Price Risk Management in Extension Beef Carcass Evaluation Programs: The Georgia Beef Challenge Experience

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Price Risk Management in Extension Beef Carcass
Evaluation Programs The Georgia Beef Challenge
Experience

• R. Curt Lacy, Patsie Cannon, Jim Collins, John C.
  McKissick, and Robert L. Stewart
• Department of Agricultural Applied Economics,
  UGA
• Department of Animal Dairy Sciences, UGA
• Georgia Cattlemens Association

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Thanks to our partners

• Georgia Cattlemens Association
• Georgia Department of Agriculture
• Iowa State University
• Tri-County Steer Carcass Futurity (TCSCF)
• USDA Agricultural Marketing Service

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Highlights of the Georgia Beef Challenge

• Began in 1991 as a way for producers to gather
  information regarding the type of cattle they
  produce
• Partnership between UGA, GA Cattlemens
  Association, GA Department of Agriculture/USDA-AMS
  , and other industry partners
• Goals of the GBC
• Improve the marketability of Georgia-bred cattle
  by establishing a database of feedlot performance
  and carcass information
• Provide educational information to Georgia
  cattlemen regarding the carcass merit of their
  genetics and explore the feasibility of retained
  ownership.

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Growth of the Georgia Beef Challenge
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How Does it Work?

1. Producer completes and mails consignment form
2. Producer is told when and where to deliver his
   calves
3. At delivery cattle are weighed, graded, and
   assigned a market price
4. Calves are shipped to IA
5. Members of the Tri-County Steer Futurity (TCSF)
   feed the calves
6. The animals are harvested and marketed on a
   carcass basis
7. Carcass and production data are returned to
   producers along with a check (usually)

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History of Risk Management in the GBC

• In early years done on an ad-hoc basis
• As numbers grew so did the RM implications
  ?county agent began doing projections and
  handling RM after consulting with GBC personnel
  consignors
• He soon realized there had to be a better way
• About 3 years ago a RM Committee was formed to
  handle RM for the program

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Georgia Beef Challenge Risk Management Plan

• Risk Management Committee comprised of extension
  economists, beef specialists, and producers
• Consignors approve pricing objectives at annual
  meeting
• RMC implements the plan

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Pricing Objectives for 2004-2005

1. Lock in a 50 profit when available
2. Buy enough protection to lock in value of cattle
   when they left GA
3. Do whatever is necessary to limit losses to
   50/head

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Making Decisions

1. Patsie Cannon sends a report on the numbers,
   weights, and sexes of cattle when they are
   shipped.
2. Curt Lacy uses UGA Custom Finishing Budgets to
   estimate breakevens and estimated profits.
3. Risk Management committee discusses and evaluates
   alternatives via phone or e-mail
4. A decision is made and implemented via our broker
   in Iowa

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Caveats

1. Producers with a futures contract worth of cattle
   in the same pen can do their own risk management
2. They can consult with the risk management
   committee regarding alternatives
3. They can ask the risk management committee for
   assistance in implementing their plan
4. They can use our broker in IA

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Alternatives Utilized

• Hedge
• Put option
• Synthetic put
• Fence
• ½ hedge

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Example Worksheets

• Example Report 1
• Breakeven Example
• Final Report

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Profits From Feeding
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Lessons Learned General

• Our genetics are as good as any
• Preconditioning pays when it comes to shipping
  cattle
• Price risk management is important

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Lessons Learned - Risk Management

• It is better to have a plan and to let experts
  implement the plan
• Producers need to a have a clear understanding of
  what they are agreeing to
• It is imperative that breakevens be calculated
  for every pen
• Past feedlot and carcass performance do play a
  role in breakevens
• Communications between feedlots, broker, and risk
  management committee are crucial

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Lessons Learned Risk Management

• There is a HUGE difference between a textbook
  hedge/option and the real world
• Managing price risk on the input side is less
  straightforward
• Hard to estimate physical needs
• Timing of feed needs is difficult
• Some type of cash strategy probably works best

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Lessons Learned Risk Management

• Live Cattle options are different from grains
• Often there is very little liquidity at the
  strike price you want
• Sometimes delivery dates make you exit early
• Timing of sales can create opportunities for
  hedging or options

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Changes in Attitudes, Latitudes, and Behaviors

• Some producers have
• Learned that not everyone can be above average
• Decided to focus on raising high quality feeder
  calves
• Changed genetics
• Started preconditioning and vaccinating
• Developed their own risk management plans

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Other Developments

• Resulted in cattle marketing workshops
• Some collective feeder cattle sales now require
  some form of carcass data
• Some producers raising discounted feeder cattle
  have begun retaining ownership
• Cattle shipped in 2004-2005 have EID tags
• USDA-AMS FSMIP Grant

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Summary

• GBC has been a very educational program for beef
  cattle producers
• Risk management makes the carcass information
  gathering process less expensive
• There is considerable difference in teaching risk
  management and actually doing it!!

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Questions?