The cattle industry in Alabama is experiencing a very challenging year in 2016. The record prices we (along with the rest of the country) have experienced over the last few years have fallen at a rate that few expected, and the prospect of prices regaining a significant positive movement in the foreseeable future seem minimum at best. This alone would be grounds for concern in the cattle industry, but we in Alabama are also facing another increasingly dire situation with drought conditions in the state. Many producers are wondering what the best option(s) are for their operation. While there is no single answer that is right or wrong for cattle producers, there are some factors that all producers should consider as they plan for the future.
The first question that producers have to ask is can I cash flow (pay my bills with money earned from my farm) from the present time until the end of the drought and/or price compression. In order to know the answer to that question, you really need to know your cost of production and what income you can reasonably expect. Cost of production can be described as what it takes per animal unit per year, or per cow or per exposed female, to produce a product that we can sell (calf or cull animal). The only way to know your true cost of production is to keep thorough records that we can analyze and get a personalized cost of production for your particular operation. Statistics from LMIC show estimated average cow costs per year nationally hovering around the $800‐dollar range. Cow‐calf enterprise budgets for Alabama with current input prices show similar numbers with projected cash costs above $700 per cow. These estimates take into account items like interest on operating capital and land rent that many producers don’t have to take into account (or choose not to take into account so that they can sleep at night). However, even if you remove every cost other than what you pay at the feed and fertilize store you still probably have close to or above $500‐600 per cow per year in costs. Prices for 5‐6 weight feeder steers and bulls in Alabama for the week of October 14th averaged between $95‐100 with heifers about $5 behind. Current prices would give us calves that should bring somewhere between $450‐600. These numbers would suggest that if trends continue as expected and we had normal hay supplies and winter annuals, average producers would be expected to be close to breakeven prices with very little room for profitability.
However, this year we don’t have normal hay supplies and winter grazing prospects diminish with each day of drought. Many producers have been feeding hay for several months and have limited supplies to last them through several months of upcoming winter feeding. Feed costs are the most significant costs associated with livestock, and by adding days of feeding purchased feeds producers will have increased costs. This would not have been such an issue over the last few years with calves priced at nearly twice what they are currently bringing, but with reduced prices and tight margins this cost can be extremely significant. There are some things that all producers can do to help with this situation. Producers with young calves can consider early weaning and selling of calves. Producers should also consider culling animals that are hard keepers, open, or are on the long side of productive age for their herd. These options can decrease feed costs and supply capital to buy feed for the remaining herd. Producers can also consider alternative feed options (dependent on availability) that may be lower cost options, such as gin trash and commodity feeds. With that being said, many producers will face tight margins and potentially negative cash flow over the next year.
That leads to the second question that producers have to ask. Am I willing/able to operate at a negative cash flow for a period of time. Negative cash flow doesn’t necessarily mean that our business is losing equity or value, but it does mean that there may be a period of time when costs exceed income. During these periods, producers will have to either borrow money or use personal assets to supplement their farming enterprise. Producers who are not willing to operate at a negative cash flow can consider partial or complete liquidation of herds. Partial liquidation might enable producers to stretch their hay supplies and use receipts from liquidated animals to purchase additional feedstuffs for retained animals. Complete liquidation would eliminate the need to purchase additional feedstuffs, would eliminate potential equity loss if prices decline further, and could allow sales of any retained hay (or other feedstuffs). Producers who choose to liquidate brood animals should consult ACES publication ANR‐2344 Drought Sales of Livestock to assist with tax implications of drought sales of livestock. Producers do have options for avoiding some tax implications of livestock sold during drought situations if they choose to replace those animals within a given time. Alternatively, producers may have the opportunity to postpone some of those tax implications for a period of time if they fall within a Federal Drought Designated area and are not going to replace the stock within the allotted time. There are several things that producers need to understand about using these allowances and the afore mentioned publication should be consulted for details.
The last questions producers must ask themselves is what is my herd worth, how much personal or business equity do I have tied up in it, and am I willing to lose some of that equity now? This will certainly be different for all producers. Producers who have entered the cattle business over the last 2‐3 years should have a significantly higher amount of equity (personal assets) tied up in brood animals. The sharp increase in feeder calves from 2011 to 2015 also signaled a sharp increase in cow, bull and heifer prices as producers (new and old) sought to build up herds and cash in on the historically high prices. Producers who have purchased breeding animals over the last 4 years could easily have from $2‐4000 dollars in each animal. Producers who have been able to retain heifers and already had an established herd should be significantly lower in the cost per breeding animal. However, while established herds and new herds will have substantially different cost values for their animals on their balance sheets, all animals will more than likely be sold at a discount in the current market. This means that producers are going to lose personal equity when they liquidate all or part of their herds. Producers who have been established for some time will have a lower cost per animal in their herd, will have profited from the 3 to 4 years of historically high prices, should have built some amount of equity (2014 was the most profitably year nationally for cattle producers in over 30 years) and shouldn’t lose all of their equity they have built. However, producers who have only entered the industry over the last few years could stand to lose significant amounts of personal equity.
