Finding Profitability in Volatile Times
by Troy Smith for Angus Productions Inc.
NASHVILLE, Tenn. (Feb. 1, 2012) — If there has been a winner in these uncertain economic times, it just might be the beef industry. Speaking during a Cattlemen’s College session, Western Kentucky University’s Nevil Speer told Cattle Industry Convention attendees that current economic conditions afford beef producers with opportunity for revenue growth. Achieving profitability, however, may depend on application of some key management strategies.
While volatile times do bring opportunities for increasing revenue, Western Kentucky's Nevil Speer reminded his audience that they also bring increased risk. [PHOTO BY TROY SMITH]
Speer noted how concerns about job security, health care costs and personal finances have altered consumer behavior. They are “deleveraging” and attempting to increase personal savings. When buying products, and particularly food, they are looking for value. That’s been good for the beef industry.
As evidence, Speer pointed to the $125 fed-cattle market — a level 55% higher than the $79 market of December 2009. Beef exports have grown, too, with export value adding $235 per head ($19 per hundredweight) to fed cattle.
Speer allowed that beef producers face high production costs, saying the median cash outlay for cow-calf producers is $535 per cow, and corn price volatility has “amplified.” Gone are the days when the average weekly change in corn futures was about 6¢ per bushel up or down. In 2011, he said, the change was 20¢-25¢.
“Going forward, I think we can expect more of the same,” said Speer. “Globalization, currency values, energy markets and other factors will influence ag commodity prices and promote volatility.”
While volatile times do bring opportunities for increasing revenue, Speer reminded his audience that they also bring increased risk. He advised producers to lock in margins through contractual arrangements and other forms of risk management. He recommended paying down debt and maintaining higher capital reserves.
“Evaluate expansion opportunities, avoiding cash traps, and manage costs,” added Speer, saying costs of production often explain much of the profitability differences among producers.
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