about it is it doesn’t cost us any more money to raise those cattle,” he said. “It doesn’t cost us any more to feed them, either. Of course, we have to get them bred, but at the end of the day, they’re worth more money.”

There is an additional cost with the genomic testing, but Hadrick says it’s worth it to them because the idea is to identify the cattle that are going to make the family money and those that won’t. They sort cattle accordingly and market those cattle accordingly.

The Hadrick cattle are harvested through a cooperative called U.S. Premium Beef. It’s a rancher-owned cooperative based in Kansas that owns parts of the National Beef Packing Plants in Dodge City and Liberal, Kansas. Hadrick said some visionary people put this idea together back in the 1990s.

“They wanted to give producers the incentive to produce better beef,” Hadrick said, “and they wanted food service businesses and consumers that need beef to be able to come and know they’re getting the highest quality beef. They also wanted to reward the producers that could give them the highest quality beef consistently.”

The grid system runs off what they call plant average. Hadrick said in order to get the premiums, producers have to bring in cattle that are better than what everyone else brings in. That can be a big challenge as they’re attracting a lot of cattle that are high quality right from the start.

The plant isn’t buying cattle from the Hadricks, but instead, they’re buying carcasses. Hadrick said that makes it much harder for producers to try to sneak a bad one through the plant. There’s no hiding a poor carcass once the hide comes off.

He said the new system has advantages from the traditional way of doing business in the cow/cattle industry.

 

 

“On the farming side of things, we got into ethanol, we got into crushing soybeans, in order to get our product closer to the end point,” he said. “The closer you sell your product to the final consumer of your product, the more you’re going to get for it because you’ve added some value to it.”

He said doing business this way isn’t easy. Producers have to manage risk more, they have to have a relationship with the packer, and with the feedlots they work with. Producers also have to know their cattle because they won’t get away with trying to slip a bad one through the chain.

“If you market average cattle, you’re going to get an average price,” Hadrick said. “We’re trying to do things a little differently to do things better.”

Sheep and goats getting more popular on southeast MN farms

The sounds of sheep and goats on southeast Minnesota farms are becoming a little more common than most residents realize. The last couple of years have seen increasing interest in raising the smaller breeds of livestock for a variety of reasons.

sheep and goats

Sheep and goat numbers are picking up on farms across southeast Minnesota, due in part to the smaller size of the animal, especially when it comes to 4H competition.

As sheep interest continues growing in both Houston and Fillmore counties, the Extension Service will host a couple of sheep-related workshops this summer. A sheep producer workshop is set for Rushford on June 16th, with a sheep workshop for area 4H members on the 17th in Preston. Extension Educator Michael Cruse said many area residents might not know that sheep and goat numbers are on the rise.

“Sheep and goats are on the increase in Houston and Fillmore counties,” Cruse said, “especially for 4H projects. There are a number of reasons for this, but the primary reason is they’re smaller animals and easier to handle for 4H kids.”

He said the sheep producer meeting in Rushford is a unique opportunity for area livestock farmers. The University of Minnesota Extension Service recently hired a Sheep Specialist named Travis Hoffman, who the U of M is sharing with North Dakota. After talking with Hoffman over the winter, Cruse wanted to put together a couple of events to maximize his time if he made the trip to southeast Minnesota.

sheep and goats

Houston and Fillmore County Extension Agent Michael Cruse is putting on Extension programs for sheep farmers and 4H kids that want to exhibit sheep and goats at local competitions. (photo from bluffcountrynews.com)

“That’s why we put together a two-day event, starting on June 16th from 2-5 pm,” Cruse said, “Hoffman will be here to do a producer meeting in Rushford and talk about everything from lamb marketing to production management to economics, with a pizza supper at the end.

“A lot of the raising and marketing of sheep is similar to other types of livestock,” Cruse added. “But with sheep, there are a lot of products you can get from them. You can market the wool, the meat, or market them as show animals. There’s a whole range of avenues you could take, and that doesn’t even take into account the organic and grass fed categories that beef is also subject to.”

