Profitability of Selected Marketing
Alternatives
Todd D. Davis
Extension Economist
Clemson University
1
Objective
• Past Profitability from 1989 - 2005
– Ability to cover cash costs?
• Does it Pay to Retain Ownership?
– Fall Sales vs. Stockering
– Fall Sales vs. Retained ownership in Kansas feedlots
• Can Hedging with Futures Help Reduce Risk?
2
Production Assumptions
• Cow-calf
– 100 cows, 85% calf crop, Selling 500 # steers & 450 # heifers on
Sep. 10
• Preconditioning
– 45 days, Gain 2 lbs/day (1.8 lbs/day), cost $60/hd
• Stockering
– Feed 150 days, Gain 2.00 lbs/day (1.85 lbs/day), Selling 890# steers
& 810 # heifers on March 24
• Finishing
– Feed 210 days, Gain 3 lbs/day, Sell 1250 # steer on May 23
3
Cost Assumptions
• Production costs based on Clemson Univ.
Enterprise Budgets (Cow-calf, stockering,
hay & forages)
• Finishing costs based on Kansas State
University Extension
• Historical input costs from USDA
4
Prices are from …
• South Carolina weekly feeder cattle cash prices
(by weight and sex) from 1989-2005 (USDA
Livestock Market News)
• Kansas weekly cash slaughter steers & heifers
prices from 1989-2005 (Kansas State)
• Daily feeder cattle and live cattle futures and
options data from 1989-2005 (Commodity
Research Bureau)
5
Past Profitability
-- Evaluating 1989-2005
6
Revenues and Total Variable Costs –
SC Cow-Calf Operation ($/hd)
1989-2005 Average Return over TVC= $150/hd
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
$550
$500
$450
$400
$350
$300
$250
$200
$150
$100
$50
$-
7
Revenue and Total Variable Costs – SC CowCalf w/ Winter Stockering Operation ($/hd)
1990-2005 Average Return over TVC = $235/hd
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
$1,000
$900
$800
$700
$600
$500
$400
$300
$200
$100
$-
8
Revenue and Total Variable Costs – SC
Cow-Calf and Finishing Operation ($/hd)
1990-2005 Average Return over TVC = $265 / hd
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
$1,100
$1,000
$900
$800
$700
$600
$500
$400
$300
$200
$100
$-
9
Your labor and management skills are
valuable!
• While you may be profitable in covering your
out-of-pocket expenses…
• Budget a return to your labor and management
skills – don’t work for free! (20% of Total
Variable Costs)
• Think about budgeting a profit margin to help
finance future business investments and growth
10
Does it pay to retain ownership every
year?
11
How do I know if I should retain
ownership or sell now?
• Compare what you gain from retained
ownership to what it costs…
• What you gain Increased Revenue
• What it costs  Additional Cost of Gain +
Lost Revenue (what you could get if you
sell now)
12
Net Increase in Returns from Stockering
vs. Fall Sales ($/hd)
1990-2005 Average = $30/hd
$125
$103
$43
$22 $19
$37
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
$150
$101
$125
$75
$86
$100
$40
$52
$75
$50
$3
$25
$0
-$25
$6
-$50
$13
-$75
$33
-$100
$79
-$125
-$150
13
Net Increase in Returns from Finishing vs.
Fall Sales ($/hd)
1990-2005 Average = -$7/hd
$125
$44
$75 $42
$80
$73
$29
$19
$25
-$25
$22
$43 $48 $29
$28
$7
-$75
$88
$129
-$125
$159
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
-$175
$125
14
Know your costs!
• It pays to budget and to know and monitor
your costs.
• Take the time to evaluate if it is pays to
retain ownership or sell it now.
– The costs and benefits can differ greatly from
year-to-year!
15
Can Hedging with Futures Help With
Reducing Risk?
16
What are Futures?
• They are contracts sold on the Chicago
Mercantile Exchange that allows you …
– “Lock in a price” – Losses in the cash market
will be offset by gains in the futures market
• This can be complicated – Let’s see if we
can use futures/options to reduce risk
– Learn mechanics at another meeting
17
Hedging Assumptions
• Cow-Calf – Sell October Feeder Cattle
Contract on March 1, Offset Sep. 10
• Winter Stockering – Sell April Feeder
Cattle Contract on Oct. 1, Offset March 24
• Finishing – Sell June Live Cattle Contract
on Oct. 1, Offset May 24
18
Net Benefit of Hedging Fall Feeder Calf
Sales – October Feeder Futures *** ($/hd)
$150
1989-2005 Avg. = -$30/hd
$86
$63
$100
$31
$31
$13
$50
1989-2002 Avg. = -$8/hd
$10
$0
-$50 $21
$54
-$100
$85
-$150
-$200
$98
Beneficial
30% of the
time
*** For Educational Purposes Only!
$139
$154
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
-$250
$51 $46
$41
$17
$22
19
Net Benefit of Hedging Fall Feeder Calf Sales & Stocker –
October Feeder & March Feeder Futures *** ($/hd)
$150
1989-2005 Avg = -$28/hd
$85
$110
$100
1989-2003 Avg = -$5/hd
$71
$48
$38
$15
$50
$24
$0
-$50
$10
$38
$38
$44
-$100
$85
$102
-$150
Beneficial
40% of the
time!
$136
-$200
$205
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
-$250
*** For Educational Purposes Only!
$143
20
Net Benefit of Hedging Fall Feeder Calf Sales & Finishing –
October Feeder & April Live Futures *** ($/hd)
1989-2003 Avg = -$5/hd
1989-2005 Avg = -$33/hd
$175
$103
$95
$79
$125
$62
$75
$58
$7
$25
Beneficial
40% of the
time!
$6
-$25
$18
-$75 $49
$83
$88
-$125
-$175
$161
$185
-$225
*** For Educational Purposes Only!
$262
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
-$275
$45
$34
21
Are Futures and Options Useful?
• Sometimes…
• Remember that you’re trying to protect against
low prices
– Futures and Options won’t “Pay” every year
– Consider the revenue provided in a ‘worst case’
scenario
– You can do better than the ‘naïve’ strategies used in
this example!
22
Thank you for your attention!
I will be happy to answer any
questions you may have.
23