Webinar: Drought — Financial Implications of Possible Decisions (Aug. 6, 2020)
With Elliott Dennis, extension livestock marketing specialist, Agricultural Economics, and Robert Tigner, extension agricultural systems economist, Agricultural Economics.
Drought is a periodic feature of the Great Plains impacting range and crop production. Drought can have severe financial impacts on ranches which try to adapt to the problem. Research and financial modeling, as well as tools projecting financial outcomes can help with the decisions that ranchers make while adjusting to drought.
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[00:00:00.329]Randy Saner: I'm Randy senior a beef edge extension educator working in Lincoln Logan and MacPherson counties. Welcome to today's seminar.
[00:00:08.160]Randy Saner: This is part of the weekly summit series of webinars produced by brassy extension farm and ranch management team and the Department of Agriculture economics.
[00:00:17.730]Randy Saner: You can find recordings of these stations, a schedule of upcoming webinars and other firstname.lastname@example.org now.edu
[00:00:28.230]Randy Saner: One source that we would like to quickly highlight in Nebraska real response high hotline in times of stress, knowing when to reach out is essential.
[00:00:38.340]Randy Saner: For Brasco row response hotline can provide mental health counseling information regarding legal assistance financial clinics.
[00:00:47.670]Randy Saner: Mediation and more the hotline is a toll free number is one 804 6402 by date. In addition, a wealth of resources related to stress and wellness can be found at rural wellness.us now.edu
[00:01:07.230]Randy Saner: During today's webinar, you are welcome to ask questions in the chat box located at the bottom of your screen.
[00:01:14.160]Randy Saner: We will address those questions during the Q AMP a period at the end of the presentation presentation drought is a fact of life for many on the Great Plains to discuss this financial impact on branches.
[00:01:26.880]Randy Saner: As well as the implications of possible decisions we have Robert Wagner and extension edge.
[00:01:32.940]Randy Saner: Extension Educator Robert is the Southwest Nebraska existence economist for Nebraska extension taking her has worked in a economics education for the past 25 years at Nebraska extension. And I always say University technical degrees are an animal science and economics.
[00:01:54.360]Randy Saner: And Elliot Dennis. Dennis and extension lifestyle marketing specialist and assistant professor in agriculture economics.
[00:02:01.650]Randy Saner: Elliot, Dr. Elliot Dennis is an assistant professor for lifestyle marketing and risk management in the Department of Agriculture economics at the University of Nebraska, Lincoln.
[00:02:10.530]Randy Saner: And its affiliated economist with the National Institute of anti microbial resistance research and education, Dr. Dennis earned his PhD in agriculture, economics, with an emphasis in livestock.
[00:02:23.190]Randy Saner: from Kansas State University. Prior to his PhD. He worked in roles and body entrepreneurs and venture capitalist. We will start today with
[00:02:35.520]Randy Saner: Dr. Dennis only
[00:02:39.360]ELLIOTT DENNIS: Okay, I'm gonna go ahead and
[00:02:43.560]ELLIOTT DENNIS: Share my slide here.
[00:02:49.320]ELLIOTT DENNIS: And we'll get started.
[00:03:03.780]ELLIOTT DENNIS: So Thanks Randy for for the introduction, as, as he mentioned or Robert and I are going to be doing a little bit of tag team today.
[00:03:11.280]ELLIOTT DENNIS: I'm going to start off in the beginning, talking a little bit about where we're at in the current situation with the drought.
[00:03:18.420]ELLIOTT DENNIS: And talk a little bit about the price cycle and some potential issues with maybe the population or destocking
[00:03:26.700]ELLIOTT DENNIS: Then Roberts going to take us through some of the kind of different scenarios and what we know from the economic standpoint and then
[00:03:34.470]ELLIOTT DENNIS: I'm going to take it back again and then finish up with some talking about some price risk management and how that can be a fundamental tool we can use regardless of whether a drought occurs or not.
[00:03:49.980]ELLIOTT DENNIS: So let's just talk about where we're at in the forage pasture and weather condition you know releases this great report.
[00:03:58.020]ELLIOTT DENNIS: It can be a weekly report we pulled the month report, and it's really just monitors drought.
[00:04:03.840]ELLIOTT DENNIS: Great resources to monitor kind of where we're at in the weather condition and really what we want to see is and focus on is this area right there. And that's where we are in
[00:04:14.940]ELLIOTT DENNIS: In Nebraska. We're, we're a little bit concerned, but really where we're seeing this large drought and potential hurdle liquidation is in
[00:04:23.070]ELLIOTT DENNIS: Is in the southwest Colorado New Mexico and western Texas. So that's important for us as we started looking at
[00:04:31.980]ELLIOTT DENNIS: You know, people starting to ship forage from Nebraska outside in order to meet those demands and also some potential liquidation feeder cattle, going to the market, a little bit earlier because pasture conditions of deteriorated.
[00:04:46.980]ELLIOTT DENNIS: So let's just talk about where the pasture conditions are nationally. This is a chart that shows the pasture land that it's rated good to excellent
[00:04:57.630]ELLIOTT DENNIS: Or pasture condition that's rated poor very poor. The red line is the 2018 numbers that 2019 numbers aren't blue
[00:05:08.010]ELLIOTT DENNIS: Five year average is the dark green line and where we're at in 2020 is in the gray line. So right here, this is where we're at.
[00:05:18.090]ELLIOTT DENNIS: Pasture condition nationally that's rated good to excellent has been decreasing right now. It's about 35% of all pasture land is rated good
[00:05:27.540]ELLIOTT DENNIS: Was pasture land deteriorates from good from good to excellent. Well, we would expect to see the Florida very poor pasture land increase. And that's exactly what we're seeing here. And notice that this difference between the five year average and the
[00:05:45.030]ELLIOTT DENNIS: Is growing. It's almost about, you know, 10% higher than it normally is over five years.
[00:05:51.960]ELLIOTT DENNIS: The. Not only is it
[00:05:54.600]ELLIOTT DENNIS: A worse condition than what we would normally expect, but the tier rates is actually started a little bit earlier than what we would have anticipated.
