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Price Risk Management in Extension Beef Carcass Evaluation Programs: The Georgia Beef Challenge Experience

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Price Risk Management in Extension Beef Carcass Evaluation Programs: The Georgia Beef Challenge Experience. R. Curt Lacy, Patsie Cannon, Jim Collins, John C. McKissick, and Robert L. Stewart Department of Agricultural & Applied Economics, UGA Department of Animal & Dairy Sciences, UGA

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Price Risk Management in Extension Beef Carcass Evaluation Programs: The Georgia Beef Challenge Experience

R. Curt Lacy, Patsie Cannon, Jim Collins, John C. McKissick, and Robert L. Stewart

Department of Agricultural & Applied Economics, UGA

Department of Animal & Dairy Sciences, UGA

Georgia Cattlemen’s Association

thanks to our partners
Thanks to our partners
  • Georgia Cattlemen’s Association
  • Georgia Department of Agriculture
  • Iowa State University
  • Tri-County Steer Carcass Futurity (TCSCF)
  • USDA – Agricultural Marketing Service
highlights of the georgia beef challenge
Highlights of the Georgia Beef Challenge
  • Began in 1991 as a way for producers to gather information regarding the type of cattle they produce
  • Partnership between UGA, GA Cattlemen’s Association, GA Department of Agriculture/USDA-AMS, and other industry partners
  • Goals of the GBC
    • Improve the marketability of Georgia-bred cattle by establishing a database of feedlot performance and carcass information
    • Provide educational information to Georgia cattlemen regarding the carcass merit of their genetics and explore the feasibility of retained ownership.
how does it work
How Does it Work?
  • Producer completes and mails consignment form
  • Producer is told when and where to deliver his calves
  • At delivery cattle are weighed, graded, and assigned a market price
  • Calves are shipped to IA
  • Members of the Tri-County Steer Futurity (TCSF) feed the calves
  • The animals are harvested and marketed on a carcass basis
  • Carcass and production data are returned to producers along with a check (usually)
history of risk management in the gbc
History of Risk Management in the GBC
  • In early years done on an ad-hoc basis
  • As numbers grew so did the RM implications county agent began doing projections and handling RM after consulting with GBC personnel & consignors
  • He soon realized there had to be a better way
  • About 3 years ago a RM Committee was formed to handle RM for the program
georgia beef challenge risk management plan
Georgia Beef Challenge Risk Management Plan
  • Risk Management Committee comprised of extension economists, beef specialists, and producers
  • Consignors approve pricing objectives at annual meeting
  • RMC implements the plan
pricing objectives for 2004 2005
Pricing Objectives for 2004-2005
  • Lock in a $50 profit when available
  • Buy enough protection to lock in value of cattle when they left GA
  • Do whatever is necessary to limit losses to $50/head
making decisions
Making Decisions
  • Patsie Cannon sends a report on the numbers, weights, and sexes of cattle when they are shipped.
  • Curt Lacy uses UGA Custom Finishing Budgets to estimate breakevens and estimated profits.
  • Risk Management committee discusses and evaluates alternatives via phone or e-mail
  • A decision is made and implemented via our broker in Iowa
caveats
Caveats
  • Producers with a futures contract worth of cattle in the same pen can do their own risk management
  • They can consult with the risk management committee regarding alternatives
  • They can ask the risk management committee for assistance in implementing their plan
  • They can use our broker in IA
alternatives utilized
Alternatives Utilized
  • Hedge
  • Put option
  • Synthetic put
  • Fence
  • ½ hedge
example worksheets
Example Worksheets
  • Example Report 1
  • Breakeven Example
  • Final Report
lessons learned general
Lessons Learned – General
  • Our genetics are as good as any
  • Preconditioning pays when it comes to shipping cattle
  • Price risk management is important
lessons learned risk management
Lessons Learned - Risk Management
  • It is better to have a plan and to let “experts” implement the plan
  • Producers need to a have a clear understanding of what they are agreeing to
  • It is imperative that breakevens be calculated for every pen
  • Past feedlot and carcass performance do play a role in breakevens
  • Communications between feedlots, broker, and risk management committee are crucial
lessons learned risk management17
Lessons Learned – Risk Management
  • There is a HUGE difference between a textbook hedge/option and the real world
  • Managing price risk on the input side is less straightforward
    • Hard to estimate physical needs
    • Timing of feed needs is difficult
    • Some type of cash strategy probably works best
lessons learned risk management18
Lessons Learned – Risk Management
  • Live Cattle options are different from grains
  • Often there is very little liquidity at the strike price you want
  • Sometimes delivery dates make you exit early
  • Timing of sales can create “opportunities” for hedging or options
changes in attitudes latitudes and behaviors
Changes in Attitudes, Latitudes, and Behaviors
  • Some producers have:
  • Learned that not everyone can be above average
  • Decided to focus on raising high quality feeder calves
  • Changed genetics
  • Started preconditioning and vaccinating
  • Developed their own risk management plans
other developments
Other Developments
  • Resulted in cattle marketing workshops
  • Some collective feeder cattle sales now require some form of carcass data
  • Some producers raising discounted feeder cattle have begun retaining ownership
  • Cattle shipped in 2004-2005 have EID tags
  • USDA-AMS FSMIP Grant
summary
Summary
  • GBC has been a very educational program for beef cattle producers
  • Risk management makes the carcass information gathering process less expensive
  • There is considerable difference in teaching risk management and actually doing it!!
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