Livestock, Equine and Forage Outlook

Kenny BurdineUK Ag Economics

KY Equine Receipts and Keeneland Sales

Economics

2011 / 2012 Equine Market

• Keeneland sales show improvement– September Yearling sale up over 12%– November Breeding sale up 41%– Pent up demand, tax incentives, large dispersals

• Stud fees likely steady in 2011, but could show slight improvement in 2012

• Recreation, show, and pleasure markets still impacted by slow economic recovery

• Changes in horse slaughter regs?Economics

Economics

US Dairy Production

1st Qtr 2nd Qtr 3rd Qtr 4th Qtr40

42

44

46

48

50

200920102011

US All Milk Price

Prices to average near $20 for yearNearly $4 above 2010, $7 above 2009Increased production to pressure prices in 2012

2012 Expectations

• Production likely to increase 1-2%• Prices likely to average $1-2 under 2011• Expect $19-21 at farm level, likely stronger in

the 1st half of the year• Weather in Oceana will be a major factor

Milk Basis – Appalachian Order

2011 Class III vs. Class IV

KY Dairy Cow Inventory

The Hog Market

2011 Hog Market Summary

• Prices increase 50% from 2009, 20% from 2010

• Sow #’s decline, but production increases slightly

• Domestic and export demand stronger• Sector remained generally profitable• Implications for 2012

Eastern Corn Belt Hog Prices

DECEMBER 1 HOG BREEDING HERDU.S. Inventory

5.0

5.5

6.0

6.5

7.0

7.5

1986 1989 1992 1995 1998 2001 2004 2007 2010

Mil. Head

US Pork Production (million lbs)

Q1 Q2 Q3 Q44800

5000

5200

5400

5600

5800

6000

6200

6400

201020112012

2012 Market Expectations• Pork production expected to increase 2% from

2011– Big change in 4th quarter

• Exports to remain strong, but US per caps to increase slightly

• Prices likely stronger in Q1, strong in summer, trending downward towards winter

• I expect upper $80’s / $90’s in summer, into $70’s by Q4

Forages

Overview

• Weather challenges in 07, 08, 10• Competition for ground – row crops• Rising input costs• Markets – shrinking dairy / beef numbers,

equine markets shaky• Rising feed prices = opportunity• Growing backgrounding industry in KY

KY non-Alfalfa Hay Production

• Acreage decreases from 2.3 to 2.1 million

KY Alfalfa Hay Production

Acreage increases from 230K acres to 250K acres

Dec 1 Kentucky Hay Stocks

Beef Cattle: Cow-calf and Stocker

TOTAL COW SLAUGHTERFederally Inspected, Weekly

85

95

105

115

125

135

145

155Thou. Head

Avg.2006-10

2011

2012

Cow slaughter up 4.3% through November

Livestock Marketing Information CenterData Source: USDA/NASS

1952

1953

1954

1955

1956

1957

1958

1959

1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

70000

80000

90000

100000

110000

120000

130000

140000

JANUARY 1 TOTAL CATTLE INVENTORYU.S., Annual

Mil. Head

Kentucky has lost 212K beef cows since 2007

U S BEEF AND VEAL EXPORTSCarcass Weight, Monthly

70

95

120

145

170

195

220

245

270

295

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC

Mil. Pounds

Avg.2005-09

2010

2011

Med / Large Frame #1 Steers500 to 600 lbs.

Med / Large Frame #1 Steers700 to 800 lbs.

Market Expectations• Calf market feeling pull from wheat and improving

margins (feeder futures)– Calves are higher, but will strengthen towards grass

• Typical seasonal peak occurs in early May– Fundamentals of supply look great

• Heavy feeders– Supplies are really tight– Slides will widen again, tighten in spring– May be strange Q1 effects– Typical peak around August

What about Expansion• Generally, expansion questions are framed to

be primarily about price• Outlook for next several years is very positive

– Cattle cycle basics of expansion phase– Profit likely here for several years

• Value of calves over next few years is going to be outstanding

Another look at expansion

• To me, expansion is more a question of cost than price outlook– What does it cost YOU to maintain a cow for a

year?• Very profitable now – expansion may make

sense• Just becoming profitable – think about cost

reducing investments

Do I always make more $ running more cows?

• I have to be profitable to begin with– Not just profitable when steer calves are selling

for $1.60 per lb• Even if profitable, it’s not that simpleA) Make more money by running more cowsB) Make more money by making more on each

cow I runC) Other enterprises – backgrounding, heifer

development, etc.

If expansion doesn’t make sense…

• Invest in things that decrease your costs• Grazing

– Improved pasture, higher utilization rates, etc.• Hay production

– Improved storage, improved feeding systems• Overhead costs

– Pay down / refi debt, re-think equipment and facilities• Upgrade your herd

– High cull cow prices, attractive capital gains

How will you expand?

• Develop your own heifers– Consider her value as weaned calf– Cost of keeping her two years before weaning her

first calf• Purchase bred heifers• Both are 10-14 year investments

– Will she return the initial investment? Don’t forget her cull value and time value of money

Heifer Development Budget

• Designed to track and plan expenses of developing heifers

• Needs to be tweaked by user to consider appropriate time frame– I made some changes in 08 because they feed into

cow-calf budgets• Variable Costs (pasture maintenance, feed,

mineral, vet, breeding, etc.)• Fixed Cost (depreciation, taxes, insurance)

Where are we now?

• Good 5wt heifers are in $140 - $160 range• Heifer calves are worth around $800 -$900• What will it cost to develop and breed (12

months) – probably $300 to $400– Interest considerations

• Then, I need to winter her a second time to get first calf – she’s 2.5 when first calf is weaned

Other costs to think about…

• Dollars spent on heifers that do not enter the cow-herd

• Possible loss in weaning weight associated with calving ease and maternal bulls

• Money made on calves that would have been sold from purchased bred heifers

Backgrounding

Backgrounding Margins

• 5wts in $160-$180• Spring / summer feeder cattle futures around

$159-$160– 8wts in Kentucky likely around $146-$150

• 850 x $1.48 = $1,258• 550 x $1.70 = $935• Gross Margin = $323 to put on 300 lbs• Can we put gain on for $1.08 / lb?

Sensitivity of BE COG

$140 $150 $160

$160 $1.03 $1.32 $1.60

$170 $0.85 $1.13 $1.42

$180 $0.67 $0.95 $1.23

550#

cal

f pric

e

850# feeder price

A few things to remember…

• A $1 increase in deferred feeder cattle futures = $1.50 on BE bid price for 5wts– Look for over and under corrections

• Work through budget / BE analysis– Comparing COG to sale price only works if no price

slide• Consider COG affects of grass (3 months away)• Weigh short term vs. long term

Price Risk Management

• Part of taking advantage of the market is not letting it get away

• Volatility is both a challenge and an opportunity

• Many price risk tools are out there– Forward Contracting, fixed basis contracts– Futures and Options– Livestock Risk Protection Insurance

Contact Information

Kenny BurdineUK Agricultural Economics

(859) 257-7273kburdine@uky.edu