[00:06:04.140]ELLIOTT DENNIS: Historically, and so it's worse. And it started a little bit sooner so where, what are we gonna do about that nationally but just because national numbers can sometimes mass, some of the impacts that we see locally.
[00:06:21.570]ELLIOTT DENNIS: Let's go look hadn't just plotless spatial map on where pasture condition is good pasture. That's rated good to excellent
[00:06:29.850]ELLIOTT DENNIS: So, as you remember, we're about 35% nationally good to excellent. This is where we're at in Nebraska so better than average nationally. So 40% of the pasture here in Nebraska was rated at good or excellent
[00:06:46.830]ELLIOTT DENNIS: On notice down here where the drought is really happening 12% of the pasture in New Mexico is rated. Good. Excellent, well below the average. And notice that there's some differences here you know you have over here in Idaho 82% really positive.
[00:07:05.160]ELLIOTT DENNIS: And then in the southwest, where a lot of the feeder cattle can come out of in the south on the southeast on pasture conditions still very positive.
[00:07:13.800]ELLIOTT DENNIS: So while we're talking about this drought and the conditions that tend to be focused on the southwest recognize that there's differences in the forage conditions.
[00:07:23.190]ELLIOTT DENNIS: And that's going to be where if we're looking to procure feeder cattle or inflows into feedlots most of that is probably going to be coming out of the Southwest, which means we would expect kind of the depressed prices down there.
[00:07:40.560]ELLIOTT DENNIS: So one of the reasons why we're kind of experiencing this
[00:07:44.670]ELLIOTT DENNIS: Hotter than usual drought is because of just some oscillations in the weather patterns and these weather patterns are just like price patterns they vary, year to year and have different reasons for why they occur. So this is a temporal plot, this is
[00:08:01.470]ELLIOTT DENNIS: Here and all the way over here. This is 2020 and when it's positive. You might have heard some of these phrases. This is what we call the El Nino effect.
[00:08:13.980]ELLIOTT DENNIS: And when it's in the blue. This is the lawn union effect. So some of you been able want listening the forecast. We're in kind of a lasagna. In fact, which means we generally have hotter than average.
[00:08:29.550]ELLIOTT DENNIS: Impacts El Nino is are generally associated with weather conditions. And so what I want to point to out here is this multi year drought that we experience and
[00:08:39.810]ELLIOTT DENNIS: 11 and 12 that really happened in the southwest. So the question is not whether we're going to experience a drought. It's about whether what's the severity of this drought.
[00:08:51.090]ELLIOTT DENNIS: Going to be is it going to be what we experienced like in 2010 2011. Is it going to be a multi year drought. Is it going to be just, we have a bad year and then pop up that would be kind of like what we experienced here 2017 was a little bit of a drought.
[00:09:07.860]ELLIOTT DENNIS: Not quite as bad. And then popped right back down.
[00:09:11.640]ELLIOTT DENNIS: So when Roberts going to be talking about how to manage during multi year droughts for a single year drought and the condition
[00:09:20.400]ELLIOTT DENNIS: And the management strategies that we use are different, as we have these different patterns.
[00:09:27.870]ELLIOTT DENNIS: Some of the resources that we as economists tend to monitor as we look at market conditions. We're always looking at kind of the drought monitor where we're at. That's gonna
[00:09:38.490]ELLIOTT DENNIS: sending signals to us on where the market is potentially headed in the future and that has a lot to do with available feed resources and then we often look at these drought projections, both are provided through the UN LM s network.
[00:09:56.130]ELLIOTT DENNIS: And free to anyone taxes.
[00:10:00.900]ELLIOTT DENNIS: So what are the assumption. It has to do with what if we don't have pasture. What do we have available feed resources.
[00:10:07.710]ELLIOTT DENNIS: And so what we can do is we can look at how much. Hey, do we have an order to feed. So if animals do have to come off pasture early
[00:10:16.050]ELLIOTT DENNIS: Do we have the opportunity to maybe dry lot. Some of these animals or if we're in the
[00:10:21.600]ELLIOTT DENNIS: If we didn't get quite as much forage production during the summer as we would have liked. And now we're going into a potentially long winter. Do we have enough. Hey, or or alternative feed resources to fetus through
[00:10:34.650]ELLIOTT DENNIS: It kind of the good thing is this where we're at Nebraska, we tend to have quite a bit of a feed resources available now there is some talk about maybe production being down a little bit for this year due to the drought conditions, but going in to the season.
[00:10:51.750]ELLIOTT DENNIS: Hey stocks are actually positive over the 10 year average by about 30 to 40 tons thousand times.
[00:11:01.680]ELLIOTT DENNIS: And notice some of the conversation that's been happening has been well as
[00:11:07.380]ELLIOTT DENNIS: Lack of hey resources happen in Colorado, and they're further amplified. This year, you know, going into the season. They didn't have
[00:11:16.320]ELLIOTT DENNIS: High hey starts now. They have a drought. So pasture conditions are poor. Now you have producers that are no face with the impact of are we going to continue to feed these animals out or a week and I tried to
[00:11:31.140]ELLIOTT DENNIS: import some feed resources and some of that feed is coming out from these high surplus states from Nebraska, Kansas, of course, South Dakota.
[00:11:41.520]ELLIOTT DENNIS: So the people who are most likely to be impacted are in this region here, the Colorado, New Mexico, not so much in Texas, just because of their availability of, of, hey, going into the season.
[00:11:58.980]ELLIOTT DENNIS: And so one of the things as we start looking at as we're considering alternatives about whether we should be price or
[00:12:06.660]ELLIOTT DENNIS: You know, have the opportunity to purchase. Hey, in the future, one of the things we do is we put together a seasonal price index. And this shows us how house strong or weak prices are relative to certain times of the year. So what we see here is not tuber
[00:12:27.930]ELLIOTT DENNIS: That when the price index is at one, that means it's average. That's about the average price, we'd expect nationally. These are national prices over these past
[00:12:38.280]ELLIOTT DENNIS: 10 years. Hey prices tend to be a little bit higher in the springtime. When the resources tend to be a little bit lower right, we don't have as much to buy, you know, this is when
[00:12:49.980]ELLIOTT DENNIS: We have eaten through all that in the winter time. So prices tend to rise a little bit
[00:12:57.450]ELLIOTT DENNIS: You can do the same thing for
[00:13:00.030]ELLIOTT DENNIS: Other Hayes, this would be kind of like your prairie. Hey, and notice that people do try to price. Some of this at times in as we're going into into the fall
[00:13:14.520]ELLIOTT DENNIS: Though just be as you're looking at potentially pricing. Hey,
[00:13:20.340]ELLIOTT DENNIS: Always try to compare it to where we're at. On average, and recognize it. Sometimes when we have droughts, it does get priced in earlier.
