Managing beef profits for long-term viability

In March 2012 the prices of feeder cattle reached record highs.

Recently I spoke with a cow/calf producer who stated “last week I sold seven heifers for the same price as steers. In all my years of raising cattle, I have never received such high prices.”

The management of profits generated during periods of high prices will impact the long-term viability of the business. Agricultural prices are highly cyclical.

There is the old adage “the cure for high prices is high prices.” This means that during periods of high prices, producers will increase production to cash in on the high prices. The increased production will result in additional products sold in the market place, which will reduce demand for the products and depress prices for producers.

The July 1, 2012 United States Department of Agriculture (USDA) Cattle (Inventory) Report stated that beef replacement heifer numbers were equal to the July 2011 report.

Fundamental economic principles dictate that at some time in the future, beef 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 marketplace will lower prices of feeder and fat cattle as well as profit margins.

The decisions that producers make during periods of high profit margins can impact the long-term profitability and viability of their businesses.

Beef cattle producers should start to take steps to position their businesses to weather the future decline in profit margins.

It is crucial that producers maintain open lines of communication with their lenders during periods of high prices and profit margins. Remember that your lender is your business partner.

I would encourage producers to contact their lenders during the summer and fall of 2012 to keep them abreast of farm production and risk management strategies that are being used to lock in profits.

Likewise, I suggest that producers sit down with their lenders and develop strategies for coping with the upcoming decline in cattle prices.

When profit margins start to decline; the producer and lender need to prioritize and develop a list where the profits will be spent to generate the highest returns.

During the times of high prices, the producer should have replenished and built up cash reserves.