Livestock Management and Marketing Considerations in Dealing With Drought Dr. Curt Lacy, Extension Economist-Livestock Keith Kightlinger, Farm Business Management Specialist

Northwest Florida Beef Conference Marianna, FL February 7, 2008 Overview 1. Where have we been? 2. Where do we think we are today? 3. Where are we going? 4. What can we do about it?

Northwest Florida Beef Conference Marianna, FL February 7, 2008 Fertilizer Prices Nitrogen prices have increased 91% since 2002

Northwest Florida Beef Conference Marianna, FL February 7, 2008 Fuel Prices Diesel prices are up 152% since 2002

Northwest Florida Beef Conference Marianna, FL February 7, 2008 Impact of Fuel & Fertilizer Prices on Cost of Production

Northwest Florida Beef Conference Marianna, FL February 7, million tons

Northwest Florida Beef Conference Marianna, FL February 7, 2008 Where do we think we are?

Northwest Florida Beef Conference Marianna, FL February 7, 2008 Impact of Drought on Cow Numbers  January 1 U.S. Herd 32.5 mil beef cows  Down 1% from 2007  Down 1.5% from 2006  January 1 SE Herd 3.25 mil beef cows  Down 3% form 2007  Down 1% from 2006  Notables GA largest decrease -7% from 2006 FL largest increase +2% from 2006

Northwest Florida Beef Conference Marianna, FL February 7, 2008

Northwest Florida Beef Conference Marianna, FL February 7, 2008 Three Biggest Mistakes Cattlemen Make During a Drought 1. Do nothing hoping it rains or that additional land can be rented or hay purchased. 2. Early weaning AND marketing calves hoping that cows won’t have to be liquidated. 3. Once culling begins, saving young cows (less than 4 yrs) instead of more productive (4-7 yrs) cows. Adapted from Gill and Pinchak. “Destocking Strategies During Drought”. TX A&M University.

Northwest Florida Beef Conference Marianna, FL February 7, 2008 The Basics 1. Most cattlemen have a finite amount of money to put into an operation. 2. Money comes from 3 places: 1. Cash on hand 2. Sales of assets (feed inventories, cows, equipment, real estate) 3. Borrowed capital 3. Assets-Liabilities = Equity 4. EQUITY IS OUR MOST IMPORTANT FINANCIAL ASSET

Northwest Florida Beef Conference Marianna, FL February 7, 2008 Our financial priorities in any situation, in order: 1. Cover our variable costs (feed, fertilizer, fuel, labor, etc.). 2. Cover our fixed costs (taxes, insurance, principal and interest). 3. Pay ourselves.

Northwest Florida Beef Conference Marianna, FL February 7, 2008 How do we help ourselves cover these costs? 1. Fewer expenses 2. More income 3. Some combination of the two Every decision you make has some impact on at least on of these

Northwest Florida Beef Conference Marianna, FL February 7, 2008 Reducing the Cost of Production Pasture and feed cost make up 63% of Variable Expenses

Northwest Florida Beef Conference Marianna, FL February 7, 2008 Covering our Cost – aka Cash Flow Net Cash Flow = Revenue – Expense – Payments Net Cash Flow = Calf Sales + Cow Sales – Feed Costs – Other Costs – Pmts Where calf sales or cow sales = Wt. X Price Drought Math 400# calf X $1.15/# = $460 1,100 pound cow x $0.48/# = $528 Cost per day = $1.00/day for calf gaining 2#/day Cost per day = $1.40/day for dry cow to maintain weight

Northwest Florida Beef Conference Marianna, FL February 7, 2008 Suggested Operating Procedure (SOP) for Cattlemen in a Drought 1. Wean early (60 doa+) 2. Segregate and feed animals by nutritional needs 3. Cull cows 4. Precondition/stocker calves BE LOOKING FOR WAYS TO CUT COSTS

Northwest Florida Beef Conference Marianna, FL February 7, 2008 Marketing Order 1. Open cows (old) 2. Open cows (young) 3. Unprofitable cows 4. Replacement heifers (in development) 5. Current calf crop 6. Marginally profitable cows year old cows Dead-weight

Northwest Florida Beef Conference Marianna, FL February 7, 2008 Effects of Cow Age on Productivity AgeAdjustment BIF Adjustment Factors for Weaning Weights (Steers)

Northwest Florida Beef Conference Marianna, FL February 7, 2008 Cull Unprofitable Cows  Yeah Buts: Must be able to match cows and calves Based on average cow cost Borderline young cows may get a pass

Northwest Florida Beef Conference Marianna, FL February 7, 2008 Cull Unprofitable Cows  Yeah Buts: Must be able to match cows and calves Based on average cow cost Borderline young cows may get a pass

Marketing Strategies for Cows and Calves

Northwest Florida Beef Conference Marianna, FL February 7, 2008 What Determines Cow Value 1. Percent Lean Meat Yield 2. Live weight

Northwest Florida Beef Conference Marianna, FL February 7, 2008 Marketing Classifications of Cull Cows ClassificationLean Percentage of Trimmings Body Condition Score Premium (Discount) Cutter/Canner85%+1-3($3.50/Cwt.) Boning Utility80-85%4-6Base Breaking UtilityLess than 80%7+($2.00/Cwt.)

