Livestock

Price Volatility

Belasco

Update on
Livestock
Prices
Livestock Price Volatility
Rationale
Behind Price
Movements

What’s Next?
Eric Belasco
Managing
Livestock Risk Assistant Professor
Department of Agricultural Economics and Economics
Montana State University
Bozeman, MT

Montana Agriculture in Volatile Times, October 2011

 Livestock
Price Volatility

Belasco

Update on
Livestock
1 Update on Livestock Prices
Prices

Rationale
Behind Price
Movements 2 Rationale Behind Price Movements
What’s Next?

Managing
Livestock Risk 3 What’s Next?

4 Managing Livestock Risk

 Feeder Prices are up more than 20% over last year

Livestock
Price Volatility Nearby Futures Cattle Prices $134.04   

$140
Belasco

$130
Update on
Livestock Feeder Live
Prices $120
Rationale
Behind Price $110
Movements

What’s Next?
$100
Managing $118.55
Livestock Risk
$90

$80

$70
Jul‐03

Jul‐04

Jul‐05

Jul‐06

Jul‐07

Jul‐08

Jul‐09

Jul‐10

Jul‐11
Jan‐03

Jan‐04

Jan‐05

Jan‐06

Jan‐07

Jan‐08

Jan‐09

Jan‐10

Jan‐11
Source: CME, compiled by LMIC
 Volatility has remained relatively stable in cattle market

Livestock Monthly Historical Volatility
Price Volatility
70%
Belasco
60%
Update on
Livestock Live Cattle Corn
Prices 50%

Rationale
Behind Price 40%
Movements

What’s Next? 30%

Managing
Livestock Risk 20%

10%

0%
Jul‐03

Jul‐04

Jul‐05

Jul‐06

Jul‐07

Jul‐08

Jul‐09

Jul‐10

Jul‐11
Jan‐03

Jan‐04

Jan‐05

Jan‐06

Jan‐07

Jan‐08

Jan‐09

Jan‐10

Jan‐11
Source: Chicago Mercantile Exchange
 Deseasonalized basis prices

Livestock
Price Volatility
Average Monthly Basis, By Cwt Steers, Billings 2000 
Belasco
to 2010
$25
Update on
Livestock
Prices $20
Rationale
Behind Price $15
Movements

What’s Next? $10

Managing
Livestock Risk $5

$0

‐$5
500‐600 lbs 600‐700 lbs 700‐800 lbs

‐$10
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Source: Provided by LMIC, complied by Duane Griffith

 Basis risk is relatively calm

Livestock
Price Volatility

Belasco
Average Monthly Seasonally Adjusted Basis price,
Update on
Livestock by cwt Steers, Billings
Prices Yrs 500-600 lbs 600-700 lbs 800-900 lbs
Rationale Mean
Behind Price
Movements 2003 - 2004 1.44 1.66 1.75
What’s Next?
2005 - 2006 5.87 2.85 1.12
2007 - 2008 -4.35 -3.85 -2.74
Managing
Livestock Risk 2009 - Now 0.80 0.36 -0.51
Standard Deviation
2003 - 2004 4.05 2.67 2.79
2005 - 2006 4.45 3.74 3.45
2007 - 2008 3.54 3.51 2.07
2009 - Now 3.53 3.67 2.27
 What drives cattle price volatility?

Livestock
Price Volatility

Belasco

Update on
Instability in the cattle market can come from
Livestock
Prices
Uncertain demand
Rationale Domestic preferences and consumption
Behind Price
Movements
Foreign preferences and new consumer markets
What’s Next?

Managing
Livestock Risk

⇒ Domestic consumer demand for beef has been solid

⇒ Beef demand is inelastic (not very sensitive to price
changes)
⇒ New trade deal with S. Korea
 What drives cattle price volatility?...(cont.)

Livestock
Price Volatility

Belasco
Instability in the cattle market can also come from
Update on
Livestock Uncertain supply
Prices
Input prices (fuel and grains)
Rationale
Behind Price
Weather uncertainty
Movements Direct effect through placement shocks
What’s Next? Indirect effect through grains price shocks
Managing
Livestock Risk
Foreign suppliers (e.g., the TB case in Mexico)

⇒ Fuel and corn prices are volatile (as usual)

⇒ Weather always uncertain (this year,last year,...)
 What are current expectations for prices next year?

