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Operating Cash Flow in Drought

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Operating Cash Flow in Drought. By: Paul H Gutierrez Sponsored by: Quay County Cooperative Extension. Objectives today. Frame the challenge/opportunity Some Basics on Cow-Calf Profit Analysis Market “ lookout ” 101 Cash Flow Management during a drought: some considerations. - PowerPoint PPT Presentation
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College of Agriculture, Consumer and Environmental Sciences Operating Cash Flow in Drought By: Paul H Gutierrez Sponsored by: Quay County Cooperative Extension
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Page 1: Operating Cash Flow in Drought

College of Agriculture, Consumer and Environmental Sciences

Operating Cash Flow in DroughtBy: Paul H GutierrezSponsored by: Quay County Cooperative Extension

Page 2: Operating Cash Flow in Drought

Objectives today

• Frame the challenge/opportunity

• Some Basics on Cow-Calf Profit Analysis

• Market “lookout” 101

• Cash Flow Management during a drought: some considerations

College of Agriculture, Consumer and Environmental Sciences

Page 3: Operating Cash Flow in Drought

Contact Information

College of Agriculture, Consumer and Environmental Sciences

Paul Gutierrez

[email protected]

(575) 635-0218

NMSU: Drought Page

http://aces.nmsu.edu/drought/index.html

Page 4: Operating Cash Flow in Drought

Framing the Challenge-The Headlines• “Drought accelerates cattle liquidation in

southern plains”

• “Cattle prices much lower as heat, drought continue”

• “Hay, grass shortage could be widespread”

• U.S. cattle herd fell to record low amid Plains drought, pricy corn”

College of Agriculture, Consumer and Environmental Sciences

Page 5: Operating Cash Flow in Drought

Framing the Challenge-Your Challenge• Job #1. Maintain appropriate stocking rates

and levels of forage utilization to avoid overstocking.

• Maintain acceptable reproductive performance of the cow herd.

• Maintain and manage the financial health of the business

College of Agriculture, Consumer and Environmental Sciences

Page 6: Operating Cash Flow in Drought

Some Genera Recommendations• Ongoing—evaluate range conditions• Ongoing—evaluate cow condition• Reduce forage needs/demands

– Sell cows, early wean, lease pasture, supplement additional energy

• Use water to help distribute cow• Cull—open cow, old cows, 2-year old producing

cows, 3- year old producing cows, replacement heifers

College of Agriculture and Home Economics

Page 7: Operating Cash Flow in Drought

Financial Management and your Drought Management Strategy

• It all starts with your Chart of Accounts, AKA Record Keeping– tax reporting;– preparing financial statements; and– completing enterprise analysis for drought

management purposes.

College of Agriculture, Consumer and Environmental Sciences

Page 8: Operating Cash Flow in Drought

Remember, for record keeping purposes, transaction occur in:

• Three (3) Categories– operating revenue and expenses;– financing transactions involving borrowing or

repayment of debt; and– capital asset purchases and sales.

College of Agriculture, Consumer and Environmental Sciences

Page 9: Operating Cash Flow in Drought

Financial Statement: Income Statement• Income Statement (think profitability)

• Retained earnings = Net Income from operation – Capital gain/loss – Taxes – Family Living Withdrawals

College of Agriculture, Consumer and Environmental Sciences

Page 10: Operating Cash Flow in Drought

Financial Statements: Balance Sheet• Balance Sheet (think liquidity and solvency) 

The balance sheet is derived from the fundamental accounting equation: 

Assets = Liabilities + Owner Equity, or 

Owner Equity (Net Worth) = Assets – Liabilities

College of Agriculture, Consumer and Environmental Sciences

Page 11: Operating Cash Flow in Drought

Financial Statement: Cash Flow(Drought Management Statement)

• Cash Flow Statement (think repayment capacity)

• Cash flow statements can also serve as a means of determining credit needs and timing of repayment, provides a source of cash receipts reported in the income statement

College of Agriculture, Consumer and Environmental Sciences

Page 12: Operating Cash Flow in Drought

The Cow-Calf Profit Analysis

Profit or loss = Revenue – Expenses, or

Profit = (price x production) – expenses

Where:

•Price = f(supply and demand)

•Production = f(no. and weights)

•Expenses = f(supply and demand-direct, indirect and interest exp.)

