While the overall outlook is optimistic for the U.S. livestock industry, increased market volatility is expected, and producers continue to face challenges and increased operating costs. Factors such as changing weather patterns, trade policy and tariffs, supply chain challenges, tax policy and labor issues create strong headwinds.
The U.S. livestock industry may be centuries old, but even with that wealth of knowledge and experience passed down on family-owned ranches and farms, managing an increasingly complex set of variables gets exponentially harder. Pricing, of course, is also part of that equation. A smaller number of large meat companies now control a significant portion of the beef, pork and chicken markets, leading to a shift from independent farms to a corporate contract model – leaving smaller producers looking for a competitive edge and working closely with lenders can help them achieve that.
At the upcoming ABA Agricultural Bankers Conference in St. Louis, Missouri (Nov. 12-14), Trey Freeman, livestock adviser with Lewisville, Texas-based Ever.Ag, will discuss the complexities of price risk management tools such as livestock risk protection, gross margin and brokerage, highlighting the importance of flexibility and strategic adaptability in an ever-changing market. Ever.Ag helps dairy, livestock, crops and agricultural business manage risk and improve efficiency and profitability.
“My goal is to arm bankers with the knowledge to better protect bank assets via loan quality and preservation of loan equity,” Freeman told the ABA Banking Journal. “I want them to walk away with a greater understanding of what it takes to keep your bank’s strategic plan up to date and improve management’s responsiveness to adverse market movements and commodity cycles.”
Freeman said that the among the biggest obstacles his livestock customers face right now is determining how to manage the “historical conditions” experienced by the industry, cattle, in particular.
“There are record high prices across the board,” he said, “but there also are a variety of factors that could cause serious disruption to the market — changes in consumer demand due to record high beef prices, New World Screwworm (of which there’s been a resurgence) and the resulting border closure, and potential packing plant closures.”
For cow and calf operations, he said, it is a question of rebuilding.
“Does it make sense for their operation? If so, when should they start retaining heifers/buying replacements? How should they balance historically high prices for feeder calves now with the potential for returns later?” he asked. “For cattle feeders, it is more on the side of balancing margins. Feeder cattle are comparatively much more expensive than fat cattle right now, having to “bet on the come.’”
Overall, he said that fixed costs have risen “significantly,” making margins smaller, even when feed prices are at manageable levels. “Labor is also a challenging factor with the current administration,” Freeman said. “This includes both on-farm labor as well as labor at packing plants and how that could impact the industry.”
To prepare for the next few years, Freeman said livestock farmers and ranchers need to understand their financials well and “have an idea of break-evens,” as well as the factors they need to actively be managing, how risk tolerant they can be and when they can take on risk, and the financial strengths and weaknesses in their operations.
This kind of operational awareness will help them to take advantage of market opportunities, chart pitfalls and be proactive in managing their margins rather than letting opportunities pass by or “failing to take advantage of profitable conditions in favor of an eternal bullish mindset,” he said.
When asked about the factors transforming business as usual, Freeman said the “big one” is technology.
“I know it’s kind of cliché these days, but with fixed costs being higher and volatile market conditions, finding efficiencies in operations and maximizing available resources and efforts is a big deal,” he said. “This comes in the form of on-farm management technology as well as back-office technology that can help with operational and financial management. Ultimately, it will widen the gap exponentially between those who utilize and those who do not.”
Bottom line, the message Freeman wants to get across to conference attendees and others is that banks should have confidence in starting a conversation with their customers about risk management tools and strategies.
“Ultimately, we want to help banks equip their ag borrowers with the knowledge and tools available to execute goal-oriented risk management plans that focus on discipline, communication and effective measurement of risk and reward,” he said, stressing the importance of ongoing collaboration of producer, risk manager and, often, the lender. “This involves active discussions aligning expectation around an effective risk management plan for individual needs — maximizing earnings and minimizing risk.”
