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Beef Production in the New Economic Environment. GEOFF BENSON, PhD Extension Economist Dept of Agricultural and Resource Economics North Carolina State University. Outline. Situation and Outlook Beef Production Sales Prices Forecasting prices Cost of production Weathering the Storm.

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Beef production in the new economic environment l.jpg

Beef Production in the New Economic Environment

GEOFF BENSON, PhD

Extension Economist

Dept of Agricultural and Resource Economics

North Carolina State University


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Outline

  • Situation and Outlook

    • Beef Production

    • Sales

    • Prices

  • Forecasting prices

  • Cost of production

  • Weathering the Storm

GEOFF BENSON, ARE, NCSU


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Beef Production, 2001-09F

Source: USDA, WASDE reports

GEOFF BENSON, ARE, NCSU


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Meat Production, 2001-09F

Source: USDA, WASDE reports

GEOFF BENSON, ARE, NCSU


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Consumer Demand

  • At Home

    • Muscle Meats

    • Processed Meats

    • Prepared Foods

  • Meals Eaten Out

GEOFF BENSON, ARE, NCSU


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Meat Demand Outlook

  • Economic Outlook for 2009

    • Income: GNP down 2.0% from 2008

    • Inflation: 1.2%, down from 2008 (~ 3.8%)

    • Unemployment: 8.4% up from 5.8% in 2008

    • Population growth: Up ~ 0.9%

    • Other -- demographics, diet fads, etc.

  • Meat demand down ~ 1.1 lb./person

    • Beef down 0.6 lb. per person

    • Chicken down 1.1 lb. per person

    • Pork up 0.7 lb. per person

GEOFF BENSON, ARE, NCSU


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.

GEOFF BENSON, ARE, NCSU


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Prices, 2001-09F

Source: USDA, WASDE reports

GEOFF BENSON, ARE, NCSU


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2009 Price Outlook

  • The futures market gives the best indication of what prices are likely to do because participants are putting their money where their mouths are

  • BUT, prices do move based on new information, both expected and unexpected

  • AND an individual producers cattle may not match the contract specifications, so projecting prices takes some extra effort

GEOFF BENSON, ARE, NCSU


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Fat Cattle Futures, $/100 lb, 3/6/09

GEOFF BENSON, ARE, NCSU


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Feeder Cattle Futures, $/100 lb, 3/6/09

GEOFF BENSON, ARE, NCSU


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What does all this for me?

  • Cow-calf:

    • Value of your cattle – their particular characteristics

    • Time of year of sale

    • Cost of production

  • Stockers:

    • Buying price and selling price

    • Cost of gain

GEOFF BENSON, ARE, NCSU


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Feeder Cattle Futures, $/100 lb, 3/6/09

GEOFF BENSON, ARE, NCSU


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Price Forecasting

  • Nearby Futures Contract Price for sale month

  • “Basis” = futures price – local cash market price for similar product

  • Use premiums & discounts to estimate the value of your cattle

    • Weight

    • Sex

    • Frame size

    • Muscling

    • Breed or cross

    • Other, e.g., market channel

GEOFF BENSON, ARE, NCSU


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Price Forecasting

  • The most useful comparison for a cow-calf producer is the NC cash (spot) price and the feeder cattle futures price for the closest month past the intended sale month

  • But

    • CME feeder cattle futures contract is for 650-849 lb. M&L 1&2 steers in truckload lots

    • NC Auction Prices are for 600 to 799 lb. M&L1&2 steers

    • Contract months are Jan, Mar, Apr, May, Aug, Sept, Oct, & Nov.

GEOFF BENSON, ARE, NCSU


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“BASIS”

  • Basis is the difference between the spot cattle price in North Carolina and the price for comparable cattle in the futures market

  • If basis is predictable, then we can use the futures market to project local North Carolina prices and use this to make business decisions

  • Some historic basis data are available at http://www.ncsu.edu/project/arepublication/AREno32.pdf

GEOFF BENSON, ARE, NCSU


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NC Basis, Avg. 1990-2000

GEOFF BENSON, ARE, NCSU


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NC Basis, 1990-2000

  • Negative

  • Seasonal: Smaller in spring, larger negative differences in the fall

  • Varied by market, west to east

  • Updated information is not available

GEOFF BENSON, ARE, NCSU


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Price Forecasting

  • Futures Contract Price for sale month

  • “Basis” = futures price – local cash market price for similar product

  • Use premiums & discounts to estimate the value of your cattle

    • Weight

    • Sex

    • Frame

    • Muscle

    • Breed

    • Time of year/seasonality

    • Other, e.g., market channel

GEOFF BENSON, ARE, NCSU


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Graded Sales, M1 Steers, 1991-2001

.