He said producers would have a chance to visit with both Hoffman and Cruse after the meeting. Then, the attention turns from sheep producers to 4H kids the next day from 8 till noon at the Fillmore County Fairgrounds.

“It’ll be a rotational type of educational event with three or four sessions for the youth,” Cruse said. “Showmanship will be one of the educational sessions as Travis (Hoffman) was also a state judge for sheep. The kids will be allowed to bring one of their own 4H-registered sheep to this event in order to practice showing their sheep, learning to get their feet in the right spot, and how to answer a judge’s questions professionally.”

He said this is a great opportunity for area 4H kids to learn, providing they can get enough people signed up.

Cruse said there are a number of reasons for the growing interest in sheep and goats across the area. First and foremost, there are marketing opportunities for sheep and sheep products, especially in Iowa. There’s also an immigrant population in Rochester and the Twin Cities that prefers both sheep and goat meat.

The other side of it is the animals themselves. They’re much smaller and don’t require as much land to raise, especially for 4H families. Sheep and goats don’t need as much space as a beef cow or larger hog.

“It’s a lot easier to get three or four ewes onto a piece of property than a full-grown dairy steer, for example,” Cruse said. “It’s also easier for the younger children in a farm family to handle the animals too.

 

 

 

 

 

 

MDA value added grants available for Minnesota agriculture

Value added agriculture grants are available from the Minnesota Department of Agriculture.

Exporting soybeans overseas is one way to add value to Minnesota’s agricultural products. The Minnesota Department of Agriculture has grants available for adding value to all kinds of agricultural products. (photo from archive.constantcontact.com)

Value added to agriculture sustains the long-term success of the industry and The Minnesota Department of Agriculture (MDA) wants to ensure the industry’s future.  The MDA has up to $1 million in grants available through the competitive Value Added Grant Program. The grant was established to advance Minnesota’s agricultural and renewable energy industries through the Agricultural Growth, Research and Innovation (AGRI) Program.

The goal of the Value Added Grant is to increase sales of Minnesota agricultural products. Some of the ways to add value include  diversifying markets, increasing market access, and increasing food safety of value-added products.

Dave Frederickson supports value added agriculture in Minnesota

Minnesota Agriculture Commissioner Dave Frederickson notes that value added agriculture does a lot to support the state’s economy, including the off-farm sectors. (Photo from mda.state.mn.us)

“Value-added businesses benefit the state of Minnesota in lots of ways,” said Commissioner of Agriculture Dave Frederickson. “They utilize Minnesota grown agricultural products in creative ways and the extra sales revenues help support our state’s economy. It’s exciting to watch Minnesota entrepreneurs improve their businesses with funding from the Value Added Grant Program.”

New or established for-profit businesses may apply for funding to help with the development of value-added agricultural products.  Some of the ways value gets added to agricultural products include added processing, marketing, or manufacturing. Grant funds reimburse up to 25 percent of the total project cost.  The maximum award is $150,000 and the minimum grant is $1,000. Equipment purchases and facility improvements are also eligible ways to add value to agricultural products.

Applications must be received no later than 4:00 p.m. on Tuesday, September 27, 2016. Applications are available at www.mda.state.mn.us/grants/grants/valueaddedgrant.aspx and may be submitted online, by mail, or in-person.

Famers assessing their finances for 2016

January is a time when farmers are typically doing paperwork, looking back at 2015 ahead of the upcoming tax season.

What some may find is their books don’t necessarily balance they way they want. The good news is, it’s possible to make better decisions in a difficult Ag economy if you have a clear understanding of where you’re operation is at financially.

Rob Holcomb wants farmers to keep a sharp eye on their finances heading into 2016.

Rob Holcomb is a University of Minnesota Extension Educator, specializing in Ag Business Management over in the Marshall regional office. (Photo from extension.umn.edu)

“What I’m seeing happening right now is people in the habit of doing a FINPACK (software from the Center for Farm Financial Management) analysis,” said Rob Holcomb, Ag Business Educator for the University of Minnesota Extension Service, “including balance sheets and income statements, are really analyzing what happened in 2015.”

