BLACKSBURG, Va. — In March 2012, the prices of feeder cattle reached record highs. By mid-July 2012, the severe drought in the Midwest and the Plains had caused soybean and corn prices to reach record high prices.
Feeder cattle prices have declined due to the record grain prices and forced liquidation of herds due to drought. Many producers are contemplating their future in the industry. Should they hang on and purchase feed or exit the industry?
What will feeder cattle prices be in 2013? Who makes this decision? The owner? The bank? Will health issues force the dispersal of the herd? Sometimes producers are forced to sell their herds ASAP when they are faced with life-threatening health issues.
Tough choice
Does the owner want to stay in business and perhaps lose all his hard earned equity? In my opinion, I feel that psychology plays a prominent role in the decision making process to exit the industry. For many producers, the operation of a cow/calf herd is both a lifestyle and a business.
Many producers have the attitude that “The beef industry has always had times of high and low prices. We have had low prices before and stayed in business. We just have to “dig in” and keep going. Eventually prices will increase.
They always have before. When we decide to sellout there are always farmers who want to expand and buy more land and cattle.
We will be OK
There is nothing to worry about.
The owner’s pride interferes with making sound economic decisions. In addition, fear of the unknown plays a major part in deciding to stay on the farm and continue raising cattle.
Where will we live? Who is going to hire a middle aged man who has always raised cattle and farmed for a living? Human nature says that people like security and do not want to leave their comfort zone.
Planning ahead. Thus producers decide to hang on and the losses in equity mount as feeder cattle prices decline. All businesses will be sold to either a family member or an outside party. We do not live forever. Many producers have made minimal contributions to social security.
Consequently, they will receive minimum payments of social security benefits in their retirement years. The proceeds from the sale of cattle, equipment and land fund retirements.
What happens when a producer sells assets and after debts are repaid and taxes are paid, the producer has few if any funds to show for a life’s work?
What will the producer live on during their retirement years? Do producers want to live in poverty in their retirement years? What is your farm’s exit strategy? On many farms, the younger generation is not interested in taking over.
On these final generation farms, the big question is timing the sale of the beef herd and the farm.
A well-known auctioneer stated that the best time to sell out is when prices are high. To most people, this statement is common sense. With the average age of American farmers around 58 years old, many farmers contemplate retiring and selling their farms in five to 10 years.
When to sell
What levels will feeder cattle prices be at when they decide to exit the industry? Does the beef producer gamble that beef prices will be on the upward trend in the beef cycle when he makes the decision to sell his beef herd?
Fundamental economic principles dictate that at some time in the future, replacement heifer numbers will increase which will expand the national beef cow herd.
This will increase the number of fat cattle being slaughtered and increase beef supplies. Consequently, the larger supplies of beef available in the market place will lower prices of feeder and fat cattle and profit margins.
Beef prices are cyclical. Although feeder cattle prices have declined due to the drought, current prices are relatively high compared to historical prices.
Prior to the increase in feeder calf prices in April 2010, the ten-year average price for Virginia producers was approximately $1 per pound for feeder steers.
For farmers who plan to sell their farms in the next five to 10 years, this may be an excellent time to disperse their herds since current prices are well above the 10-year average.
The bottom line is as follows: Does the producer want to remain in control of his business and decide to sell the farm on his time frame (maintaining equity for retirement) or will he let others (e.g. bank, doctors) make these decisions for him?
Remain competitive
On the other hand, producers who elect to stay in business for the long run need to position their businesses to remain competitive for the inevitable decline in feeder cattle prices. In the coming years, the cow/calf producers who survive and remain competitive (maintain and increase equity) are the ones who have the lowest production costs in a volatile world market place.
Maximizing profit per unit of production (cwt.) can be achieved by year round grazing. Many producers incorporate stockpiling forages into their grazing systems as a way to eliminate the need to bale hay to feed their animals during the winter months.
By having the cattle harvest their forage year ’round, producers are able to use less machinery and reduce their overhead costs. Sometimes producers may need to reduce stocking rates in order to have enough acreage for the animals to graze year round.
(Peter Callan, peter.callan@vt.edu, is an Extension Agent, Farm Business Management, Northern District, Virginia Cooperative Extension.)