GEOFF BENSON, ARE, NCSU


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Graded Sales, M1 Steers, 1991-2001

.

GEOFF BENSON, ARE, NCSU


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Graded Sales, M1 Heifers v. Steers, 1990-2001

GEOFF BENSON, ARE, NCSU


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Graded Sales, 500-599 lb. Steers, 1990-2001

GEOFF BENSON, ARE, NCSU


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Angus

Braford

Brahman

Brangus

Braunveih

Charolais

Chianina

Devon

Galloway

Gelbveih

Red Poll

Sahiwal

Salers

Santa Gertrudis

Shorthorn (dual)

Simmental

South Devon

Tarentais

Zebu

+ Crosses & Composites

Selected Breeds

  • Hereford

  • Holstein (dairy)

  • Jersey (dairy)

  • Limousin

  • Longhorn

  • Maine Anjou

  • Nellore

  • Piedmontese

  • Pinzgaur

  • Polled Hereford

GEOFF BENSON, ARE, NCSU


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Graded Sales, 500-599 lb. M1 Steers, 1991-2001

GEOFF BENSON, ARE, NCSU


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Marketing Options

  • Regular auction = Base

  • Graded sale

  • Special programs, e.g., Southeast Pride, pre-conditioned sales

  • Direct sale

  • Truckload lots

  • Retained ownership

GEOFF BENSON, ARE, NCSU


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Marketing Options

  • Choices are affected by

    • Number of cattle for sale

    • Uniformity of cattle

  • Market premiums vary with method of sale

  • Marketing cost varies with method of sale

  • Consider risk

GEOFF BENSON, ARE, NCSU


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Price Outlook

  • Use futures price, basis, and information on premiums and discounts to estimate local prices as part of your production and marketing decisions

  • But what about cost of production…

GEOFF BENSON, ARE, NCSU


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.

Source: USDA, “World Agricultural Supply & Demand Situation

GEOFF BENSON, ARE, NCSU


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Prices Paid Index for Selected Inputs

Source: Agricultural Prices, NASS, USDA, January 2009

GEOFF BENSON, ARE, NCSU


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Forage Production Costs, NCSU Enterprise Budgets, $/ton of DM

GEOFF BENSON, ARE, NCSU

GEOFF BENSON, ARE, NCSU

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Beef Production Costs, NCSU Enterprise Budgets, 2008, $/head sold

* Includes cost of cattle

GEOFF BENSON, ARE, NCSU

GEOFF BENSON, ARE, NCSU

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Outlook Summary

  • Outlook for US production, sales and prices is poor:

    • Production @ 26,110 mil. lb. 

    • Consumption @ 61.6 lb. per person 

    • Fed cattle prices @ $89.00/cwt. =

    • Feeder cattle prices at $102.00/cwt 

  • Feeder calf prices next fall are expected to be similar to 2008 and still good relative to historic prices

  • Higher cost of production

  • Stocker profits depend heavily on anticipating price movements correctly or hedging

GEOFF BENSON, ARE, NCSU


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Where are Costs & Profits Headed?

GEOFF BENSON, ARE, NCSU

  • Forage Production

    • Continued higher fertilizer prices and tight supplies

    • Temporary relief then higher fuel prices

    • Longer term, general cost increases resulting from higher energy costs

  • Cattle

    • Higher forage costs

    • Continued higher purchased feed prices

    • Longer term, general cost increases resulting from higher energy costs

    • Little change in cattle prices in 2009

    • Losses for many producers in 2009

GEOFF BENSON, ARE, NCSU

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Economics works!

  • When production costs increase

    • Producers’ profits shrink

    • Producers respond by buying and using less and/or looking for alternatives

    • If adjustments in production practices fail to return the business to profitability producers cut back and some quit entirely

    • Reduced supplies tighten up the market and prices increase to the point where producers can make adequate returns

    • A new market balance is achieved

GEOFF BENSON, ARE, NCSU

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Economics works!

