Risk Management Issues Facing Beef
Cattle Production
ERME Pre-Conference
The Changing Role of Risk in Livestock Production Management
April 2, 2013
Shannon Neibergs
Associate Professor Extension Economist, Director WCRME
Overview of Presentation
• Price variability and market risk in beef markets
• Cattle risk management options
• Production management risk issues
• Feed additives - Ractopamine
• New management tools
Monthly Meat Price Spreads
http://www.ers.usda.gov/data-products/meat-price-spreads.aspx
Beef Price Spread Analysis
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•
•
•
•
•
•
•
Net Farm Value share of retail value increasing since 2010
Derived demand market is driven by the consumer (domestic and export)
Beef demand continues to struggle in the start of 2013
First quarter beef production is lowest since 2006 down 3% from 2012
Beef production down due to decreased slaughter numbers – carcass weight increasing
Composite cut-out value has an apparent price ceiling at $200 cwt
Fed cattle trading to trend below $130 cwt
Substitution effects between protein products limits price gains
Meat in cold storage is relatively high
Source: DLR Vol. 11, No. 16 / January 23, 2013
Beef export trends
U S BEEF EXPORTS TO MAJOR MARKETS
Carcass Weight, Monthly
Mil. Pounds
90
80
Japan
70
60
Canada
50
40
30
Mexico
20
10
0
2005
2006
2007
2008
Livestock Marketing Information Center
Data Source: USDA-ERS & USDA-FAS
2009
2010
2011
2012
2013
I-N-35
03/11/13
South
Korea
Cattle on Feed Profitability
AVERAGE RETURNS TO CATTLE FEEDERS
Feeding 725 Lb. Steers, S. Plains, Monthly
$ Per Head
275
225
175
125
75
25
-25
-75
-125
-175
-225
-275
-325
2004
2005
2006
2007
2008
2009
Livestock Marketing Information Center
Data Source: USDA-AMS & USDA-NASS, Compiled & Analysis by LMIC
2010
2011
2012
2013
C-P-22
03/15/13
Negative profit pressure on feeder prices
MED. & LRG. #1 FEEDER STEER PRICES
700-800 Pounds, Southern Plains, Weekly
$ Per Cwt.
170
160
Avg.
2007-11
150
140
130
2012
120
110
2013
100
90
JAN
APR
Livestock Marketing Information Center
Data Source: USDA-AMS, Compiled & Analysis by LMIC
JUL
OCT
C-P-49
03/25/13
And calf price
MED. & LRG. #1 STEER CALF PRICES
400-500 Pounds, Southern Plains, Weekly
$ Per Cwt.
235
Avg.
2007-11
215
195
175
2012
155
135
2013
115
JAN
APR
Livestock Marketing Information Center
Data Source: USDA-AMS, Compiled & Analysis by LMIC
JUL
OCT
C-P-49A
03/25/13
Cow – calf returns
COW-CALF RETURNS
AND CATTLE INVENTORY
$ Per Cow
180
U.S., Annual
Mil. Head
120
140
115
100
110
60
105
20
100
-20
95
-60
90
-100
Cow-Calf
Returns
Cattle
Inventory
Jan 1
85
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Livestock Marketing Information Center
Data Source: USDA-AMS & USDA-NASS, Compiled & Analysis by LMIC
C-P-67
12/18/12
Cattle on Feed – will declining supply drive price?
CATTLE ON FEED
US Total, Monthly
Mil. Head
12.0
Avg.
2007/11
11.5
11.0
2012
10.5
2013
10.0
9.5
JAN
FEB
MAR
APR
MAY
Livestock Marketing Information Center
Data Source: USDA-NASS
JUN
JUL
AUG
SEP
OCT
NOV
DEC
C-N-10
03/22/13
Cattle Risk Management Options
Cow-Calf Market Risk
Favorable calf prices have eased market risk
management for cow-calf producers – given adequate
forage availability.
Market Risk Management Options
1. Forward Contract
•
•
Direct to feedlot
Backgrounding operation
2. Hedging – risk transfer
a. Offset futures market contract transaction with local
cash market
b. Futures Market
• Feeder Cattle Contract 50,000 lbs, 650-849 lbs
• Live (Fed) Contract 40,000 lbs, 55% Choice, YG 3
c. Options Market
• Put and call collar strategy
Basis – Price difference between Chicago and Toppenish
428 S. G Street
Toppenish WA 98948
Market Risk Management - Basis
www.BeefBasis.com
BeefBasis.com current hedge analysis
Market Risk Management Options
3.
LRP (Livestock Risk Protection) insurance is an USDA RMA
insurance policy intended to provide protection against a price
decrease for feeder and fed cattle.
•
If the Actual Ending Value is below the Expected “Insured” Ending Value a
loss may be paid relative to the Producer’s chosen coverage level.