College of Agriculture, Consumer and Environmental Sciences

Page 13: Operating Cash Flow in Drought

Some Recent Stats

• July 1, all cattle inventory 99.69 mil, down 1.4 percent

• In OK, last two weeks-56% increase feeder cattle sales, 205% increase cow & bull sales

• July 17, 32% of US pastures rated poor, TX no 1 cattle state, rated 94% poor to very poor

• Good News! Export demand up 34%

College of Agriculture and Home Economics

Page 14: Operating Cash Flow in Drought

JANUARY 1 COW INVENTORYU.S., Annual

5

10

15

20

25

30

35

40

45

1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011

Mil. Head

Beef

Dairy

C-N-0207/22/11

-1.6 Percent

2011 = 30.9 Million Head

+0.7 Percent2011 = 9.1 Million Head

Livestock Marketing Information Center

Data Source: USDA-NASS

Page 15: Operating Cash Flow in Drought

CALF CROPJuly 1 Estimates, U.S., Annual

35

37

39

41

43

45

1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011

Mil. Head

C-N-18B07/22/11

-0.5 Percent

2011 = 35.5 Million Head

Livestock Marketing Information Center

Data Source: USDA-NASS

Page 16: Operating Cash Flow in Drought

HEIFERS HELD AS BEEF COW REPLACEMENTS

July 1, U.S.

3

4

5

6

7

1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011

Mil. Head

C-N-3707/22/11

-4.5 %

Livestock Marketing Information Center

Data Source: USDA-NASS

Page 17: Operating Cash Flow in Drought

CALF PRICES AND CATTLE INVENTORYWestern Kansas 5-600 Lb. Steers, Annual

90

95

100

105

110

115

120

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010

Mil. Head

45

60

75

90

105

120

135$ Per Cwt.

CattleInventory

Calf Price

C-N-4107/22/11Livestock Marketing Information Center

Data Source: USDA-AMS & USDA-NASS, Compiled & Analysis by LMIC

Page 18: Operating Cash Flow in Drought

U S BEEF AND VEAL EXPORTSAs a Percentage of Production, Carcass Weight, Annual

0

2

4

6

8

10

1987 1990 1993 1996 1999 2002 2005 2008 2011

Percent

I-N-0707/26/11Livestock Marketing Information Center

Data Source: USDA-ERS & USDA-FAS, Compiled & Analysis by LMIC

Page 19: Operating Cash Flow in Drought

U S BEEF AND VEAL NET IMPORTSAs a Percentage of Production, Carcass Weight, Annual