[00:13:31.020]ELLIOTT DENNIS: What if we do, what if we are entering into either, you know, a long term drought period or a multi year drought period. What are we to do
[00:13:40.170]ELLIOTT DENNIS: Well what Robert will really focus on and what I hope to set the stage for is that it really depends on where we're at in the press cycle.
[00:13:47.610]ELLIOTT DENNIS: And the price cycle is something is producers sure you're all familiar with. You don't want prices are strong, or making lots of money that sends us a signal that we should expand
[00:13:59.820]ELLIOTT DENNIS: As we start to expand as cow calf operators, what we're gonna do. We're gonna hold back heifers and then the fewer heifers that go to market were actually raise prices in the short run.
[00:14:11.760]ELLIOTT DENNIS: So more people will enter the market. Again, but over you know that two three year period. Those heifers eventually become cows and it increases the calf drop
[00:14:23.070]ELLIOTT DENNIS: And then now we have this new calf crap that comes to market chasing those higher prices. Well, the in increase in supply in the short run is going to cause prices to decrease
[00:14:37.710]ELLIOTT DENNIS: Then producers are going to liquidate liquidate some of their hurt. There may be going to sell off some cows.
[00:14:44.580]ELLIOTT DENNIS: Maybe not retain quite as many heifers so that even further puts the price farther down and then that kind of cycles back up. We have a small cap crop and then we go back. So this cycle happens
[00:14:56.760]ELLIOTT DENNIS: When we're focusing on the drought. It's an influx of heifers or cow is coming to the market and this further AMP can further push down prices.
[00:15:08.850]ELLIOTT DENNIS: And so when we're making the decision about whether to liquidate, you know, D populate or we're talking about destocking really depends on where we're at in this price cycle where we are in the cow calf expansion or contractionary phase.
[00:15:25.650]ELLIOTT DENNIS: And so these droughts, if they're overlaid onto the cattle price cycle can really accelerate the contractions phrase the phases and a multi year drought you and further accelerates that. So the big question is, given that I'm seeing some drought conditions today.
[00:15:45.780]ELLIOTT DENNIS: In my area and potential forecast in the future for increasing your ad populate do I put some of those heifers or or callous to market or do I decide to hold and feed them out and kind of ride out the price. The price decreases.
[00:16:03.510]ELLIOTT DENNIS: And so some of the strategies which Robert will go over. We have some management strategies that we can focus on this buying fee that's using available feed resources.
[00:16:13.530]ELLIOTT DENNIS: We might even do some if we need to boost your income do some liquidation maybe get a job in town and then even even doing some diversification down here, this might be retained ownership on the
[00:16:31.320]ELLIOTT DENNIS: On the cows out or then get her cattle that we put into the feedlot and my be on expanding into some cropland.
[00:16:43.620]ELLIOTT DENNIS: So when we were talking about potentially D populating do a drought, very important to consider where we're at the price cycle, because if we sell
[00:16:54.240]ELLIOTT DENNIS: At we decided to de populate at the bottom of the cycle and we're selling our, our females that drought price or drought sale prices.
[00:17:06.060]ELLIOTT DENNIS: And then when prices kicked back up for buying females at higher prices and there's lots of things that we lose the genetic potential in the program as well.
[00:17:16.020]ELLIOTT DENNIS: And that we don't actually ever make up the losses that we that we experienced
[00:17:24.210]ELLIOTT DENNIS: So where are we at in this price cycle. We've talked a lot about where this is that that it matters where we're at. So right here, the blue line is where we are at in the price uncle.
[00:17:35.940]ELLIOTT DENNIS: So we are at the peak of the price cycle and just on our way down. So the January. January 1 2020 2020 inventory showed that for really the first time and you know the last
[00:17:52.470]ELLIOTT DENNIS: Four or five years inventory has had just started to peak. So we're not at the bottom of the price cycle. So the drought shouldn't hurt us quite as bad. If we're looking to potentially be populate
[00:18:05.340]ELLIOTT DENNIS: What we're just starting to come down on that downward trend. So what you'll notice is that this downward trend really varies. Once we start peaking we're generally three to four years before we're at the bottom.
[00:18:20.910]ELLIOTT DENNIS: Once we start picking
[00:18:24.570]ELLIOTT DENNIS: On the price cycle.
[00:18:26.790]ELLIOTT DENNIS: So keep that in mind as Robert is talking about some strategies recognize that we have a lot more flexibility and potentially de populating verse destocking because of where we're at in that price cycle.
[00:18:40.920]ELLIOTT DENNIS: And Robert will take us through a little bit of what we need to do on this historically assessing what some of the ranch profitability, given that we have either a year or multi year drought.
[00:19:00.810]Robert Tigner: Okay, so
[00:19:03.360]Robert Tigner: We do have some indications about
[00:19:09.390]Robert Tigner: What type of strategies do work under the specific conditions that Elliott was talking about, is this a sort of a flash drought, a one year drought, or is this a longer term occurrence.
[00:19:25.020]Robert Tigner: In the southwestern part of Nebraska during the early 2000s. We had a multi year drought that impacted much of of our my producers in this region. And so one of the ways that we take a look at that is to model those occurrences.
[00:19:48.150]Robert Tigner: Okay.
[00:19:54.030]Robert Tigner: There.
[00:19:55.710]Robert Tigner: Definitely is this isn't responding to rapidly. Anyway, so the two potential decisions that we have here really as Elliott said is to de populate we're going to match.
[00:20:08.760]Robert Tigner: Heard size heifers and calves to the forage resources that we have or are we going to D stock by destocking I'm referring to moving cows tabs heifers
[00:20:22.650]Robert Tigner: You know yearlings into some kind of feeding.
