College of Agriculture, Consumer and Environmental Sciences Operating Cash Flow in Drought By: Paul H Gutierrez Sponsored by: Quay County Cooperative Extension

Objectives today Frame the challenge/opportunity Some Basics on Cow-Calf Profit Analysis Market “lookout” 101 Cash Flow Management during a drought: some considerations College of Agriculture, Consumer and Environmental Sciences

Contact Information College of Agriculture, Consumer and Environmental Sciences Paul Gutierrez (575) NMSU: Drought Page

Framing the Challenge-The Headlines “Drought accelerates cattle liquidation in southern plains” “Cattle prices much lower as heat, drought continue” “Hay, grass shortage could be widespread” U.S. cattle herd fell to record low amid Plains drought, pricy corn” College of Agriculture, Consumer and Environmental Sciences

Framing the Challenge-Your Challenge Job #1. Maintain appropriate stocking rates and levels of forage utilization to avoid overstocking. Maintain acceptable reproductive performance of the cow herd. Maintain and manage the financial health of the business College of Agriculture, Consumer and Environmental Sciences

Some Genera Recommendations Ongoing—evaluate range conditions Ongoing—evaluate cow condition Reduce forage needs/demands –Sell cows, early wean, lease pasture, supplement additional energy Use water to help distribute cow Cull—open cow, old cows, 2-year old producing cows, 3- year old producing cows, replacement heifers College of Agriculture and Home Economics

Financial Management and your Drought Management Strategy It all starts with your Chart of Accounts, AKA Record Keeping –tax reporting; –preparing financial statements; and –completing enterprise analysis for drought management purposes. College of Agriculture, Consumer and Environmental Sciences

Remember, for record keeping purposes, transaction occur in: Three (3) Categories –operating revenue and expenses; –financing transactions involving borrowing or repayment of debt; and –capital asset purchases and sales. College of Agriculture, Consumer and Environmental Sciences

Financial Statement: Income Statement Income Statement (think profitability) Retained earnings = Net Income from operation – Capital gain/loss – Taxes – Family Living Withdrawals College of Agriculture, Consumer and Environmental Sciences

Financial Statements: Balance Sheet Balance Sheet (think liquidity and solvency) The balance sheet is derived from the fundamental accounting equation: Assets = Liabilities + Owner Equity, or Owner Equity (Net Worth) = Assets – Liabilities College of Agriculture, Consumer and Environmental Sciences

Financial Statement: Cash Flow (Drought Management Statement) Cash Flow Statement (think repayment capacity) Cash flow statements can also serve as a means of determining credit needs and timing of repayment, provides a source of cash receipts reported in the income statement College of Agriculture, Consumer and Environmental Sciences

The Cow-Calf Profit Analysis Profit or loss = Revenue – Expenses, or Profit = (price x production) – expenses Where: Price = f(supply and demand) Production = f(no. and weights) Expenses = f(supply and demand-direct, indirect and interest exp.) College of Agriculture, Consumer and Environmental Sciences

Some Recent Stats July 1, all cattle inventory mil, down 1.4 percent In OK, last two weeks-56% increase feeder cattle sales, 205% increase cow & bull sales July 17, 32% of US pastures rated poor, TX no 1 cattle state, rated 94% poor to very poor Good News! Export demand up 34% College of Agriculture and Home Economics

Livestock Marketing Information Center Data Source: USDA-NASS

Livestock Marketing Information Center Data Source: USDA-NASS

Livestock Marketing Information Center Data Source: USDA-NASS

Livestock Marketing Information Center Data Source: USDA-AMS & USDA-NASS, Compiled & Analysis by LMIC

Livestock Marketing Information Center Data Source: USDA-ERS & USDA-FAS, Compiled & Analysis by LMIC

Livestock Marketing Information Center Data Source: USDA-ERS & USDA-FAS, Compiled & Analysis by LMIC

Livestock Marketing Information Center Data Source: USDA-ERS & USDA-FAS, Compiled & Analysis by LMIC

On the other side of the profit equation—COST of Production Market Fundamentals Supply and Demand College of Agriculture and Home Economics