He added, “A lot of people are doing analysis, and unless they’ve got some special circumstances, farm returns are due on March 1.”

Dave Bau is encouraging farmers to get their finances in line.

Dave Bau is a University of Minnesota Extension Educator also specializing in Ag Business Management, and based in the Worthington office.

Looking ahead to 2016, Holcomb said the financial condition on farms is a mixed bag.

“We had people last year that had big trouble managing the tax bill,” Holcomb said. “What led to this challenge was the buildup of $8 per bushel corn, which caused more trouble than first thought. You hate to be negative about it, but I knew it would cause trouble down the line, and that’s what we’re finding now.”

He said certain farmers were doing a lot to avoid paying some taxes, like deferring income to the next year.

“They were also maxing out on pre-payments,” Holcomb said. “The problem is, a lot of farmers were rolling these massive deferred tax liabilities forward every year, even though they’re showing a loss. They may have a loss over the last couple years on their accrued farm income, but they still have this cash they have to deal with, because if they don’t do it, they have a monstrous tax bill.”

He said a lack of steady farm income leads to an obvious problem in that situation.

“The challenge is the recent lack of cash flow is such that they can’t afford to have that big tax bill,” Holcomb said. “In a sense, they’ve backed themselves into a corner with their tax problem.

“But that’s not everybody,” he added. “Some folks have been paying a little more as they go and didn’t have a big aversion to paying taxes, I think those folks are in much better shape.”

Holcomb said one of the big buzzwords in the Ag industry is working capital.

“It’s a current and intermediate cushion that the farmer has,” Holcomb said. “The more working capital you have, the better. Unfortunately, we’ve been burning some working capital over the last couple years. That’s probably the thing that lenders are getting the most squeamish about right now.

The lack of working capital on some farms is showing signs of getting serious.

“I got a call last week from a banker in my area that was asking about lender mediation,” Holcomb said. “That conversation can only be the result of one thing, which is a farmer out there that the bank is getting ready to pull the plug on.

“That means there are farm folks who could be in tough shape,” he added.

He’s especially worried about young farmers.

“When the $8 per bushel corn began coming down,” Holcomb said, “some of the younger guys were paying ridiculous land rental rates to try and get their hands on some acres to work. The problem is they’ve got the least ability to weather out low prices because they don’t have a lot of working capital. They have a cost structure that’s not sustainable.”

High land rental rates are squeezing farmers finances.

The high cost of land rental rates in farm lease contracts are putting a heavier squeeze on farmers and their financial bottom line than we’ve seen in several years. (photo from americasnewfarmers.org)

Rents are beginning to come down, but they have a ways to go to ensure profitability for both farmers and landowners.

Rent is the largest input cost for corn and soybeans,” said Dave Bau, University of Minnesota Ag Business Management Educator in Worthington. “Rents are going down, but at current corn and bean prices, they should be around $100 to $125 an acre. Even base rents on flexible leases are still much higher than this.”

There is still pressure on farmers for land rents to remain very high for at least one more year.

“Farmers are doing more and more flexible agreements with a base rent and additional rent if prices improve,” Bau said. “With other input costs not coming down significantly, break-even prices for corn are $3.80 to $4.00 for corn, and $9.50 to $10 for soybeans.”

Bau adds, “Cash prices currently are around $3.40 for corn, and $8.25 for soybeans.”

With this much economic gloom ahead, what’s the key to surviving the downturn in 2016?

“I think the number one thing is you have to get your cost structure in line,” Holcomb said. “Land rent is one of those high costs that can be negotiated. $400 land rent won’t work right now.”

One of the best things farmers can do is figure out where they’re at financially before they make decisions on the year ahead.

“The farmers I fear for the most are the ones that aren’t doing any kind of financial analysis,” Holcomb said. “They have no idea where they’re at. It’s a sad situation when they find out they’re in trouble, and it’s their banker that tells them”

He added, “The smart producers know where they’re at, and that can alleviate a lot of trouble.”

Farmers need to do a better job of marketing their products in 2016.

“There are marketing workshops going on around the state,” Holcomb said, “and I think it’s really important to look at that.”