[00:20:26.790]Robert Tigner: Regimen or removing them to read pasture.
[00:20:31.170]Robert Tigner: The
[00:20:34.500]Robert Tigner: The group listed here Bastion from University of Wyoming modeled occurrence a model multi year droughts either droughts that occurred very quick quickly in the first year and then
[00:20:53.850]Robert Tigner: Relaxed and the following two years or a model where drought accelerated during the course of the three of the four years. They also compared this against
[00:21:09.510]Robert Tigner: The con the choices, one would make in in managing these this drought. Compare that against peak to peak price cycle or trough to trough price cycle.
[00:21:25.320]Robert Tigner: So the forage response here we I wanted you to understand what this drought was going to look like this is in Fremont county Wyoming.
[00:21:36.540]Robert Tigner: And the deviation from mean April precipitation is the the way that they're determining whether or not this is a drought in that particular year.
[00:21:51.600]Robert Tigner: So during the first three year drought, you see that April precipitation was on was off by 1.29 inches but to find two years. It was only off by point two 6.24
[00:22:08.220]Robert Tigner: This led to a steep production that first year of forage for cows over the course of that year, not so steep a decline in year two and three for the four year drought to deviation
[00:22:24.720]Robert Tigner: From normal April precipitation accelerated so that during the fourth year it was a decline of about 1.16
[00:22:36.540]Robert Tigner: You'll notice though that the forage response was fairly severe in years, two, three and 430 percent reduction in year two and forage 24% in year three and 36% reduction in year four. So those for those four years saw us a steep reduction in forage available for those for those cows.
[00:23:11.280]Robert Tigner: Here we have
[00:23:13.260]Robert Tigner: A chart of the models projections of discounted net present value. Okay. And the precipitation during that occurrence.
[00:23:26.160]Robert Tigner: During the four year at the top of this, this chart stable precipitation what it takes.
[00:23:34.800]Robert Tigner: Is the control, if you will, and it shows that if
[00:23:39.660]Robert Tigner: All gears.
[00:23:41.850]Robert Tigner: During the runs of this model. They had stable April precipitation always the same amount of April cetacean returns would average somewhere around $34,000 per
[00:23:58.590]Robert Tigner: Heard this is a 200 cow herd. So it's not as large as some birds. So we would end up with about $34,000 normal precipitation very variation in Fremont County, we would end up with about 14,007 57 in net returns a net returns are defined as returns after all costs, which means
[00:24:25.560]Robert Tigner: Full economic cost has been taken into account, and these are our returns after that.
[00:24:33.390]Robert Tigner: If we had a three year drought, we ended up with
[00:24:37.320]Robert Tigner: Net have $86,000 or 80 $600. This is under the the regimen, where we do populate we sell cows off.
[00:24:49.380]Robert Tigner: And then four year drought, we come up with a net present value of almost the same amount as under variable precipitation. However, under those two drought.
[00:25:03.120]Robert Tigner: Consequences from a peak to peak, we ended up with a net loss of $112,244 and under a four year drought of about $3,921. Why did we have a loss here of much larger for the three year drought. The reason is that we purchased fee very early on and that
[00:25:33.330]Robert Tigner: Drought continued to pressure our revenues and we were unable to build a heard back rapidly enough to
[00:25:46.410]Robert Tigner: To gain income. We also bought heifers
[00:25:51.600]Robert Tigner: To build back up at higher prices we were still on the downhill side of that peak to peak, but we still bought heifers to replace those cows at a higher price than occurred about three, four years later.
[00:26:06.570]Robert Tigner: So those camp prices were unsustainable for those purchased animals. The same thing occurred for the drought year
[00:26:17.760]Robert Tigner: The four year drought year we bought animals at a little bit higher prices heifers at higher prices than we would have had we waited three or four years later, but we did not have as rapid
[00:26:35.010]Robert Tigner: Increase in our borrowing because our for each resources were not as deeply impacted until year four and the trough to trough.
[00:26:48.390]Robert Tigner: You'll notice the difference in the net returns the three year drought purchasing feed options perform much better and a trough to trough. In other words, we need to know
[00:27:00.480]Robert Tigner: Whether or not we're in a the bottom of the price cycle, or the the top of the price cycle to understand whether or not we might end up with net negative returns, no matter which strategy we have
[00:27:17.880]Robert Tigner: We will have better returns in a trough to trough using either strategy, we need to know if we're at the peak and if we purchase feed options or purchase feed and use that option we are likely to have net negative returns
[00:27:40.020]Robert Tigner: So here again is a summary of those and a summary of the amount of hey purchased, we still see we see that there's larger purchases of hay in that
[00:27:53.850]Robert Tigner: Three year drought than we had in the four year drought, because of its accelerated the four year drought accelerated through rather than having a rapid drought occur.
[00:28:09.150]Robert Tigner: Here you see an interesting depiction of the instead of the mean, the change in income from the peak to peak price cycle compared to the choices of management that that an individual takes
[00:28:31.020]Robert Tigner: The three year drought that cross hatch ends up being the worst choice and it becomes a net negative returns of in excess of $60,000 at the bottom of the price cycle or about the bottom of the
[00:28:50.970]Robert Tigner: Price cycle as it starts to turn up.
[00:28:54.720]Robert Tigner: So this has consequences for an individual who is at some risk in the first place in knowing whether or not to purchase or D populate
[00:29:08.220]Robert Tigner: Both the four year and the three year drought. You notice had in at least a low of minus $40,000 of net returns. But those net returns, or negative for about five or six years out of the price cycle.
[00:29:27.000]Robert Tigner: Those people at most risk would would need to understand that this might be the consequence of multiple multi year drought, whereas the three year for year drought.
[00:29:40.140]Robert Tigner: And if I have a high debt to asset ratio in the first place. I need to think about that as a a consequence that might make my ranch or
[00:29:55.890]Robert Tigner: Cattle operation unstable because I could not withstand multiple years of net negative returns as this occurs.
[00:30:08.070]Robert Tigner: However, the previous chart was was peak to peak here, we have trough to trough. In this scenario, the model indicates that we do not have that kind of risk for any of the choices that we have, we have better performance of course for the drought. Where are we
[00:30:35.160]Robert Tigner: Where are we, D populate but those farms and ranches at with high debt to asset ratios don't have the same kind of risk financial risk that they would have if they were in the other price cycle.