-2

0

2

4

6

8

10

12

14

1987 1990 1993 1996 1999 2002 2005 2008 2011

Percent

I-N-1107/26/11Livestock Marketing Information Center

Data Source: USDA-ERS & USDA-FAS, Compiled & Analysis by LMIC

Page 20: Operating Cash Flow in Drought

MAJOR U S BEEF EXPORT MARKETSCarcass Weight, Annual

0

100

200

300

400

500

600

700

Japan Canada Mexico Korea

Mil. Pounds

Avg.2004/08

2009

2010

I-N-1807/26/11

Livestock Marketing Information Center

Data Source: USDA-ERS & USDA-FAS, Compiled & Analysis by LMIC

Page 21: Operating Cash Flow in Drought

On the other side of the profit equation—COST of Production

•Market Fundamentals

Supply and Demand

College of Agriculture and Home Economics

Page 22: Operating Cash Flow in Drought

U S ANNUAL CORN ENDING STOCKSCrop Year

0

1

2

3

4

5

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

Bil. Bushels

G-NP-0907/26/11Livestock Marketing Information Center

Data Source: USDA-NASS, Compiled & Forecasts by LMIC

Page 23: Operating Cash Flow in Drought

NATIONAL AVERAGE CORN PRICECrop Year, Received by Farmers

1.00

2.00

3.00

4.00

5.00

6.00

7.00

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

$ Per Bushel

G-NP-0307/26/11Livestock Marketing Information Center

Data Source: USDA-NASS, Compiled & Forecasts by LMIC

Page 24: Operating Cash Flow in Drought

U S TOTAL CORN SUPPLY AND PRICECrop Year

8

9

10

11

12

13

14

15

16

1987 1990 1993 1996 1999 2002 2005 2008 2011

Bil. Bushels

1.25

1.75

2.25

2.75

3.25

3.75

4.25

4.75

5.25

5.75

6.25$ Per Bushel

Supply

Price

G-NP-1307/26/11Livestock Marketing Information Center

Data Source: USDA-NASS, Compiled & Forecasts by LMIC

Page 25: Operating Cash Flow in Drought

U S TOTAL SOYBEAN MEALSUPPLY AND PRICE

Crop Year

20

25

30

35

40

45

1986 1989 1992 1995 1998 2001 2004 2007 2010

Mil. Tons

125

175

225

275

325

375$ Per Ton

Supply

Price

G-NP-1407/12/11Livestock Marketing Information Center

Data Source: USDA-ERS, Compiled by LMIC

Page 26: Operating Cash Flow in Drought

U S HAY STOCKS AND PRODUCTIONCrop Year

0

20

40

60

80

100

120

2007 2009 2011

Mil. Tons

December 1Hay Stocks

Alfalfa HayProduction

Other HayProduction

07/12/11Livestock Marketing Information Center

Data Source: USDA-NASS, Compiled & Forecasts by LMIC

Page 27: Operating Cash Flow in Drought

U S ALL HAY STOCKSMay 1 (Beginning of Crop Year)

5

10

15

20

25

30

35

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

Mil. Tons

G-NP-2107/12/11Livestock Marketing Information Center

Data Source: USDA-NASS, Compiled & Forecasts by LMIC

Page 28: Operating Cash Flow in Drought

US RANGE AND PASTURE CONDITIONPercent Poor and Very Poor, Weekly

5

10

15

20

25

30

35

40

May Jul Sep

Percent

Avg.2005-09

2010

2011

G-NP-3007/26/11

Livestock Marketing Information Center

Data Source: USDA-NASS, Compiled & Analysis by LMIC

Page 29: Operating Cash Flow in Drought

WESTERN REGIONRANGE AND PASTURE CONDITION

Percent Poor and Very Poor, Weekly

5

10

15

20

25

30

35

40

45

50

May Jul Sep

Percent

Avg.2005-09

2010

2011

G-NP-3107/26/11

Livestock Marketing Information Center

Data Source: USDA-NASS, Compiled & Analysis by LMIC

Page 30: Operating Cash Flow in Drought

SOUTHERN PLAINS REGIONRANGE AND PASTURE CONDITION

Percent Poor and Very Poor, Weekly

5

15

25

35

45

55

65

75

85

95

May Jul Sep

Percent

Avg.2005-09

2010

2011

G-NP-3307/26/11

Livestock Marketing Information Center

Data Source: USDA-NASS, Compiled & Analysis by LMIC

Page 31: Operating Cash Flow in Drought

SLAUGHTER COW PRICESSouthern Plains, 85-90% Lean, Weekly

40

45

50

55

60

65

70

75

80

85

JAN APR JUL OCT

$ Per Cwt.

Avg.2005-09

2010

2011

C-P-3507/25/11Livestock Marketing Information Center

Data Source: USDA-AMS

Page 32: Operating Cash Flow in Drought

MED. & LRG. #1 STEER CALF PRICES400-500 Pounds, Southern Plains, Weekly

115

125

135

145

155

165

175

JAN APR JUL OCT

$ Per Cwt.

Avg.2005-09

2010

2011

C-P-49A07/25/11Livestock Marketing Information Center

Data Source: USDA-AMS, Compiled & Analysis by LMIC

Page 33: Operating Cash Flow in Drought

MED. & LRG. #1 STEER CALF PRICES500-600 Pounds, Southern Plains, Weekly

100

110

120

130

140

150

160

170

JAN APR JUL OCT

$ Per Cwt.

Avg.2005-09

2010

2011

C-P-5407/25/11Livestock Marketing Information Center

Data Source: USDA-AMS, Compiled & Analysis by LMIC

Page 34: Operating Cash Flow in Drought

MED. & LRG. #1 FEEDER STEER PRICES700-800 Pounds, Southern Plains, Weekly

90

100

110

120

130

140

150

JAN APR JUL OCT

$ Per Cwt.

