How to survive a cattle market downturn

In short, this means that producers must find ways to tighten their belts. The one caveat to remember is that those numbers are based on the assumption that producers won’t make changes to the way things are currently managed on the farm or ranch. The markets will always fluctuate. They always have, and they always will. But, in reality, there are many things a producer can do to stay in the black, or at the very least, set themselves up to be around when the pastures are greener.

Brian R. Williams

Probably the best starting point is to create a budget. Other strategies can range from developing a marketing plan to finding ways to add value to the cattle. Producers can also plan ahead to build up some working capital to draw from when markets turn downward.

Enterprise budgets

As I mentioned earlier, creating a budget is the best place to start when thinking about making changes in light of down cattle markets. There are two primary types of budgets that cattle producers can use: enterprise budgets and partial budgets. Enterprise budgets include all income, costs and the profits associated with the production of one specific commodity (in this case, cattle). An enterprise budget can be helpful in many ways: First and most importantly, it can tell you whether or not you’re profitable.

An enterprise budget can also help to identify areas of inefficiency. What are the highest cost areas? Where is the revenue coming from? Could either be improved? An enterprise budget can help answer all of these questions. Don’t know how to put together an enterprise budget? Contact your local extension office or do a quick online search. Most states have extension specialists who will provide a few examples that can be a tremendous help in getting started.

Partial budgets

Partial budgets can be just as useful as an enterprise budget, but are often much simpler to make. A partial budget looks at the additional revenues and the additional costs associated with a change in management practices. Let’s say you’re thinking about retaining ownership of your calves to try to generate a little extra revenue. A partial budget for such an endeavor would include the additional revenue from selling a larger calf, as well as the costs associated with keeping the calf around longer. If the additional revenue is greater than the additional costs, go for it. If not, a partial budget was a good way of evaluating such an alternative on paper and many have prevented a financial loss.

Marketing plan

Another strategy that can be helpful when the markets make a downturn is to create a marketing plan and look for ways to add value to your cattle. The first step to a marketing plan is determining a breakeven price using a budget. This is the price at which profit levels are zero and serves as a baseline from which to work.

While marketing livestock is a bit more difficult than marketing grain because livestock cannot be “stored,” there are still several tools at one’s disposal. Once a breakeven price is known, the futures and options market can be used to place a hedge and “lock in” prices at profitable levels. Similarly, a put option can be purchased to create a price floor while also leaving room for upward price movement.

Adding value to cattle

There are also several management strategies that a producer can use to add value to calves.

Some recent research using Mississippi auction data has shown that cattle with body condition scores (BCS) of 5 to 7 bring a premium over cattle with scores above or below that level, with a BCS of 6 bringing the best price. Other management practices such as castration and dehorning will also increase prices at the local auction barn.

Building working capital

Building working capital can be another excellent way of ensuring continuity when markets make a downturn. In short, working capital is the funds that are readily available to meet short-term financial obligations. The most common form of working capital is a cash reserve, but can be in the form of other assets such as calves, feed and other inputs that can be quickly and easily liquidated. Typically, it is recommended that producers try to maintain a working capital “cushion” of 15 to 35 percent of gross revenue. Although it may be difficult to build much working capital this year, it is definitely a strategy to keep in mind once markets make a turn for the better.

Producers have many options at their disposal to mitigate losses when markets make a downturn. I have outlined just a few other options available to producers, but there are many others that have not been mentioned. Perhaps the biggest take-home message is regardless of the strategy taken, the importance of careful planning is highest when cattle prices are at their lowest.