LRP Parameters
To Execute a LRP insurance policy
When purchasing an Specific Coverage Endorsement (SCE) through an
insurance agent (http://www3.rma.usda.gov/tools/agents/companies/indexLPI.cfm)
Producer Determines:
Number of head to insure
Date and weight expects to market livestock
Producer Selects:
Coverage price
Endorsement length
Producer Pays premium:
Endorsement in effect upon receipt of RMA approval number
LRP Purchase Coverage Prices, Rates
http://www3.rma.usda.gov/apps/livestock_reports/main.aspx
LRP Actual Value Feeder Cattle Price Index
http://www.cmegroup.com/market-data/datamine-historical-data/cash-settled-commodity-index-prices.html
LRP Coverage Prices, Rates and Actual Ending Values
http://www3.rma.usda.gov/apps/livestock_reports/main.aspx
RLRP Coverage Prices, Rates and Actual Ending Values
Risk Averse Scenario - choosing highest coverage available
Endorsement
Length
13 weeks
Notes
Expected end value
$159.739
From RMA Table
Coverage Level
0.9629
Producer Choosen
Coverage Price
$153.813
From RMA Table
Cost / cwt
$2.644
From RMA Table
Assume 100 600 lb Feeders
600
Cwt insured
Insured Value
$92,288
Insure coverage price
Premium Payment
$1,586
Cost * insured weight
Subsidy 13%
$206
13% subsidy
Net Premium Payment
$1,380
Net premium payment
Actual End Value
$138.83
CME price index
Indemnity Payment
$8,989.61
(Coverage-end)*cwts
Gain/(loss) in expected market value
($12,545.40) ROUGH estimate of market loss
Gain/(loss) in LRP investiment
ROI on LRP
$7,609.44 Indemity - net premium payment
551%
Gain / net premium payment
Market Risk Management Options
3.
LGM Cattle (Livestock Gross Margin Cattle) insurance is an USDA
RMA insurance policy intended to provide gross margin protection
between fed cattle price and (cattle feeder cost and feed cost).
LGM Cattle
 LGM for Cattle is different from traditional options in that LGM for
Cattle is a bundled option that covers both the cost of feeder cattle
and the cost of feed. This bundle of options effectively insures the
producer’s gross margin (cattle price minus feeder cattle and feed
costs) over the insurance period.
 Indemnity at end of 11-month insurance period is the difference, if
positive, between gross margin guarantee and actual gross margin
 Does not insure against loss due to death or damage to cattle
LGM Cattle
 Expected/Actual gross margin per head of cattle for a yearling
finishing operation =
(12.50 * Live Cattlet) – (7.50 * Feeder Cattlet-5) – (50 * Cornt-2)
 Gross Margin Guarantee = Expected gross margin – deductible

Deductibles from $0 to $150 per head
 The premium is calculated by a determinant Monte Carlo simulation
procedure
 Indemnity payment = Gross margin guarantee – actual gross margin
if greater than zero
U.S. LRP and LGM Summery of Use
LRP and LGM Policies and Loss Ratios
Number
Number
Policies Earning
Policies Earning
Premium
Indemnity
Loss Ratio
LRP
LGM
LRP
LGM
LRP
LGM
2008
715
32
500
22
1.62
1.30
2009
410
21
242
8
1.60
0.37
2010
803
9
441
0
0.48
0.00
2011
1460
8
447
2
0.16
0.10
2012
1228
2
669
1
1.15
1.58
Federal Crop Insurance Corp. Summary of Business - Livestock
as of 03/28/2013
http://www3.rma.usda.gov/apps/sob/soblpi/commodity.cfm
2012 LRP by State Use
2012 By State LRP Feeder Cattle Summary of Business and Loss Ratios
State
ALABAMA
ARKANSAS
CALIFORNIA
COLORADO
GEORGIA
IOWA
IDAHO
ILLINOIS
INDIANA
KANSAS
KENTUCKY
MICHIGAN
MINNESOTA
MISSOURI
MISSISSIPPI
MONTANA
NORTH CAROLINA
NORTH DAKOTA
NEBRASKA
NEW MEXICO
OHIO
OKLAHOMA
OREGON
SOUTH DAKOTA
TENNESSEE
TEXAS
VIRGINIA
WASHINGTON
WISCONSIN
WEST VIRGINIA
WYOMING
Policies
Policy Number Avg head
Total
Earn Prem Indemnity of Head
policy Liabilities Premium Subsidy Indemnity
2
2
50
25
43,417
1,272
164
2,862
2
1
157
79
162,756
1,591
207
7,530
0
0
0
0
0
0
0
0
22
5 2,416
110 2,502,953
55,826
7,256
28,313
2
2
346
173
373,240
11,716
1,523
27,302
29
15 4,839
167 5,027,134 119,003 15,471 177,078
12
5 1,006
84 1,046,433
27,950
3,635
32,099
1
1
7
7
5,986
91
12
162
3
2
340
113
357,539
7,049
917
3,182
157
96 24,199
154 23,766,208 434,697 56,523 684,973
9
5
911
101
908,370
12,388
1,610
21,152
0
0
0
0
0
0
0
0
14
7 1,305
93 1,508,524
36,715
4,774
17,302
47
27 9,716
207 10,373,453 227,288 29,550 382,629
1
1
75
75
69,774
2,570
334
2,298
34
26 5,005
147 4,997,361 161,322 20,973 266,565
0
0
0
0
0
0
0
0
126
68 15,745
125 17,722,975 381,829 49,634 687,019
231
136 27,202
118 27,122,685 773,296 100,527 976,992
2
1 2,180