When demand falls

Markets are oversupplied, prices fall

Buyers respond to lower prices by buying more and by switching away from substitutes or alternatives, which lowers their prices too

Producers respond to lower prices by producing less, which helps moderate the price reductions long term

A new market balance is achieved

GEOFF BENSON, ARE, NCSU

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GEOFF BENSON, ARE, NCSU


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GEOFF BENSON, ARE, NCSU


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GEOFF BENSON, ARE, NCSU


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Cattle Cycles

  • Low prices force liquidation of breeding stock, adding to beef supplies and reducing prices further

  • Reduced production leads to higher prices encouraging heifer retention for breeding, reducing beef supplies and raising prices further

  • Lags causing the 10 to 12 year cycle

    • Decision making

    • 15 months to raise a heifer to breeding age

    • Breeding seasonality & 9-month gestation

    • 14-18 month birth to slaughter

GEOFF BENSON, ARE, NCSU


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$ CONSUMER $

Beef Product & $$ Flows

RETAILER

PROCESSOR

WHOLESALER

FINISHING

PACKER

COW-CALF

STOCKER

GEOFF BENSON, ARE, NCSU


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The Big Picture Message

In the near term, the US meats sector – poultry, pork and beef – must shrink so meat prices can increase. “Shrink” = fewer livestock marketed and, probably, fewer producers

The cow-calf producer takes more of a hit in a downturn and gets more of the gravy on the upswing

An unanswered question is how the new cost structure affects regional competitiveness

Eventually, prices must adjust to higher costs of production so that enough producers can make an acceptable profit to stay in business

There is wide variation in financial performance among farms

GEOFF BENSON, ARE, NCSU

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Cow-calf returns over operating expense, US & regions, 2006-7

+$62

N/A

+$153

-$111

-$70

N/A

-$169

+$55

+$1

US avg. net income over operating expense/cow for 2006-7 =-$/10/cwt. Regional differences from US average are shown

GEOFF BENSON, ARE, NCSU


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MN Cow-calf Cost & Returns, 2007

Source: MN Farm Business Management database

GEOFF BENSON, ARE, NCSU

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MN Stocker Cost & Returns, 2007

Source: MN Farm Business Management database

GEOFF BENSON, ARE, NCSU

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Two Issues NC Producers Face

  • All producers are not alike & affect longer term financial prospects for each individual producer – i.e., competitiveness

    • Can you survive?

    • If so, do you want to?

  • Short term survival strategies

GEOFF BENSON, ARE, NCSU


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1. Long term: Why do you have Cattle?

OR

FUN OR MONEY?

GEOFF BENSON, ARE, NCSU

GEOFF BENSON, ARE, NCSU

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Do you know your production cost?

  • Operating cost - out of pocket expenses, e.g. forage production, other feed, vet, fuel, repairs

  • Fixed/Ownership/Investment costs

    • Depreciation

    • Interest

    • Taxes & insurance

  • Labor cost or charge for the value of your time

GEOFF BENSON, ARE, NCSU

GEOFF BENSON, ARE, NCSU

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Are You Financially Healthy?

Farm is profitable most years by return on investment & to management

Producer has cash flow to meet operating expenses, debt service, family living needs in a timely manner

Business is solvent – has low debt load and high equity as collateral for loans and as a reserve

Financial performance cannot be predicted from farm performance

There are relatively few practices that can be recommended in all situations

GEOFF BENSON, ARE, NCSU


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2. Short-term: Coping with Higher Costs

GEOFF BENSON, ARE, NCSU

  • Forage production costs

    • Fertilization

    • Choice of forage crop

    • Renovation

  • Forage utilization costs

    • Pasture management

    • Stored forages

  • Risk (drought) management

  • Cattle options


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Fertilization

Fertilizer cost

Shop around and price nutrients by the lb.