Northwest Florida Beef Conference Marianna, FL February 7, 2008 Cull Cow Economics 1,100 pound cow BCS 5 worth $55.00/Cwt. = $ pound cow BCS 3.5 worth $51.50/Cwt. = $412 Difference =$188 + plus cost of feed

Northwest Florida Beef Conference Marianna, FL February 7, 2008 Cull Cow Marketing  When Before October 1  What Cows in good flesh (BCS 4+) Cows without obvious defects  How Local market Direct????  Live weight  Carcass basis

Northwest Florida Beef Conference Marianna, FL February 7, 2008 Increasing Income Calf Crop  Short-term backgrounding/creep feeding  Retained ownership Stockering Custom-finishing  Forward price part of your production

Northwest Florida Beef Conference Marianna, FL February 7, 2008 Forward Pricing Part of Your Production  Producers with 50,000# or more can use futures.  Can use video auctions either through local markets or other to forward price calves up to 90 days.  Forward cash contract with order buyers and feedyards.

Northwest Florida Beef Conference Marianna, FL February 7, 2008 Longer-term Cost Considerations  May need to revisit stocking rates  Probably will need to reconsider pasture-mix Cost/lbs. of protein or energy produced Legumes may now make more sense  Cow reproductive efficiency  Cow cost Longevity Replacement heifer economics Return to cross-breeding

Northwest Florida Beef Conference Marianna, FL February 7, 2008 Computer Decision-Aids  Alternative Feedstuffs Calculator  Marketing Alternatives Calculator  Budgets Cow-calf Stockering Custom Finishing

Tax Implications of Weather Forced Sales Slides developed by Keith D. Kightlinger Farm Business Management Specialist University of Georgia

Northwest Florida Beef Conference Marianna, FL February 7, 2008 Weather-Related Sales of Livestock  Special Income Tax reporting may be available for Sales in excess of normal business practice Caused by weather-related conditions  Drought  Flood  Other conditions causing a shortage of water and/or feed Special rules depend on  Whether market or breeding livestock  Whether disaster declaration issued

Northwest Florida Beef Conference Marianna, FL February 7, 2008 Involuntary Conversion Internal Revenue Code Sec. 1033(e)  Applies to breeding, dairy or draft livestock No holding period requirement Does not apply to livestock held in the ordinary course of trade or business (Market Livestock)  Reporting gain postponed by purchasing replacement animals Replacement period runs 2 years from end of sale tax year  Deferral of gain based on sale $ per head  No federal disaster declaration needed

Northwest Florida Beef Conference Marianna, FL February 7, 2008 Sec. 1033(e) Special Rules  Replacement period is 4 years if weather conditions lead to federal disaster declaration Replacement period can be further extended by IRS in cases of on-going drought  Replacements must be like use If sale conditions also make like use replacement impossible, replacement can be made with any property No disaster declaration required to replace with unlike property if like-use replacement prevented

Northwest Florida Beef Conference Marianna, FL February 7, Year Deferral of Income  Election made under Internal Revenue Code Sec. 451(e)  Applies to all livestock (market and breeding, dairy, draft)  Taxpayer Principal business must be farming Must use cash method of accounting  Weather-related conditions must also cause federal disaster declaration

Northwest Florida Beef Conference Marianna, FL February 7, 2008 Making an Election  Internal Revenue Code Sec. 451(e) Election must be made by due date of return, including extensions, for the sale year Election can be revoked, but cannot be made on an amended return  Internal Revenue Code Sec. 1033(e) Election can be made any time during replacement period (2 years, or 4 years) If election revoked, gain must be reported in year of sale

Northwest Florida Beef Conference Marianna, FL February 7, 2008 Animals Eligible for Either Election  Animals (breeding, dairy, draft) eligible for either election (Federal disaster declaration)  Special rules permit revocation of Sec. 1033(e) election and adoption of Sec. 451(e) election during 4-year replacement period Allows election of one-year reporting deferral (reporting in year following sale year) on amended return Permits avoidance of reporting in sale year if Sec (e) election made, and replacement subsequently deemed impractical

Northwest Florida Beef Conference Marianna, FL February 7, 2008 Dealing With The Drought Summary 1. Keep in mind where we are in cycle – Better to do good job with fewer cattle than HA job with a lot! 2. Cull all LIKELY non-productive mature cows (10yrs plus, open etc.)–remember relation between nutrition and putting a calf on the ground. Keep the productive factory in place - 4 to 7 year old cows. 3. If they ain’t growing, they need to be going! Can wean 60 days plus. 4. Put emphasis on things will get you more NET money – Marketing, Management records (vaccinations, implants, feed products, etc.), Performance records. A SHARP PENCIL.