Livestock
Price Volatility

Belasco
March ’12 August ’12
Update on Cash Price 140.06
Livestock
Prices Feeder Futures Price 146.95 148.75
Rationale 20-Day Hist. Vol. 7.92% 9.00%
Behind Price
Movements Expected Steer Prices
What’s Next?
500 - 600 169.62 155.55
Managing
600 - 700 158.63 149.85
Livestock Risk 700 - 800 146.34 147.39
Expected Heifer Prices
500 - 600 158.92 150.70
600 - 700 149.37 144.96
Assumes todays futures prices and seasonal basis adjustment
Note: Futures and cash prices as of 10/26
 Thinking about prices for next year

Livestock
Price Volatility

Belasco

Update on
Livestock
Prices

Rationale
Behind Price
Movements

What’s Next?

Managing
Livestock Risk
 Is the drought over?

Livestock
Price Volatility
U.S. Drought Monitor October 25, 2011
Valid 8 a.m. EDT

Belasco

S SL
Update on S
L
Livestock
Prices S

SL
Rationale S
Behind Price
Movements
L
SL SL
What’s Next? SL S S L

SL
Managing S
L
Livestock Risk SL

Intensity: Drought Impact Types:

D0 Abnormally Dry Delineates dominant impacts
D1 Drought - Moderate
S = Short-Term, typically <6 months
D2 Drought - Severe (e.g. agriculture, grasslands)
D3 Drought - Extreme
L = Long-Term, typically >6 months
D4 Drought - Exceptional (e.g. hydrology, ecology)

The Drought Monitor focuses on broad-scale conditions.

Local conditions may vary. See accompanying text summary
for forecast statements. Released Thursday, October 27, 2011
http://droughtmonitor.unl.edu/ Author: David Miskus, NOAA/NWS/NCEP/CPC
 Risk management options

Livestock
Price Volatility

Belasco

Update on
Livestock Managing Price Risk
Prices
Futures and options market
Rationale
Behind Price Put on feeder or live cattle prices
Movements Call on corn prices
What’s Next?
Forward contracting
Managing Federal insurance
Livestock Risk
Livestock Risk Protection (cattle price)
Managing Production Risk
Pasture, Rainfall, and Forage (Rainfall index)
 An Illustration of Downside Risk

Livestock
Price Volatility

Belasco

Update on Representative MT livestock operation

Livestock
Prices
2,000 head herd
Rationale
Behind Price 15% cull rate
Movements

What’s Next? Steers sold at 575 lbs and $1.50 per lb

Managing
Livestock Risk
Heifers sold at 535 lbs and $1.45 per lb
Compare this case with that of 6% (32% likelihood)and
12% (17% likelihood) reductions in revenue
Initial cash on hand: $25,000
 A Comparison Using the Case Farm

Livestock
Price Volatility

Belasco

Scenario
Update on
Livestock Metric Base -6% -12%
Prices Revenue ($M) 1.46 1.41 1.32
Rationale Current Assets ($Thousands) 497.16 409.65 322.13
Behind Price Net Cash Flow ($Thousands) 202.16 114.65 27.13
Movements
Current Ratio 3.02 2.49 1.96
What’s Next?
Working Capital ($Thousands) 332.49 244.97 157.45
Managing
Livestock Risk
Rate of Return on Business Equity (%) 2.01 1.06 0.09
Net Business Income ($Thousands) 308.55 221.03 133.51
Net Business Income from Operations Ratio 0.21 0.16 0.10
Term Loan Credit Score 1.50 1.60 1.80
Operating Loan Credit Score 1.90 1.90 2.35
 Livestock
Price Volatility

Belasco

Update on
Livestock
Prices
Thank you for your time
Rationale
Behind Price
Movements

What’s Next? Send any remaining questions to me at

Managing
Livestock Risk
eric.belasco@montana.edu
or
(406) 994-3706