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College of Agriculture, Consumer and Environmental Sciences
Operating Cash Flow in DroughtBy: Paul H GutierrezSponsored 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
College of Agriculture, Consumer and Environmental Sciences
Contact Information
College of Agriculture, Consumer and Environmental Sciences
Paul Gutierrez
(575) 635-0218
NMSU: Drought Page
http://aces.nmsu.edu/drought/index.html
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
On the other side of the profit equation—COST of Production
•Market Fundamentals
Supply and Demand
College of Agriculture and Home Economics
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
Lets consider some “what if”
• Drought Sales of Livestock –25%
• Early Weaning
College of Agriculture, Consumer and Environmental Sciences
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
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
Contact Information
College of Agriculture, Consumer and Environmental Sciences
Paul Gutierrez
(575) 635-0218
NMSU: Drought Page
http://aces.nmsu.edu/drought/index.html
Now What?
College of Agriculture, Consumer and Environmental Sciences