Livestock, Equine and Forage Outlook Kenny Burdine UK 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

US Dairy Production

US All Milk Price Prices to average near $20 for year Nearly $4 above 2010, $7 above 2009 Increased 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 1 st 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

US Pork Production (million lbs)

2012 Market Expectations Pork production expected to increase 2% from 2011 – Big change in 4 th 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

Cow slaughter up 4.3% through November

Livestock Marketing Information Center Data Source: USDA/NASS Kentucky has lost 212K beef cows since 2007

Med / Large Frame #1 Steers 500 to 600 lbs.

Med / Large Frame #1 Steers 700 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 simple A)Make more money by running more cows B)Make more money by making more on each cow I run C)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 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 $146-$ x $1.48 = $1, 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 $1.03$1.32$1.60 $170$0.85$1.13$1.42 $180$0.67$0.95$ # calf price 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 Burdine UK Agricultural Economics (859)