Consider alternative sources, e.g., broiler litter

Substitute legumes for bought N

“Mine” P and pH -- if the farm has a future

Rent more pasture

Change the forage mix – type of pasture, grazing v. stored forages

Cut waste and losses

GEOFF BENSON, ARE, NCSU

GEOFF BENSON, ARE, NCSU

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Pasture Fertilization

Five Issues related to Nitrogen

Production response to nitrogen and soil fertility status

Cost of additional production

Cost to graze an animal

Effect on carrying capacity

Effect on profitability

GEOFF BENSON, ARE, NCSU


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Nitrogen Response in Tall Fescue

Source: Mueller & Green, NCAES, AG 338

GEOFF BENSON, ARE, NCSU


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Nitrogen Response, lb. DM/per acre

Fescue: From Mueller & Green

GEOFF BENSON, ARE, NCSU


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Soil Fertility

Response to N depends on soil type, pH and availability of other nutrients such as P and K

Lime and other nutrients are needed to maintain fertility now and long term – affects cost of the fertilization program

Example: Lime, P, K, etc. needed at a cost of $60 per acre, applied + N at $.50, $.75 and $.90 per lb of N

GEOFF BENSON, ARE, NCSU


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Average Cost per lb of DM

Fescue yields from Mueller & Green

Average response ~ 30 lb DM/1 lb. N

+/- $60/acre of lime, P, K, etc.

GEOFF BENSON, ARE, NCSU


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Average Cost/Cow, N + $60/acre

If cow needs 30 lb DM per day

180 days of grazing/acre (no hay)

Grazing loss = 50% of production

GEOFF BENSON, ARE, NCSU


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Carrying Capacity, Fescue e.g.

Cow needs 30 lb DM per day X 180 days of grazing/acre (no hay) with grazing loss of 50% = 10,800 lb DM production/cow

GEOFF BENSON, ARE, NCSU


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Fertilization strategy

Soil Test! Apply only what is needed to maintain soil fertility – pH, P, K, etc.

Fertilizer cost affects grazing cost per cow – no or low N may not be the most profitable strategy

Pasture response to N levels affects pasture carrying capacity  joint decision about fertilization and number of cattle on the farm

GEOFF BENSON, ARE, NCSU


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Forage Production Costs, NCSU Enterprise Budgets, $/ton of DM

GEOFF BENSON, ARE, NCSU

GEOFF BENSON, ARE, NCSU

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Losses: Grazing Management

GEOFF BENSON, ARE, NCSU

  • Use controlled grazing to reduce waste

    • Loss ~ 25% with strip or rotational grazing

    • Loss ~ 50% if cattle are grazed for, say, three weeks in the same pasture

  • Controlled Grazing Example

    • 10 acres at 2 tons DM/acre

    • Permanent fencing & water exist

    • It costs $15 per move X 12 moves = $180

    • Cattle eat 15 tons v. 10 tons if set stocked

    • Cost of saved feed = $180/5 tons = $36/ton DM

  • Add any cost of transporting cattle, etc.


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Grazing Management Cost

  • New investment in fencing, water, etc. is a major cost – full economic cost can be up to $200 per acre for a rotational grazing set up

  • Time & equipment to move livestock

    Example:

    • ¾ Ton Pick-up @ $19.81 /hour

    • Labor @ $ 9.40 /hour

    • Total = $29.21 /hour

      (4-wheeler cost is less than $10/hour)

GEOFF BENSON, ARE, NCSU

GEOFF BENSON, ARE, NCSU

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Hay Making Cost, DM basis

  • Small square bales -- $89/ton of DM ($76 as made)

  • Large round bales -- $78/ton of DM ($66 as made)

  • Add cost of growing the hay crop to this

  • Hay costs $164/ton of DM for LRB ($139 as made)

  • Add to this the risk of rain & losses in storage and feeding plus feeding costs

  • What are your hay costs?

  • What are your alternatives -- Can you buy it cheaper? Can you change your crop management to reduce hay needs, e.g., by changing fertilization, stockpiling?

GEOFF BENSON, ARE, NCSU

GEOFF BENSON, ARE, NCSU

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2008 Tractor, 55 HP, + spear

Annual ownership cost

Operating cost

Total Machine cost

+ Labor

Total cost

$ 4.41/hr

$ 11.95/hr

$ 16.36/hr

$ 9.40/hr

$ 25.76/hr

Bale Feeding Costs

GEOFF BENSON, ARE, NCSU

GEOFF BENSON, ARE, NCSU

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Losses Add to Feed Costs

Source: Sustainable Dairy Systems Manual, UT & UK

GEOFF BENSON, ARE, NCSU

Harvest losses – range from 5% to 50% of harvestable production

Storage losses – 5% to 20% of feed made

Feeding losses – 5 to 15% of feed available

Combined losses – 15 to 50%

Evaluate cost effective ways of trimming losses

GEOFF BENSON, ARE, NCSU

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What is Your Total Ration Cost?