[00:30:55.020]Robert Tigner: So how do I decide where I am at well done rules tend to be something that
[00:31:03.420]Robert Tigner: People like to utilize. I'm a little cautious about some roles one North Dakota retired Ag Economist, that happens to be a rancher in Wyoming. Wyoming as well.
[00:31:18.720]Robert Tigner: Says that when camp prices are low D population is the only feasible strategy.
[00:31:24.990]Robert Tigner: He
[00:31:26.640]Robert Tigner: Says that because of the experience of those North Dakota ranchers and a few years of droughts that he had many of those and the analysis and the repeated analysis that he did
[00:31:38.940]Robert Tigner: Because of those those trials that the North Dakota ranchers experience. But when camp prices are high different strategies are possible.
[00:31:50.160]Robert Tigner: However, I prefer to utilize some kind of analysis data and calculation and modeling, if you will, rather than using dumb rules.
[00:32:04.200]Robert Tigner: The bottom line though with both this spreadsheet from Colorado State University orphan pack. I'll describe unpacking in a little better, a little more broadly later.
[00:32:18.270]Robert Tigner: The bottom line is, though, that for either of these things to work, we have to know what our costs productions are if we don't calculate
[00:32:29.250]Robert Tigner: Cost to production per cow per unit of per pound of capsule whatever unit you're using, we cannot utilize these spreadsheets and fin pack effectively. That is true whether this is in drought or whether we're operating in a normal situation.
[00:32:52.560]Robert Tigner: So,
[00:32:54.090]Robert Tigner: This Colorado State spreadsheet is available from their website again here we we input a number of different production parameters that we're we're interested in, we need to we need to know what we expect for cap prices or we have to
[00:33:17.160]Robert Tigner: Look forward into the, into whether we're at the peak or the trough of price cycle and understand how that price cycle may impact our expected prices for calves in the future. So we input those we estimate
[00:33:39.510]Robert Tigner: Whether we're going to purchase additional feed and how much that's going to cost us
[00:33:44.970]Robert Tigner: This is going to vary by year, and we're going to, it's going to vary.
[00:33:49.440]Robert Tigner: As Elliott was saying, if that drought is widespread if we're in New Mexico and the southern southwestern part of Colorado.
[00:34:01.770]Robert Tigner: Hey, is going to be short availability is going to be short and we're going to have to truck at a long ways. So there's going to be a lot of transportation. On top of that, so we may end up be paying that $200
[00:34:15.210]Robert Tigner: per ton for hey locally. If we are in Southwest Nebraska and the drought has is only for us, regional, then we may have much better prices, much lower prices available for us because transportation and availability is better.
[00:34:39.870]Robert Tigner: So here's the options that
[00:34:42.930]Robert Tigner: That this
[00:34:45.030]Robert Tigner: Spreadsheet calculates. So the first option is I mentioned is a purchasing additional feed the second option is truck compares to rent and pasture. It was interesting to me back in 2004 five while I was still working at Iowa State. I was running across Nebraska.
[00:35:07.980]Robert Tigner: Angus cows on rented pasture in Iowa Northeast Iowa.
[00:35:14.610]Robert Tigner: They had been trucked at far west two states West or east, excuse me to find a pasture. So that cost back 2004 and five was six was lower than we would have we will experience now that cost will be much greater to transport cattle to rent a pasture than it is today or back then.
[00:35:46.290]Robert Tigner: So the next cost it or option we have a cell pairs and replace cattle.
[00:35:52.530]Robert Tigner: Later on,
[00:35:54.990]Robert Tigner: This is a difficult one.
[00:35:57.720]Robert Tigner: If we look at the replacement cost that is expected for those animals we have here $1,000 replacement cost.
[00:36:10.410]Robert Tigner: In 2012
[00:36:13.770]Robert Tigner: We had a severe drought across the Midwest and corn belt. We had the population occur during that year. And interestingly, a couple of years later.
[00:36:28.710]Robert Tigner: Those heifers those bread halfords we're not selling for $1,000 apiece, where they
[00:36:34.770]Robert Tigner: I heard of red heifer sign for
[00:36:39.000]Robert Tigner: As high as 40 $500 a pregnant heifer
[00:36:45.900]Robert Tigner: So we need to be careful about costing or
[00:36:51.000]Robert Tigner: projecting forward what those costs for those replacement animals might be
[00:36:57.270]Robert Tigner: We need to probably input two or three different costs to figure out whether or not that
[00:37:06.240]Robert Tigner: A that option is reasonable for us or not. If we assume that we're going to spend 1000 bucks for a replacement animal
[00:37:17.190]Robert Tigner: That might give us one solution. But if we think that we're at the trough are going to replace animals in two or three years when that peak when that when those animals are in up costs are
[00:37:33.060]Robert Tigner: Accelerating or increasing we may need to input 20 $500 for a replacement now instead of that $1,000 then that solution might change as to what's a better choice for us trucking or feeding okay so
[00:37:52.170]Robert Tigner: When you think about
[00:37:54.780]Robert Tigner: The cost of replacement animals, make sure that you use two or three different values so that you can get two or three different solutions and get as sense of whether this is very sensitive what whether that Choice Option three is very sensitive to the price you use for placement animals.
[00:38:19.410]Robert Tigner: So then output comes and under normal conditions by feed and rent pastures, so
[00:38:28.740]Robert Tigner: We then have another choice of cell cows.
[00:38:33.420]Robert Tigner: What this chart is telling us is the change in net worth. And so it gives us an indication of whether or not
[00:38:41.970]Robert Tigner: One of these choices is is better for us, it gives us a choice. It gives us a sense of whether or not we are borrowing has increased and we have not been been able to recapture that
[00:38:56.970]Robert Tigner: That net worth.
[00:39:00.510]Robert Tigner: In improvement based on the the
[00:39:05.670]Robert Tigner: Numbers that we use for the model in all this cases in all these cases in the solutions that we have here, you see that selling cows and replacing at a later date is is the better solution. I did not run this with higher prices that may change the solution.