So, producers are tasked with the question of whether to buy feed and stay in the cattle industry, or liquidate all or parts of their herd. There is no simple answer for that question. It is incorrect, however, to say there is no right or wrong answer for that question. There is a right business plan for each producer. Each producer should evaluate their ability to cash flow, purchase feeds, and survive over the next few years until we see prices rebound and the drought end. Cattle producers who have been around a while are certainly aware of the cattle cycle. The cattle cycle (like most things in a capitalistic society) ebbs and flows based on a number of factors, primarily profitability and biology. Heifer retention and herd rebuilding has already slowed down significantly, and looks to slow even more (after the sharp increase of we saw in 2014 and 2015). Cattle inventories should be steady to slightly decreasing over 3 the next few years. Eventually, inventory numbers will provide incentives for feedlots to pay more for feeder cattle and prices will begin to increase again. When will that happen? Again, there is no simple answer to that question. Will prices return to 2014 numbers? It doesn’t seem likely anytime in the near future. Most economic models seem to predict that prices will remain relatively low for the next year or 2, and then begin to rebound slowly. Producers should weight their options based on potential profit from sales based on calf numbers that are as low as they have been since 2010. Producers must look at this scenario and choose between three options, (1) keep their cattle and buy feed with the expectation that they might have a negative cash flow situation and have to supplement cash with personal equity or some form of operating loan, (2) sell all or part of their herd and use the tax exemptions allowed due to drought and purchase brood animals back to replace liquidated animals without tax penalties at a later date, or (3) liquidate livestock and feed supplies in order to minimize equity lost and then evaluate future business plans to consider whether to get back into the cattle industry.
The cattle industry is a commodity industry. There is no certainty for producers as far as prices or profitability. Many producers enjoy being in the cattle industry and are willing to supplement with personal money when times are difficult, or are attempting to build equity in a cattle herd long term with little consideration for yearly profit potential. Many other producers are in the industry to make money that is necessary for personal or family expenses. Each scenario is different. Each scenario must be evaluated based on individual needs and goals. Contact your regional Farm and Agribusiness Agent to assist you in evaluating your herd for current and future needs and plans. Agents can work with you to put together a balance sheet to help you evaluate the health of your farm and your retained equity. Agents will also work with you to assist with plans to ensure that you can cash flow and evaluate equity growth from year to year on your farm.
Here’s a couple more thoughts on some more general drought management strategies.
- “You can’t feed your way out of a drought.” This old time rule of thumb from the West has some truth to it. While we might say it, we often try to do just that, and for good reasons. But, buying feed is expensive and its easy to far surpass the ability to recoup those costs. It has often been better to sell earlier rather than later. The timing with this drought is such that prices have already declined sharply and selling now is right at the point when, seasonally, prices are at their lowest. Figure out now the amount you are willing to spend to keep the herd intact. Biting the bullet now by selling some cows will keep you from spending money feeding the poorer cows in the herd.
- Consider moving the cows to a “sacrificial pasture” where they can be fed. This practice allows the other pastures to rest. It will result in lower costs for feed hauling and your time in driving around to various places. This practice might work well for producers whose cows are spread out over multiple places. If doing this, it will be worth a visit with your landlord to let them know about it. They will likely appreciate knowing that you are moving the cattle off their place to keep the land in good shape. It’s an easy opportunity to earn some goodwill. And to let them know you will move the cattle back when the pastures improve.
- Closely examine feed alternatives. We currently have the lowest corn, wheat, and soybean prices in about a decade or more. There may be some feeding opportunities that will deliver lower cost nutrients to the cows than putting out hay, especially if it is low quality hay. Don’t forget about other feeds like baled up corn stalks, wheat and rice straw, and gin trash. A bigger ranch might consider a tub grinder or other feed mixer equipment that might allow them to deliver feed to the herd at an economic benefit compared to just hay.
- Be proactive at the FSA office on the Livestock Forage Program (LFP). Visit with your FSA office about the forms and information necessary to file as soon as the proper declarations are made on the severity of the drought. The program uses the Drought Monitor to assess the severity of the drought and the length of time in drought conditions