  • Yields & quality vary for different forages -- Figure the nutritional needs of the animal to achieve desired performance

  • Figure total ration cost when comparing alternative forages including:

    • Supplementary feeds, minerals, etc.

    • Storage and feeding losses

    • The cost of putting out feed(s)

  • If different rations produce different levels of in animal performance, figure both income and cost, e.g., income over feed cost

GEOFF BENSON, ARE, NCSU

GEOFF BENSON, ARE, NCSU

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Drought (Risk) Management

GEOFF BENSON, ARE, NCSU

  • Carry a hay reserve (made or bought)

  • Plan for more acres than needed normally

    • Harvest and store any surplus

    • Harvest and sell any surplus

  • Diversify

    • Grow more than one type of forage

    • Spread production geographically

  • In years when yields are poor

    • Buy supplementary forages

    • Buy commodities and by-products to stretch supplies

      All incur cost. Which is least costly with your farm history?

GEOFF BENSON, ARE, NCSU

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Cattle Options

Change cattle types, numbers, management practices

Cow numbers (fewer?), selling fewer calves taken to heavier weights?

Improving animal performance

Marketing -- prices & premiums related to sale weight, frame, breed/color, season, choice of market etc.

For stockers, buying and selling prices

Value-added, e.g., finishing cattle & direct marketing beef

GEOFF BENSON, ARE, NCSU


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MN Cow-calf Cost & Returns, 2007

Source: MN Farm Business Management database

GEOFF BENSON, ARE, NCSU

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Beef Production Costs, NCSU Enterprise Budgets, 2008, $/head sold

* Includes cost of cattle

GEOFF BENSON, ARE, NCSU


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Whole Farm Issues

  • Financial decisions depend on the whole farm and family situation

    • Other farm enterprises, e.g., cattle on poultry and hog farms, supplementary enterprises on crop farms

    • Farm overhead costs

    • Farm tax benefits

      • Ag Use valuation for property taxes

      • Filing taxes as a farmer

    • Non-farm income and lifestyle

GEOFF BENSON, ARE, NCSU


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Summary

Higher production costs will persist

Livestock production and prices will adjust eventually so the remaining producers can make adequate returns. Who will survive?

Livestock producers are a diverse group

Family goals differ

Type of operation, scale and production practices differ

Profitability and financial health varies among farms

GEOFF BENSON, ARE, NCSU


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Summary

Long-term Questions

Can your operation meet family goals and needs with increased costs of production?

Do you have the financial resources to make it through the adjustment period?

Making adjustments

Know your cost of production and profit (loss) margin

Identify alternative production systems and practices

Evaluate the effects on income and/or costs

GEOFF BENSON, ARE, NCSU


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Summary

GEOFF BENSON, ARE, NCSU

  • Evaluate forage options

    • Growing your own forages

      • Evaluate fertilizer sources and unit prices

      • Evaluate optimum fertilizer use -- Consider fertilization and carrying capacity jointly

    • Soil test and selectively “Mine” P & pH

    • Include more legumes

    • Reduce losses-- Substitute time and management for cost

    • Change forage mix

    • Rent pasture

GEOFF BENSON, ARE, NCSU

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Summary

GEOFF BENSON, ARE, NCSU

Estimate impact of forage choices on total feed cost, including supplements, year round

Evaluate cattle options -- Include the effects of changes in livestock type, numbers and performance on income

How does the bottom line change? IS IT ENOUGH?

There is nothing new in these ideas but the current economic environment creates added incentives to re-evaluate livestock enterprise and adopt proven profitable practices

GEOFF BENSON, ARE, NCSU

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Summary

No $ilver Bullet$

No $imple an$wer$!!

Sometimes there are no solutions, just tough decisions

Seek help with the economics if you are not comfortable doing it

=

+

GEOFF BENSON, ARE, NCSU


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Geoff Benson

  • Phone: (919) 515-5184

  • Fax: (919) 515-6268

  • E-mail: geoff_benson@ncsu.edu

  • Web page:

    http://www.ag-econ.ncsu.edu/ faculty/benson/benson.html

  • NCSU Enterprise Budgets web site:

    http://www.ag-econ.ncsu.edu/

    extension/Ag_budgets.html

GEOFF BENSON, ARE, NCSU

GEOFF BENSON, ARE, NCSU

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