[00:39:26.700]Robert Tigner: So this other decision tools.
[00:39:30.270]Robert Tigner: You'll notice you would have noticed in in the CSU spreadsheet, you would have noticed that they had two or three years of of calculations there.
[00:39:43.260]Robert Tigner: But with Finn pack which is
[00:39:46.530]Robert Tigner: A financial package.
[00:39:49.440]Robert Tigner: It can look to up to 15 different scenarios. The CSU.
[00:39:55.770]Robert Tigner: System spreadsheet does not include some of those scenarios. Is somebody going to find a job someplace.
[00:40:04.830]Robert Tigner: Like Randy has talked about what other
[00:40:10.170]Robert Tigner: Enterprises. Can I add to this operation, such as guided hunts, such as goats or sheep.
[00:40:21.270]Robert Tigner: We can also take a look at whether or not we're going to add yearlings or background and calves as the flexibility in the in the range system to
[00:40:37.530]Robert Tigner: To match our animal units to the forge available in a particular year.
[00:40:43.620]Robert Tigner: So we can combine scenarios using fin pack.
[00:40:48.960]Robert Tigner: In a way that the CSU.
[00:40:52.440]Robert Tigner: model does not the spreadsheet does not
[00:40:57.810]Robert Tigner: Choose which which financial package you're going to use based on whether you want to think out longer term or whether you want to consider multiple scenarios multi and combinations of scenarios, instead of bye bye feed or sell cows or move them to pasture.
[00:41:22.440]Robert Tigner: So a little bit of the example of of fin pack.
[00:41:28.920]Robert Tigner: It will provide a cash flow and it will provide a net returns
[00:41:37.590]Robert Tigner: And compare the net returns and cash flows for each of the chosen scenarios, side by side.
[00:41:44.970]Robert Tigner: Impact is available from a net Nebraska farm business incorporated
[00:41:51.060]Robert Tigner: There's going to be a cost to that.
[00:41:54.120]Robert Tigner: But it will be much less than
[00:41:59.910]Robert Tigner: An error or
[00:42:02.580]Robert Tigner: The cost of purchasing excess extra feed for cattle.
[00:42:10.110]Robert Tigner: So it will also then calculate a cost production. Okay.
[00:42:16.860]Robert Tigner: Magnify from the net Nebraska farm business incorporated is no longer available or won't be available soon but fin pack does allow you to cost out
[00:42:32.400]Robert Tigner: A variety of
[00:42:34.710]Robert Tigner: Enterprises. If you have multiple enterprises on your operation in this, in this example, we are calculating total expense for beef calves. This is a high cost here, of course, but it's just an example of how that that
[00:42:54.480]Robert Tigner: Finn pack can be utilized to assess whether or not this will reduce cost or increased cost over the long run.
[00:43:08.040]Robert Tigner: So the evaluation steps here that that as I see it, understand your current situation in the cow price cycle in this short term if you believe this is a short
[00:43:20.520]Robert Tigner: Occurrence of the drought is a short occurrence economize find those areas where you can reduce costs.
[00:43:31.050]Robert Tigner: cattle ranchers are excellent at that because in the long run. The low cost producer will stay in in business economic theory tells us that determine what is feasible.
[00:43:46.080]Robert Tigner: Now I've talked about it a number of different options here your ranch your farm is going to have different resources. So your feasibility is different than somebody else.
[00:43:57.330]Robert Tigner: So you need to understand what those feasibility is estimate the initial options costs and expected income through that CSU using a net present value or a partial budgeting.
[00:44:14.220]Robert Tigner: So now I need to get over to to
[00:44:17.970]Robert Tigner: Elliot and give it back to him.
[00:44:24.510]ELLIOTT DENNIS: Thanks, Robert.
[00:44:26.640]ELLIOTT DENNIS: Yeah, appreciate what Robert said, knowing that we're at that we're at a peak of the price cycle right now. So as we go back and look at some of what Robert was
[00:44:36.960]ELLIOTT DENNIS: Was looking at recognizing that we're probably managing the peak to peak situation and not in a trough troughed so really those situations about
[00:44:46.650]ELLIOTT DENNIS: Buying feed or depopulated are extremely important in that farm Nebraska farm business also does that and then also in our department, we have the Nebraska financial strong services, which is
[00:44:59.280]ELLIOTT DENNIS: Also does something similar, but regardless of what of what we do, or what the drought condition might be. There's some certain things that we can
[00:45:10.890]ELLIOTT DENNIS: Do to manage price risk so price is always a function of the supply and the demand and in the market right we got our demand, we have our supply
[00:45:21.810]ELLIOTT DENNIS: This is the price that we end up seeing, we see this price and there's things that are impacting the supply and demand. Some of these might be production factors.
[00:45:32.730]ELLIOTT DENNIS: So the BSC in 2003 with the bomb cycling last year, or in this case, we're talking about pasture conditions, really what we're talking about is that there is going to be some sort of influx potentially in supply
[00:45:48.450]ELLIOTT DENNIS: You know with with the pasture conditions if we're talking about the bomb cyclone with animals dying. We're talking about a reduction in the supply so supplies going this way.
[00:46:02.040]ELLIOTT DENNIS: So price would would be going up. So each of these is fundamentally impacting the supply and demand and then these are outside of the operational controls and then this this year we've
[00:46:15.810]ELLIOTT DENNIS: Unfortunately, have experienced quite a bit of this price risk we have it US, China trade war they got resolved really at the end of 2020 was when China started buying product again.
[00:46:27.270]ELLIOTT DENNIS: Where the whole come fire the packing plant in Holcomb Kansas last August. Coming up on actually, you know, one year anniversary this week, then we have
[00:46:39.300]ELLIOTT DENNIS: And so the real question is how how do feeder cattle prices are in, how are they impacted by these rare market events that are completely out of our control. So what I did is I said, Okay, what was the price before, these are the feeder cattle futures prices.
[00:46:57.690]ELLIOTT DENNIS: What was the future kairos market trading at prior to these events. This is when the market shock happened. This is the market shark.
