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Cattle risk management is a numbers game

Controlling losses | With small margins in the feedlot business, operators must closely monitor their operations

Knowing what he knows now, Greg Appleyard would have found someone to help with risk management 10 years ago.

The former owner of Cattleland Feedyard at Strathmore, Alta., had to learn the hard way as he spent 20 years plotting a course through the vagaries of the beef and grain markets.

“Eight years ago, if there had been somebody like myself, I would have hired me,” he said.

“I had to make all the mistakes to try to learn how to get where I am.”

That hands-on knowledge led to the birth of Agra Risk Solutions Inc., which guides clients from Western Canada, the United States and Brazil through risk management and helps them understand cost of production, margins and commodity trading. He provides only education and advice, allowing the client to make final decisions.

The company is connected to a Chicago trading firm.

He said not much help was available for him when he really needed it.

“In Western Canada, you can’t buy Risk Management for Dummies, and that is what the industry needs.”

The small staff at Agra Risk Solutions start with the basics, helping people understand costs such as labour, fuel, crop insurance, depreciation, open cows and income from culled cows.

Appleyard said many producers know their costs but struggle to pull the data together and understand margins.

He can show clients how he controlled losses when he ran his own feedlot. He fed 8,000 cattle a year, and his worst loss was $40 per head rather than the $250 loss that many experienced this year.

Working through the year, his company provides basic education and can help clients develop a basic hedge and risk portfolio. More strategies can be added as clients become more comfortable with these tools.

Appleyard prefers to work with the entire family. Everyone hears the same message, and eventually someone is appointed as the contact person.

Some clients include families in transition. The parents want to retire but also want the next generation to develop a consistent hedge plan before they turn it over.

The size of the operation does not matter to Agra Risk, but so far it has been involved with mostly mixed operations.

Grain farms have done well in the last few years, but that cycle cannot continue.

“All these people are expanding, paying big rent, buying new equipment and there is no real thought this can go lower,” Appleyard said.

“People always want to believe prices are going higher. There is a joke: there were two good years in the cattle business — 1988 and next year.”

He said risk can be handled by developing a standard program that is specialized to the farm and helps it operate with greater ease.

“I see us becoming specialists in risk scenarios.”

Managing risk and volatility is critical, said beef economist Kathy Larson of the Western Beef Development Centre in Saskatchewan.

The industry is shrinking and costs are increasing, she told a beef conference in Banff, Alta., June 18.

Canada’s cow herd has shrunk 25 percent since 2005 and the number of beef operations in Western Canada is down 30 percent. The average herd size is around 200 head.

The number of feedlots reporting capacity of more than 1,000 head has dropped to 172 from 236 in 2001. The greatest decline occurred in 2012.

The number of yards with more than 10,000 head capacity is now 42 up from 35 in 2002. However, bunk capacity is down only 1.6 percent.

There are only two major beef packers left.

Price improvements are negligible.

The average fall price for a 550 pound steer in Alberta was $147 per hundredweight in 2001 and $155 per cwt. in 2012. Cow prices have improved by 16 percent and fed steers are up 8.8 percent.

She said feedlots lost money the last few years and profits were elusive for cow-calf producers. Her research shows a producer selling a 550 lb. calf needed to receive $1.25 per lb. to break even in the last 10 years, but on average Saskatchewan producers hit that target only four years out of 10.

However, top producers achieved profits even in the poor market years of 2003 and 2008 because they managed risk.

Larson said input costs are constantly rising.

Barley is trading at $6.40-$6.80 this year, an 80 percent jump from 2001.

Retail gas in Calgary and Edmonton has gone up 74 percent in 10 years.

Alberta primary industry wage rates are 63 percent higher than 2001, increasing from an average of $17 per hour to $28. She did not have precise figures for farm labour wages.

The cost of borrowing is almost flat with a record low prime rate. Farmers have increased debt by 55 percent, with Farm Credit Canada being the largest holder of debt.

Farm debt is close to $10 billion in Saskatchewan and $15.75 billion in Alberta.

She said Saskatchewan and Alberta farmland prices have increased by nearly 100 percent since 2001.

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