- Feeder cattle prices have declined due to the record grain prices and forced liquidation of herds due to drought.
- Many cattle producers are contemplating their future in the industry. Should they hang on and purchase feed or exit the industry? What will feeder cattle prices be in 2013? Who makes this decision? The owner?
Human nature says that people like security and do not want to leave their comfort zone. Thus producers decide to hang on and the losses in equity mount as feeder cattle prices decline.
All businesses will be sold to either a family member or an outside party. We do not live forever.
Many producers have made minimal contributions to social security. Consequently, they will receive minimum payments of social security benefits in thei rretirement years.
The proceeds from the sale of cattle, equipment and land fund retirements. What happens when a producer sells assets and after debts are repaid and taxes are paid, the producer has few if any funds to show for a life’s work?
What will the producer live on during the retirement years? Do producers want to live in poverty in their retirement years? What is your farm’s exit strategy?
On many farms, the younger generation is not interested in taking over. On these final generation farms, the big question is timing the sale of the beef herd and the farm.
A well known auctioneer stated that the best time to sell out is when prices are high. To most people, this statement is common sense. With the average age of American farmers around 58 years old, many farmers contemplate retiring and selling
their farms in five to 10 years. What levels will feeder cattle prices be at when they decide to exit the industry?
Does the beef producer gamble that beef prices will be on the upward trend in the beef cycle when he makes the decision to sell his beef herd?
Fundamental economic principles dictate that at some time in the future, replacement heifer numbers will increase which will expand the national beef cow herd. This will increase the number of fat cattle being slaughtered and increase beef supplies. Consequently, the larger supplies of beef available in the marketplace will lower prices of feeder and fat cattle and profit margins. Beef prices are cyclical.
Although feeder cattle prices have declined due to the drought, current prices are relatively high compared to historical prices. Prior to the increase in feeder calf prices in April 2010, the 10 year average price for Virginia producers was approximately $1 per pound for feeder steers.
For farmers who plan to sell their farms in the next five to 10 years, this may be an excellent time to disperse their herds since current prices are well above the 10 year average. The bottom line is as follows: does the producer want to remain in control of his business and decide to sell the farm on his time frame (maintaining equity for retirement) or will he let others (e.g. bank, doctors) make these decisions for him?
On the other hand, producers who elect to stay in business for the long-run need to position their businesses to remain competitive for the inevitable decline in feeder cattle prices.
In the coming years, the cow/calf producers who survive and remain competitive (maintain and increase equity) are the ones who have the lowest production costs in a volatile world market place.