Livestock Marketing Information Center Data Source: USDA-NASS, Compiled & Forecasts by LMIC

Livestock Marketing Information Center Data Source: USDA-NASS, Compiled & Forecasts by LMIC

Livestock Marketing Information Center Data Source: USDA-NASS, Compiled & Forecasts by LMIC

Livestock Marketing Information Center Data Source: USDA-ERS, Compiled by LMIC

Livestock Marketing Information Center Data Source: USDA-NASS, Compiled & Forecasts by LMIC

Livestock Marketing Information Center Data Source: USDA-NASS, Compiled & Forecasts by LMIC

Livestock Marketing Information Center Data Source: USDA-NASS, Compiled & Analysis by LMIC

Livestock Marketing Information Center Data Source: USDA-NASS, Compiled & Analysis by LMIC

Livestock Marketing Information Center Data Source: USDA-NASS, Compiled & Analysis by LMIC

Livestock Marketing Information Center Data Source: USDA-AMS

Livestock Marketing Information Center Data Source: USDA-AMS, Compiled & Analysis by LMIC

Livestock Marketing Information Center Data Source: USDA-AMS, Compiled & Analysis by LMIC

Livestock Marketing Information Center Data Source: USDA-AMS, Compiled & Analysis by LMIC

Livestock Marketing Information Center Data Source: USDA-AMS

Livestock Marketing Information Center Data Source: USDA-AMS

Summary Strong fundamentals: –Cow inventory down and decreasing –Historically small calf crop –No signs/opportunity of “real” herd build up –Feedlot placements/marketing strong –Export markets strong College of Agriculture and Home Economics

Some “other” strong fundamental Pasture conditions are poor to very poor Feed stuff prices at record highs Force sales of livestock pressuring market Supplemental pasture and forage options regionally limited Cost of production, in general, continue to increase College of Agriculture and Home Economics

Unit Cost of Production—What can you do to make a difference? Profit = (Price x Production) – Expenses Price or Unit Cost of Prod. = (Expenses) (Production) Ex. $500/500 lbs = $1.00/lb College of Agriculture, Consumer and Environmental Sciences

Profit per Cow Formula Profit or loss = (((%calf crop x weaning wt.) x price) + ((%cull lvstk sales x wt.) x price))- expenses/cow For example: –85% weaned calf crop (CC), –500-lb $1.35/lb. (PCC). –14% (CL), 1150-lb (PCL). – Total annual exp $525 per cow (ACE). College of Agriculture, Consumer and Environmental Sciences

Plugging in the numbers Profit or loss = (((%cc 85% x WW 500lbs) x PCC $1.35/lb.) + ((CL 14% x CW 1150lb) x PCL $.65/lb.) – ACE $525 = ((425lbs x $1.35/lb.) + (161lbs x $.65/lb.) - $525 = ($ $104.65) - $525 =$ $525 = $153.40/cow College of Agriculture, Consumer and Environmental Sciences

Lets consider some “what if” Drought Sales of Livestock –25% Early Weaning College of Agriculture, Consumer and Environmental Sciences

Consider these Scenarios Scenario 1: Standing forage is inadequate and the decision is too traditional wean calves in late October—cows nutrient requirement not met Scenario 2: Standing forage is inadequate and the decision is too traditional wean calves in late October—cows nutrient requirement met Scenario 3: Standing forage is inadequate and the decision is too early wean calves July 30 th and to sell as early weaned calves—cows nutrient requirement met Scenario 4: Standing forage is inadequate and the decision is too early wean calves July 15 th and to place calves in feedlot for approximately 112 days—market late October. College of Agriculture and Home Economics

Tax options for Drought Sales Code Section 451(e): Elect to postpone reporting taxable gain on the additional sales of any livestock for one year; or Code Section 1033(e): Elect to postpone, and all together avoid, paying taxes on the gain from the sale of breeding stock if replaced within a specified time frame. College of Agriculture and Home Economics

Contact Information College of Agriculture, Consumer and Environmental Sciences Paul Gutierrez (575) NMSU: Drought Page

Now What? College of Agriculture, Consumer and Environmental Sciences