[00:47:08.190]ELLIOTT DENNIS: And what it prices do the blue line that you'll see here. That's the coven
[00:47:14.220]ELLIOTT DENNIS: We had some recovery and this is post, post days event and it slowly started to come up
[00:47:22.860]ELLIOTT DENNIS: Comparing the coven issue to whole can fire you. You can see the magnitude. Magnitude difference of why we focus so much on Cove, it not only had severe price changes, but it's taken a very long time for the prices to recover back
[00:47:41.550]ELLIOTT DENNIS: So these price sharks that are completely out of the control that tend to be very sudden and generally come without warning can have impacts on the prices that we receive at the local cash market.
[00:47:57.150]ELLIOTT DENNIS: Animals are the same, that they were the day before. But what the markets willing to pay for them has has changed and so
[00:48:05.490]ELLIOTT DENNIS: So what we can talk about is we can say, well, we can overlay this in the drought scenario.
[00:48:11.640]ELLIOTT DENNIS: We know that these weathers tend to go in cycles. We don't know if there is going to we generally know within a year that there's a certain probability of drought.
[00:48:21.870]ELLIOTT DENNIS: But we don't perfectly know whether a drought is going to occur or the question that we really have is, can we potentially
[00:48:29.760]ELLIOTT DENNIS: Or mitigate some of these potentially lower feeder cattle prices. So one of the ways that we can do that as soon as some price risk management. I just went ahead and just selected a central Nebraska operation, assuming we're going to sell.
[00:48:45.840]ELLIOTT DENNIS: 550 wins steers in May, or sorry, we're going to price the cattle in May and then sell them in September. So that means we're setting our price risk management decision in May.
[00:48:58.710]ELLIOTT DENNIS: And we observe our cash price and we have our plus or minus gains and losses and our on our positions in the futures market or in our livestock risk protection.
[00:49:10.110]ELLIOTT DENNIS: So what I did here is said okay, look at these last 10 years if we would have used risk management. And then what I did is I took the local cash prize for Nebraska Nebraska combined auction and said,
[00:49:22.440]ELLIOTT DENNIS: Given that we use this risk management scenario, what was our cash above or net profit above or below just selling in the cash market.
[00:49:33.960]ELLIOTT DENNIS: And what you'll see here is that it, it varies not going to go over each scenario but you'll see 2014 when we had huge run up in the prices. Some of these risk management scenarios. Didn't do quite as well. This isn't in the money put that's an out of the money put
[00:49:54.000]ELLIOTT DENNIS: And this is a general head where we sell futures. Well, look at this.
[00:50:00.630]ELLIOTT DENNIS: If we just use an in the money put priced in May for September delivery, we would have earned about about a little $4 and 50 cents per hundred more than the local cash market. And this takes into account our commission fees and all of that.
[00:50:18.630]ELLIOTT DENNIS: If we exclude 2014 which were we had, you know, astronomical cash or cash prices that would have increased about five and a half.
[00:50:28.980]ELLIOTT DENNIS: This is a risk management strategy that allows us to pretend protect severe downside risk on on profits and the great thing about engaging in these risk management tools.
[00:50:43.890]ELLIOTT DENNIS: Is that we can still benefit from the premiums that we received for our cattle in the cash market. So if you have good sorting you have healthy cattle, you have
[00:50:53.910]ELLIOTT DENNIS: Superior genetics, the market, the cash price will still pay you for that. But what we're getting is this benefit by using some
[00:51:03.420]ELLIOTT DENNIS: Sort of risk management tool either LLP livestock risk protection or using the futures market. And so we still get that cash price plus or minus what these gains or losses are
[00:51:15.780]ELLIOTT DENNIS: But we can still gain from the cash up rise but protect ourselves if we have the SIP year decreases, like what happened with Kobe. No one would have expected that, you know, going into this year.
[00:51:29.400]ELLIOTT DENNIS: Another alternative if we're thinking about some ways to manage this price risk is to look at the PRF and PRF essentially allows you to protect some solar to forage pasture range and forage insurance and really what you'll see here
[00:51:45.870]ELLIOTT DENNIS: Is we'll share all these slides afterwards. But if we're winning calves and selling them and just focus on this scenario, if we had PRF insurance.
[00:51:59.520]ELLIOTT DENNIS: For the last 18 years we would have essentially earned about $40,000 more net profit over that time and then we look at the drought years
[00:52:10.950]ELLIOTT DENNIS: We just look at the drought years it's almost $120,000 more and so PRF is another way that we can manage where if forest production doesn't meet a certain average production level.
[00:52:25.170]ELLIOTT DENNIS: Then you the indemnity gets paid out to you. And so looking at these strategies and recognizing that if we
[00:52:32.880]ELLIOTT DENNIS: If we don't want to manage price risk, we can still manage our fortress using pastor engine forge insurance and Jay Parsons here at the University of Nebraska, Lincoln Department of Ag econ
[00:52:46.290]ELLIOTT DENNIS: Is more than willing to have our to talk with you about this and gave a previous webinar on on signups for that.
[00:52:56.070]ELLIOTT DENNIS: To kind of the take home message is, you know, the objective is really to survive in the short run, we recognize that there's price cycles.
[00:53:03.690]ELLIOTT DENNIS: And that we're trying to put out strategies we recognize. We're at the top of this cycle. So making sure we're really utilizing these drought tools that Robert went over and really proactively trying to manage for this risk.
[00:53:21.210]ELLIOTT DENNIS: And that there are some tools like pasture range and forge insurance and some sort of risk management using livestock risk protection or some hedging using futures and options that can help us be profitable in the short run, and continue to
[00:53:36.690]ELLIOTT DENNIS: Be ranching in the future.
[00:53:40.050]ELLIOTT DENNIS: Or that that's all that we have I think Robert and I are going to take some questions and we'll, we'll pass it back to you. Randy.
[00:53:53.610]Randy Saner: So I'm going to look at the chat.
[00:53:58.350]Randy Saner: So Robert, let's say we had
[00:54:01.650]Randy Saner: An age cow is older taking more feed.
[00:54:07.230]Randy Saner: Would it so we could use your sheet to tell her that we should keep that cow or seller during and drought.