1090 2,850,892
94,867 12,332
98,814
0
0
0
0
0
0
0
0
87
33 25,743
296 27,217,127 467,110 60,724 425,890
11
8 2,267
206 2,751,545
79,886 10,384
95,394
278
133 40,855
147 41,475,990 1,278,042 166,138 1,046,667
21
12 3,884
185 4,095,138
43,029
5,594
29,647
8
5 1,608
201 1,603,665
22,698
2,951
30,420
23
17 1,843
80 1,984,994
40,916
5,319
95,248
10
9
580
58
592,993
24,283
3,157
44,078
5
3
253
51
275,398
6,970
906
1,069
20
5 1,569
78 1,736,826
33,933
4,415
21,927
17
11 2,944
173 3,481,959
98,369 12,787 181,760
Federal Crop Insurance Corp. Summary of Business - Livestock as of 03/28/2013
http://www3.rma.usda.gov/apps/sob/soblpi/commodity.cfm
Loss
Ratio
2.25
4.73
0
0.51
2.33
1.49
1.15
1.78
0.45
1.58
1.71
0
0.47
1.68
0.89
1.65
0
1.8
1.26
1.04
0
0.91
1.19
0.82
0.69
1.34
2.33
1.82
0.15
0.65
1.85
AGR – Lite Revenue Insurance
Adjusted Gross Revenue (AGR) –Lite is a whole-farm/ranch revenue protection plan of insurance.
•
•
•
Uses a Producer’s 5 year historical farm average revenue as reported to IRS on Schedule F.
Provides insurance for multiple commodities in one insurance product.
Widely available (WA, ID, OR and several others).
Revenue
Premium Coverage
Subsidy Levels
48%
80%
55%
75%
59%
65%
•
Subsidized premium:
•
Insurance based on revenue but Schedule F expenses are reviewed.
•
March 15 purchase deadline.
Market Risk
No matter what market risk tool you chose
to use, you still need to market the cattle
and deliver them to a sale point.
http://texashistory.unt.edu/ark:/67531/metapth43358/
Production Management Risk – Feed additive
Change in beef production management due to ractopamine hydrochloride
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•
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•
Very effective feed additive to promote lean muscle growth
FDA approved and commercially available since 2004
Optaflex and Zilmax for beef, Paylean for swine
Partitions nutrients from fat growth to lean growth through increased protein
synthesis
• Trials show 17 to 21 lbs increased gain and increased dressing percent with
limited impact on quality grade
Production Management Risk – Feed additive
Impacts in beef production management due to ractopamine hydrochloride
• Cattle can be placed in feedlots heavier but are on feed relatively longer to
increase lean carcass weight
• Packaging issues
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•
•
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Larger rib eyes increases ability for thin cut steaks and maintain adequate portion size
Traditional grilling steaks are larger and priced on weight are expensive
Changing how families eat steak as they are passed around the dinner table, or will consumers
accept steaks cut in half
Increased size of roasts are not as much an issue and increased trim is beneficial in the
hamburger production chain
Production Management Risk – Feed additive
Market risk due to ractopamine hydrochloride
• FDA approval does not ensure consumer acceptance
•
•
bST and fluid milk
Ammonium hydroxide treatment of Lean Finely Textured Beef
• Trade restrictions on ractopamine
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•
•
•
Russia, China, European Union
Separate production / processing systems if packer wants to serve those markets
• Differential demand across the carcass cuts
Agreeing to ship ractopamine free pork and beef to these markets could lead other countries to
introduce similar restrictions
If producers stop using ractopamine at a time of record-high feed prices, they will see their losses
increase
Production Management Risk – Marker assisted selection
Examples of genetic markers under investigation
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•
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Disease susceptibility to BRD
Feed efficiency
Meat quality
Grazing tendency
Reproductive efficiency
• Marker assisted selection
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•
Marker assisted selection effective for individual trait phenotypes
Work needed on determining the co-variance between genetic markers
• Positively or negatively correlated
• Heritability of traits
• Economic importance
• Marker assisted selection implemented at cow-calf level
•
Extract market value of improved genetics at weaning
• Value of preconditioned calves
• Retained ownership
Summary and Questions
Thank you
Shannon Neibergs
sneibergs@wsu.edu
509 335 6360