Eric Belasco. Montana Agriculture in Volatile Times, October 2011

Transcription

1 Risk Eric Assistant Professor Department of Agricultural Economics and Economics Montana State University Bozeman, MT Montana Agriculture in Volatile Times, October 2011

2 1 2 Risk 3 4 Risk

3 Feeder are up more than 20% over last year $140 Nearby Futures Cattle $ $130 $120 $110 Feeder Live Risk $100 $90 $ $80 $70 Jan 03 Jul 03 Jan 04 Jul 04 Jan 05 Jul 05 Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Source: CME, compiled by LMIC

4 Volatility has remained relatively stable in cattle market Risk 70% 60% 50% 40% 30% 20% Monthly Historical Volatility Live Cattle Corn 10% 0% Jan 03 Jul 03 Jan 04 Jul 04 Jan 05 Jul 05 Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Source: Chicago Mercantile Exchange

5 Deseasonalized basis prices Risk $25 $20 $15 $10 $5 Average Monthly Basis, By Cwt Steers, Billings 2000 to 2010 $0 $5 $ lbs lbs lbs Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Provided by LMIC, complied by Duane Griffith

6 Basis risk is relatively calm Risk Average Monthly Seasonally Adjusted Basis price, by cwt Steers, Billings Yrs lbs lbs lbs Mean Now Standard Deviation Now

7 What drives cattle price volatility? Instability in the cattle market can come from Uncertain demand Domestic preferences and consumption Foreign preferences and new consumer markets 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

8 What drives cattle price volatility?...(cont.) Risk Instability in the cattle market can also come from Uncertain supply Input prices (fuel and grains) Weather uncertainty Direct effect through placement shocks Indirect effect through grains price shocks Foreign suppliers (e.g., the TB case in Mexico) Fuel and corn prices are volatile (as usual) Weather always uncertain (this year,last year,...)

9 What are current expectations for prices next year? Risk March 12 August 12 Cash Price Feeder Futures Price Day Hist. Vol. 7.92% 9.00% Expected Steer Expected Heifer Assumes todays futures prices and seasonal basis adjustment Note: Futures and cash prices as of 10/26

10 Thinking about prices for next year Risk

11 Is the drought over? October 25, 2011 U.S. Drought Monitor Valid 8 a.m. EDT S SL S L S L SL SL SL SL S S S L Risk S SL SL L 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, Author: David Miskus, NOAA/NWS/NCEP/CPC

12 Risk management options Risk Price Risk Futures and options market Put on feeder or live cattle prices Call on corn prices Forward contracting Federal insurance Risk Protection (cattle price) Production Risk Pasture, Rainfall, and Forage (Rainfall index)

13 An Illustration of Downside Risk Risk Representative MT livestock operation 2,000 head herd 15% cull rate Steers sold at 575 lbs and $1.50 per lb 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

14 A Comparison Using the Case Farm Risk Scenario Metric Base -6% -12% Revenue ($M) Current Assets ($Thousands) Net Cash Flow ($Thousands) Current Ratio Working Capital ($Thousands) Rate of Return on Business Equity (%) Net Business Income ($Thousands) Net Business Income from Operations Ratio Term Loan Credit Score Operating Loan Credit Score

15 Risk Thank you for your time Send any remaining questions to me at or (406)