1 profitability of selected marketing alternatives todd d. davis extension economist clemson...
TRANSCRIPT
1
Profitability of Selected Marketing Alternatives
Todd D. Davis
Extension Economist
Clemson University
2
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?
3
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 $60/hd
• Stockering– Feed 150 days, Gain 2.00 lbs/day (1.85 lbs/day), Selling 890#
steers & 810 # heifers on March 24
• Finishing– Feed 210 days, Gain 3 lbs/day, Sell 1250 # steer on May 23
4
Cost Assumptions
• Production costs based on Clemson Univ. Enterprise Budgets (Cow-calf, stockering, hay & forages)
• Finishing costs based on Kansas State University Extension
• Historical input costs from USDA
5
Prices are from …
• South Carolina weekly feeder cattle cash prices (by weight and sex) from 1989-2005 (USDA Livestock Market News)
• Kansas weekly cash slaughter steers & heifers prices from 1989-2005 (Kansas State)
• Daily feeder cattle and live cattle futures and options data from 1989-2005 (Commodity Research Bureau)
7
Revenues and Total Variable Costs – SC Cow-Calf Operation ($/hd)
$-$50$100$150$200$250$300$350$400$450$500$550
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
1989-2005 Average Return over TVC= $150/hd
8
Revenue and Total Variable Costs – SC Cow-Calf w/ Winter Stockering Operation ($/hd)
$-$100$200$300$400$500
$600$700$800$900$1,000
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
1990-2005 Average Return over TVC = $235/hd
9
Revenue and Total Variable Costs – SC Cow-Calf and Finishing Operation ($/hd)
$-$100$200$300$400$500$600$700$800$900$1,000$1,100
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
1990-2005 Average Return over TVC = $265 / hd
10
Your labor and management skills are valuable!
• While you may be profitable in covering your out-of-pocket expenses…
• Budget a return to your labor and management skills – don’t work for free! (20% of Total Variable Costs)
• Think about budgeting a profit margin to help finance future business investments and growth
12
How do I know if I should retain ownership or sell now?
• Compare what you gain from retained ownership to what it costs…
• What you gain Increased Revenue
• What it costs Additional Cost of Gain + Lost Revenue (what you could get if you sell now)
13
Net Increase in Returns from Stockering vs. Fall Sales ($/hd)
$40$86
$6
$75
$3
$33$79
$101
$13
$52
$125
$43
$37
$22 $19
$103
-$150-$125-$100-$75-$50-$25
$0$25$50$75
$100$125$150
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
1990-2005 Average = $30/hd
14
Net Increase in Returns from Finishing vs. Fall Sales ($/hd)
$42$19
$7
$44
$129$125
$88
$73
$28
$80
$29$22
$159
$43 $48$29
-$175
-$125
-$75
-$25
$25
$75
$125
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
1990-2005 Average = -$7/hd
15
Know your costs!
• It pays to budget and to know and monitor your costs.
• Take the time to evaluate if it is pays to retain ownership or sell it now.– The costs and benefits can differ greatly from
year-to-year!
17
What are Futures?
• They are contracts sold on the Chicago Mercantile Exchange that allows you …– “Lock in a price” – Losses in the cash market
will be offset by gains in the futures market
• This can be complicated – Let’s see if we can use futures/options to reduce risk– Learn mechanics at another meeting
18
Hedging Assumptions
• Cow-Calf – Sell October Feeder Cattle Contract on March 1, Offset Sep. 10
• Winter Stockering – Sell April Feeder Cattle Contract on Oct. 1, Offset March 24
• Finishing – Sell June Live Cattle Contract on Oct. 1, Offset May 24
19
Net Benefit of Hedging Fall Feeder Calf Sales – October Feeder Futures *** ($/hd)
$21$54
$13
$85
$41
$63
$31
$51 $46
$86
$22
$10
$17
$31
$139$154
$98
-$250
-$200
-$150
-$100
-$50
$0
$50
$100
$150
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
1989-2005 Avg. = -$30/hd
*** For Educational Purposes Only!
Beneficial30% of thetime
1989-2002 Avg. = -$8/hd
20
Net Benefit of Hedging Fall Feeder Calf Sales & Stocker –
October Feeder & March Feeder Futures *** ($/hd)
$38
$102
$48
$136
$38
$110 $71
$85
$10
$85
$44
$15$38
$24
$143
$205-$250
-$200
-$150
-$100
-$50
$0
$50
$100
$150
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
1989-2005 Avg = -$28/hd
*** For Educational Purposes Only!
Beneficial40% of thetime!
1989-2003 Avg = -$5/hd
21
Net Benefit of Hedging Fall Feeder Calf Sales & Finishing –
October Feeder & April Live Futures *** ($/hd)
$49$88
$7
$161
$62
$103
$58
$83
$6
$79
$18$34
$95
$45
$262
$185
-$275
-$225
-$175
-$125
-$75
-$25
$25
$75
$125
$175
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
1989-2005 Avg = -$33/hd
*** For Educational Purposes Only!
Beneficial40% of thetime!
1989-2003 Avg = -$5/hd
22
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!