Avg.2005-09

2010

2011

C-P-4907/25/11Livestock Marketing Information Center

Data Source: USDA-AMS, Compiled & Analysis by LMIC

Page 35: Operating Cash Flow in Drought

SLAUGHTER STEER PRICESSouthern Plains, Weekly

80

85

90

95

100

105

110

115

120

125

JAN APR JUL OCT

$ Per Cwt.

Avg.2005-09

2010

2011

C-P-5207/25/11Livestock Marketing Information Center

Data Source: USDA-AMS

Page 36: Operating Cash Flow in Drought

STEER HIDE AND OFFAL VALUELive Animal Basis, Weekly

7.50

8.50

9.50

10.50

11.50

12.50

13.50

14.50

JAN APR JUL OCT

$ Per Cwt.

Avg.2005-09

2010

2011

C-P-3907/25/11Livestock Marketing Information Center

Data Source: USDA-AMS

Page 37: Operating Cash Flow in Drought

Summary

• Strong fundamentals:– Cow inventory down and decreasing – Historically small calf crop– No signs/opportunity of “real” herd build up– Feedlot placements/marketing strong– Export markets strong

College of Agriculture and Home Economics

Page 38: Operating Cash Flow in Drought

Some “other” strong fundamental

• Pasture conditions are poor to very poor

• Feed stuff prices at record highs

• Force sales of livestock pressuring market

• Supplemental pasture and forage options regionally limited

• Cost of production, in general, continue to increase

College of Agriculture and Home Economics

Page 39: Operating Cash Flow in Drought

Unit Cost of Production—What can you do to make a difference?

• Profit = (Price x Production) – Expenses

• Price or Unit Cost of Prod. = (Expenses)(Production)

• Ex. $500/500 lbs = $1.00/lb

College of Agriculture, Consumer and Environmental Sciences

Page 40: Operating Cash Flow in Drought

Profit per Cow Formula

• Profit or loss = (((%calf crop x weaning wt.) x price) + ((%cull lvstk sales x wt.) x price))-expenses/cow

• For example: – 85% weaned calf crop (CC), – 500-lb (WW), @ $1.35/lb. (PCC). – 14% (CL), 1150-lb (CW), @$.65/lb. (PCL).– Total annual exp $525 per cow (ACE).

College of Agriculture, Consumer and Environmental Sciences

Page 41: Operating Cash Flow in Drought

Plugging in the numbers

• Profit or loss = (((%cc 85% x WW 500lbs) x PCC $1.35/lb.) + ((CL 14% x CW 1150lb) x PCL $.65/lb.) – ACE $525

• = ((425lbs x $1.35/lb.) + (161lbs x $.65/lb.) - $525

• = ($573.75 + $104.65) - $525• =$678.40 - $525• = $153.40/cow

College of Agriculture, Consumer and Environmental Sciences

Page 42: Operating Cash Flow in Drought

Lets consider some “what if”

• Drought Sales of Livestock –25%

• Early Weaning

College of Agriculture, Consumer and Environmental Sciences

Page 43: Operating Cash Flow in Drought

Consider these Scenarios• Scenario 1: Standing forage is inadequate and the decision

is too traditional wean calves in late October—cows nutrient requirement not met

• Scenario 2: Standing forage is inadequate and the decision is too traditional wean calves in late October—cows nutrient requirement met

• Scenario 3: Standing forage is inadequate and the decision is too early wean calves July 30th and to sell as early weaned calves—cows nutrient requirement met

• Scenario 4: Standing forage is inadequate and the decision is too early wean calves July 15th and to place calves in feedlot for approximately 112 days—market late October.

College of Agriculture and Home Economics

Page 44: Operating Cash Flow in Drought

Tax options for Drought Sales

• Code Section 451(e): Elect to postpone reporting taxable gain on the additional sales of any livestock for one year; or

• Code Section 1033(e): Elect to postpone, and all together avoid, paying taxes on the gain from the sale of breeding stock if replaced within a specified time frame.

College of Agriculture and Home Economics

Page 45: Operating Cash Flow in Drought

Contact Information

College of Agriculture, Consumer and Environmental Sciences

Paul Gutierrez

[email protected]

(575) 635-0218

NMSU: Drought Page

http://aces.nmsu.edu/drought/index.html

Page 46: Operating Cash Flow in Drought

Now What?

College of Agriculture, Consumer and Environmental Sciences


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