Different Risk Management
Improved breeding for quality beef can gain top prices for herd owners.
Cow herd owners leery of the futures market or insurance for risk management can look to quality beef for protection.
Scott Brown, University of Missouri (MU) livestock economist, discussed that option at the MU Thompson Farm field day Tuesday, Sept. 20. He asked the farmers present if any were using risk management. No hands went up.
“You could have made lots of money with risk management,” he added.
Brown said he suggested at the field day a year ago that beef prices had strong downside risk. Prices fell sharply in the past year.
The beef-owner response was not a surprise. Livestock owners don’t use risk-control tools widely used by crop farmers, Brown said. The economist spoke after MU scientists told of research on breeding quality beef.
Jared Decker, MU Extension geneticist, said that steers from the Thompson herd had graded 33% USDA Prime. That’s compared to the national average of 3% Prime at the time.
Brown’s charts show Prime beef prices consistently sold well above prices for USDA Choice and Select, the lower grades.
Plus, the Prime price line over time was fairly smooth. The price lines for the lower grades jumped up and down. Prime prices are less volatile, he said. Then he suggested that higher, less volatile price offers risk management. Steady prices reduce unknowns.
The high-quality beef not only brings more money, it also sells at premium prices at the packers. Programs such as the Certified Angus Beef® (CAB®) brand help boost income even in times of low beef prices.
The animal scientists pointed out that using better genetics through artificial insemination (AI) adds more than beef quality. Marbling — thin layers of fat — in beef cuts increases with known genetics. That marbling score determines the final USDA grade of a beef cut.
Brown did not predict a bottom point for falling beef prices. However, he said downside risk remains. Risk management can still prove profitable in uncertain times.
“Develop a plan,” he advised. “Going home and doing nothing is a plan — not a good plan, but a plan.”
He said that cow-calf returns of $550 per head as in 2014 will not likely be seen again. “We had never — I say, never — in history seen returns like those.”
However, his charts showed that falling prices remain above long-term averages from before the beef-price bubble.
“Basic economic laws still work,” Brown said. “Supply and demand affects prices.” His numbers showed that producers, in response to record prices, held back more heifers and grew more calves.
In the last two years, producers sold an additional 3 billion pounds (lb.) of meat per year. That was on top of record pork and chicken already on the market. In his forecast, Brown sees another 3 billion lb. of beef coming.
Brown said the cattle cycle is changing. Backing off on production comes much slower now. “Producers respond to high prices by increasing the cow herd. But they delay cutting the herd when prices drop,” he explained.
Editor’s Note: Duane Dailey is a writer for University of Missouri Extension.