[00:54:13.560]Randy Saner: Because she would be higher risk, right, because she's not going to produce a bigger calf. Those are some issues. We could look at as far as especially depending on what the cycle is accountable cycle time
[00:54:28.530]Robert Tigner: Yeah, especially for those cows that are aged, you know,
[00:54:35.400]Robert Tigner: They
[00:54:38.640]Robert Tigner: I hate to sell a pregnant cow. I really that bugs me, but she might be higher cost. You could use that spreadsheet to
[00:54:48.390]Robert Tigner: To compare which group of cows, you might want to hold on to and feed. Okay, that that could be one use for it, but I would use it as as a group of cows, your age cows are going to be more expensive as your Andy alludes to
[00:55:08.640]Robert Tigner: But I
[00:55:10.410]Robert Tigner: So yes, you could do it that way if you group cows by age.
[00:55:15.840]Robert Tigner: You're going to have to know how much more feed that cat is going to take in. And that's something to talk with a nutritionist with
[00:55:34.020]Randy Saner: So another question would be the other alternative would be to sell some of those open heifers that are pretty valuable or or selling as Brad heifers and just not increase the size of your third
[00:55:48.030]Randy Saner: When, when the drought is you can also look at that through your planning programs, too. Right.
[00:55:55.440]Robert Tigner: Yeah, especially fin pack would be very useful for that.
[00:56:00.330]Robert Tigner: It has three components to fin LRB long range budget fin flow cash flow and Finn and which is financial analysis. So you can build those cash flows based and defend or based on
[00:56:18.480]Robert Tigner: Based on those parameters that you think you're going to take on
[00:56:25.260]Robert Tigner: Fin pack is a very useful tool. It's underutilized, and is an excellent planning longer range planning tool.
[00:56:37.140]Randy Saner: So Elliot on risk management.
[00:56:40.590]Randy Saner: I think the biggest challenge some producers have is
[00:56:46.860]Randy Saner: There and about nervous about trying and for the first time. And so what would be some options as opposed to engineering or doing a put. What's the other option out there. You mentioned one, I'm sure. But I just wanted to kind of go mentioned again. Yeah.
[00:57:02.640]ELLIOTT DENNIS: Sure. So when are generally when we're talking about
[00:57:07.110]ELLIOTT DENNIS: Some of our, our risk management tools. There's really three ways that we can manage some sort of risk. We can do forward contracts. So that would be like a video sale.
[00:57:17.760]ELLIOTT DENNIS: There were really locking in a price, subject to a price slide, you know, an adjustment between what you say we're going to the way
[00:57:27.570]ELLIOTT DENNIS: Expected at sale and what's actually delivered and that really eliminates a lot of basis risk and clocks in our cash price and then hedging using futures and options requires a broker and some people are a little bit leery about that.
[00:57:45.810]ELLIOTT DENNIS: But as we show what the hedging the in the money puts the fence. Those are all would have been executed as a broker and we can see that
[00:57:56.010]ELLIOTT DENNIS: Over time, you know, some years we're going to make money. Some years we're going to lose money. But on average over a long cycle or can actually be more profitable over time.
[00:58:07.680]ELLIOTT DENNIS: The other alternative when we're selling a futures, or our put
[00:58:15.180]ELLIOTT DENNIS: We're actually have a specific contract from the CME so for feeder cattle, that's going to be 50,000 pounds. So that's about 66 to 90 head. The other alternative
[00:58:29.160]ELLIOTT DENNIS: Is going to be livestock risk protection so LLP is actually very specific to production, you can ensure forehead. If you want it to you can ensure 2000 head.
[00:58:42.270]ELLIOTT DENNIS: You can, and so it gives you the exact proportion of of coverage that you need. And when you actually look at the subsidy rates.
[00:58:53.310]ELLIOTT DENNIS: And the premiums that you would pay. They're actually almost identical to what you would pay in the futures market.
[00:59:00.390]ELLIOTT DENNIS: And so, and the great thing about using LR P is that you're not subject to what they call margin calls or or the or the maintenance margin and you can purchase that really from anyone that you get a loan from Farm Bureau Farm Credit
[00:59:16.740]ELLIOTT DENNIS: And the premium is really what helps it
[00:59:20.970]ELLIOTT DENNIS: Be just as economical and they just raised those rates up so
[00:59:27.000]ELLIOTT DENNIS: If you're a regular producer, you get a 20% premium are anywhere from 20 to 30% premium and then if you're in a new beginning farmer rancher, you get an additional 10% premium on top of that. So it really makes great economic sense in order to use that risk management.
[00:59:49.200]Randy Saner: So really, really size doesn't make a difference on El RP depending, you can be any size and still still use that contract which is a nice
[00:59:59.160]Randy Saner: A nice feature of that contract.
[01:00:01.440]ELLIOTT DENNIS: Yeah and that you can do it for a Brahmin cattle dairy cattle steers heifers and there is a certain amount of
[01:00:10.260]ELLIOTT DENNIS: Cattle that you can ensure through LR P for in a given year, but
[01:00:16.110]ELLIOTT DENNIS: Most producers who are going to use that are never going to hit those levels.
[01:00:23.130]Randy Saner: Sounds good. I'm
[01:00:26.070]Randy Saner: looking to see if we have any other questions you may type in the Q AMP. A there at the box if you do have a question.
[01:00:34.350]Randy Saner: And we will we will we will get them an ass.
[01:00:38.130]Randy Saner: Right now I'm not seeing any more.
[01:00:42.210]Robert Tigner: And we're at one o'clock so
[01:00:43.860]Randy Saner: And we've got so I guess we should probably get ready. And so I want to thank you, Robert and Elliot, and everyone for joining the webinar.
[01:00:52.770]Randy Saner: recording of the webinar will be posted at farm you and al.edu where you can also register for other upcoming webinars as reminder check farmed at Yahoo and aol.edu for schedule for
[01:01:04.770]Randy Saner: More webinars centered around farm and ranch management. The series continues next Thursday at noon WITH A LOOK AT THE MARK marketing corn and soybeans. After the August was the report.
[01:01:16.680]Randy Saner: You'll be receiving a short 30 minute survey 30 seconds survey in your email, and we would really appreciate your feedback on today's webinar and your input on future sessions. Thanks again for joining us. Thanks, guys.
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