Cattle Outlook & Risk Management

1. Cattle Outlook & Risk Management James Mintert, Ph.D. Professor & Extension State Leader Department of Agricultural Economics Kansas State University Nevada Cattlemen’s Association Convention Elko, Nevada November 17, 2006 www.agmanager.info/livestock/marketing jmintert@ksu.edu

2. A Shrinking IndustryResponding to a Lack of Profitability Current inventory is about 26% smaller than in 1975

3. Rising Productivity Is Partially Responsible

4. But Weaker Demand Was Key Beef Demand 1980-1998

5. Measuring Changes In Beef Demand1998-2004 Demand in ’04 Was Up About 25% from 1998 Level

6. Measuring Changes In Beef Demand1998-2005 Beef Demand During All of ’05 Decreased About 4% But Demand in ’05 Was Still Up About 21% from 1998 Level

7. Demand Improved Steadily from ’98 through ’04Downward Blip in ’02 Following 9/11

8. Downturn Got Underway in mid-2005

9. Beef Demand ShiftersWhat’s been taking place recently? Demand index does not indicate why shifts occur • Possible reasons for recent downturn • Low carb diet effect has worn off • Larger chicken supplies • Consumer’s disposable income growth slowing • Expect more domestic demand weakness • How do we turn this around?

10. International Trade Outlook

11. U.S. Was A Net Exporter From 1981-2003

12. Top 5 Importers Accounted for 91% of U.S. Exports U.S. needs to recapture these markets to regain $’s and volume

13. Cattle Imports from Canada Are IncreasingBut Remain Well Below 2002’s Record Level Jan-July 2006 imports 32% below 2002’s and 21% below 2001’s

14. Beef Imports From Canada Decline

15. Result: U.S. Imports Falling Below 2005’s

16. Where Are We Headed? Trade • Other countries may have comparative advantage in cow-calf production • U.S. strength is in high quality beef products • Exports to Pacific Rim increasing in ’07 • Regaining market share will take several years • Market access is key • Consumer incomes in importing countries are key to long-run growth in exports

17. Long, Slow Road to Export Recovery

18. Export Recovery Means Net Beef Imports in 2007 Could Be 1/2 2004’s

19. Supply Side in the U.S.

20. Mid-Year Inventory Was Above 2005’s, And…

21. Strong Profitability Encouraging Expansion, But…

22. Poor Pasture Conditions Could Be Holding Back Expansion Livestock Marketing Information Center Data Source: USDA/NASS

23. U.S. Beef Cow Slaughter Up 17% vs. 2005

24. But Producers Have Been Holding Back Heifers

25. Slaughter Is Expected To Rise Modestly

26. Long Term Trend Toward Higher WeightsBut Will Rising Grain Prices Hold Weights Down?

27. And Beef Production Will Rise Cyclically

28. Prices Near Record High in ’06 & Again in ‘07

29. But Higher Corn Prices Lead To Lower Bids for Feeders

30. Cattle Feeders Will Adjust Bids Based Upon Higher Feed CostsPrices in ’07 Headed Lower

31. Rising Corn Prices Pushing Prices Lower

32. Higher Feed Costs Mean Lower Prices Are AheadCycle Peak in ’05 & ‘06

33. Ethanol, Corn Prices, & Cattle

34. 3 Largest Corn Crops On Record

35. But Corn Usage Has Been Growing Rapidly

36. Ethanol Usage Growing Rapidly

37. U.S. Will Need More Corn AcresHow Do We Get Them?

38. It Will Take Higher Prices To Push Acreage Higher Average Prices Will Be Higher and Frequency of Price Spikes Could Increase

39. Where Are Corn Prices Headed?Higher Corn Prices Spell Trouble for Livestock Producers Ethanol increases the likelihood of price spikes

40. Increasing Market Volatility Means Managing Risk Will Be More Important In The Future Livestock Risk Protection Insurance: How Does It Work?

41. LRP-What Is It? • Livestock Risk Protection (LRP) Insurance • LRP for feeder cattle available in Nevada • Provides protection against a decline in CME Feeder Cattle Price Index while you own cattle • CME Feeder Cattle Price Index is a 7 day weighted average of cash feeder cattle prices across the U.S.

42. How Does LRP Work? To use LRP to protect against a price decline, • you would purchase LRP insurance for a particular set of cattle (# of hd. & ending wt.) • you must choose • Coverage Price (this is similar to an option’s Strike Price) • End Date (e.g., the date coverage ends) • Price you pay is known as LRP premium

43. Definitions • Expected End Value • A forecast of the CME Feeder Price Index on the insurance policy’s end date • Coverage Level • The % of the expected end value covered by the policy

44. Definitions • Coverage Price • Level of protection provided by policy in $/cwt. • Expected End Value X Coverage Level = Coverage Price • End Date • The date that coverage period ends for each contract • You selects weeks of coverage desired (within limits set by RMA-usually 13 to 39 weeks)

45. LRP Feeder Cattle Premium • To calculate actual LRP premium you must know • Number of cattle ready for market (weighing less than 9.0 cwt) on End Date • Target Weight per head • Ownership share in cattle

46. LRP Feeder Cattle Premium • Insured Value Equals • # of Head x Target Weight (cwt) x Coverage Price x Ownership Share (%) • Total Premium Equals • Insured Value x Rate • Producer Premium Equals • Total Premium minus USDA Subsidy • USDA Subsidy = 13% of Total Premium

47. LRP Premium Calculation Example • An operation has 100 head of feeder cattle on Aug. 16 • Expects to market the feeder cattle at a target weight of 7.00 cwt each in mid-November • Insured share is 100 percent • Assume Expected End Value (updated daily by RMA on its website) is $116.45 per live cwt

48. Premium Calculation Example • Producer selects a coverage price which is a % of the Expected End Value published by RMA • Assume producer selects $110 per cwt. coverage price (e.g., 94% of RMA’s Expected End Value) • For this coverage price, the rate is 0.6773% • The premium subsidy is 13 percent

49. Premium Calculation Example • 100 head * 7 cwt = 700 cwt. • 700 cwt. * coverage price ($110) = $77,000 • $77,000 * insured share (1.00) = $77,000 Insured Value

50. Premium Calculation Example • $77,000 * rate of 0.006773 = $521.52 Total Premium • $521.52 * .13 (subsidy) = $67.80 subsidy • $521.52 (total premium) minus $67.80 subsidy = producer premium of $453.72 = $0.65/cwt. producer paid premium