Livestock, Equine and Forage Outlook

1. Livestock, Equine and Forage Outlook Kenny Burdine UK Ag Economics

2. KY Equine Receipts and Keeneland Sales Economics

3. 2011 / 2012 Equine Market • Keeneland sales show improvement • September Yearling sale up over 12% • November Breeding sale up 41% • Pent up demand, tax incentives, large dispersals • Stud fees likely steady in 2011, but could show slight improvement in 2012 • Recreation, show, and pleasure markets still impacted by slow economic recovery • Changes in horse slaughter regs? Economics

4. US Dairy Production Economics

5. US All Milk Price Prices to average near $20 for year Nearly $4 above 2010, $7 above 2009 Increased production to pressure prices in 2012

6. 2012 Expectations • Production likely to increase 1-2% • Prices likely to average $1-2 under 2011 • Expect $19-21 at farm level, likely stronger in the 1st half of the year • Weather in Oceana will be a major factor

7. Milk Basis – Appalachian Order

8. 2011 Class III vs. Class IV

9. KY Dairy Cow Inventory

10. The Hog Market

11. 2011 Hog Market Summary • Prices increase 50% from 2009, 20% from 2010 • Sow #’s decline, but production increases slightly • Domestic and export demand stronger • Sector remained generally profitable • Implications for 2012

12. Eastern Corn Belt Hog Prices

14. US Pork Production (million lbs)

15. 2012 Market Expectations • Pork production expected to increase 2% from 2011 • Big change in 4th quarter • Exports to remain strong, but US per caps to increase slightly • Prices likely stronger in Q1, strong in summer, trending downward towards winter • I expect upper $80’s / $90’s in summer, into $70’s by Q4

16. Forages

17. Overview • Weather challenges in 07, 08, 10 • Competition for ground – row crops • Rising input costs • Markets – shrinking dairy / beef numbers, equine markets shaky • Rising feed prices = opportunity • Growing backgrounding industry in KY

18. KY non-Alfalfa Hay Production • Acreage decreases from 2.3 to 2.1 million

19. KY Alfalfa Hay Production Acreage increases from 230K acres to 250K acres

20. Dec 1 Kentucky Hay Stocks

21. Beef Cattle: Cow-calf and Stocker

23. Cow slaughter up 4.3% through November

24. Kentucky has lost 212K beef cows since 2007 Livestock Marketing Information Center Data Source: USDA/NASS

26. Med / Large Frame #1 Steers500 to 600 lbs.

27. Med / Large Frame #1 Steers700 to 800 lbs.

28. Market Expectations • Calf market feeling pull from wheat and improving margins (feeder futures) • Calves are higher, but will strengthen towards grass • Typical seasonal peak occurs in early May • Fundamentals of supply look great • Heavy feeders • Supplies are really tight • Slides will widen again, tighten in spring • May be strange Q1 effects • Typical peak around August

29. What about Expansion • Generally, expansion questions are framed to be primarily about price • Outlook for next several years is very positive • Cattle cycle basics of expansion phase • Profit likely here for several years • Value of calves over next few years is going to be outstanding

30. Another look at expansion • To me, expansion is more a question of cost than price outlook • What does it cost YOU to maintain a cow for a year? • Very profitable now – expansion may make sense • Just becoming profitable – think about cost reducing investments

31. Do I always make more $ running more cows? • I have to be profitable to begin with • Not just profitable when steer calves are selling for $1.60 per lb • Even if profitable, it’s not that simple • Make more money by running more cows • Make more money by making more on each cow I run • Other enterprises – backgrounding, heifer development, etc.

32. If expansion doesn’t make sense… • Invest in things that decrease your costs • Grazing • Improved pasture, higher utilization rates, etc. • Hay production • Improved storage, improved feeding systems • Overhead costs • Pay down / refi debt, re-think equipment and facilities • Upgrade your herd • High cull cow prices, attractive capital gains

33. How will you expand? • Develop your own heifers • Consider her value as weaned calf • Cost of keeping her two years before weaning her first calf • Purchase bred heifers • Both are 10-14 year investments • Will she return the initial investment? Don’t forget her cull value and time value of money

34. Heifer Development Budget • Designed to track and plan expenses of developing heifers • Needs to be tweaked by user to consider appropriate time frame • I made some changes in 08 because they feed into cow-calf budgets • Variable Costs (pasture maintenance, feed, mineral, vet, breeding, etc.) • Fixed Cost (depreciation, taxes, insurance)

35. Where are we now? • Good 5wt heifers are in $140 - $160 range • Heifer calves are worth around $800 -$900 • What will it cost to develop and breed (12 months) – probably $300 to $400 • Interest considerations • Then, I need to winter her a second time to get first calf – she’s 2.5 when first calf is weaned

36. Other costs to think about… • Dollars spent on heifers that do not enter the cow-herd • Possible loss in weaning weight associated with calving ease and maternal bulls • Money made on calves that would have been sold from purchased bred heifers

37. Backgrounding

38. Backgrounding Margins • 5wts in $160-$180 • Spring / summer feeder cattle futures around $159-$160 • 8wts in Kentucky likely around $146-$150 • 850 x $1.48 = $1,258 • 550 x $1.70 = $935 • Gross Margin = $323 to put on 300 lbs • Can we put gain on for $1.08 / lb?

39. Sensitivity of BE COG 850# feeder price 550# calf price

40. A few things to remember… • A $1 increase in deferred feeder cattle futures = $1.50 on BE bid price for 5wts • Look for over and under corrections • Work through budget / BE analysis • Comparing COG to sale price only works if no price slide • Consider COG affects of grass (3 months away) • Weigh short term vs. long term

41. Price Risk Management • Part of taking advantage of the market is not letting it get away • Volatility is both a challenge and an opportunity • Many price risk tools are out there • Forward Contracting, fixed basis contracts • Futures and Options • Livestock Risk Protection Insurance

42. Contact Information Kenny Burdine UK Agricultural Economics (859) 257-7273 kburdine@uky.edu