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Coping with Volatility

Posted Dec. 1, 1996

Coping with volatility, or how to survive cyclical low beef prices, all-time high grain prices and other minor happenings, like drought. If you are still in the cattle business as you read this you have probably survived the cyclical low in beef prices for the current, 1990-??, cattle inventory cycle.

Now you should turn your attention to making it to, and taking advantage of, the next price peak in about 2002! For cow-calf producers who have not sold their 1996 heifer calves, now may be the time to save as many as possible for replacements. These heifers will be in their prime as cows in 2002.

Along the way they should have added value as the drought areas of the southwestern U.S. restock. Stocker-feeder operators who tend to business usually experience good years as the cattle inventory bottoms out and prices begin to rise.

The feedlot sector is currently enjoying the prospects of more plentiful feed and ample supplies of feeder cattle. Will everyone in the various segments of the cattle industry experience profits as we approach the 21st century? It is safe to say they will not.

To maintain profitable operations in today's volatile times all agricultural producers must remain flexible. They must delay final production decisions as they gather and assess information from throughout the world that affects the profitability of their enterprises.

Often the window of opportunity to procure inputs, initiate production and profitably price output will be narrow. In today's information age, producers around the world will recognize opportunities and fill 'voids' very quickly. The response of grain producers to 1996 prices is a case in point.

With the flexibility afforded by the F.A.I.R. farm program and record prices at planting time, spring wheat, sorghum and corn growers expanded acreage. Those who did not also forward price their expected production will realize harvest time prices significantly below 1995 prices.

Wide fluctuations in both production and prices are expected to be the norm the next five to seven years. One knowledgeable marketing specialist is projecting wheat prices in a range of $2.50 to $7.00 per bushel from 1997 to 2001. Several weather forecasting services maintain that we are in a major dry cycle and will experience significant dry periods if not extended drought over the next several years.

Foreign agricultural policy, especially China's, will influence U.S. and world prices and production more than ever before. The integration of new technologies, such as genetically engineered plants, into general production practices coupled with production flexibility may cause shifts in traditional cropping patterns.

What does the individual need to do to survive volatile prices and production and periods of rapid technological change? Having a specific plan should help ensure getting through the tough times while preparing for the years ahead. Just running things as usual is not a good plan!

This time of year is as good a time as any (actually better since you are doing your year end tax planning, aren't you?) to evaluate where you are and make specific plans for the next several years. If you have been pinched by recent cattle prices try to determine where your real economic problems are. They have always been there - they were just masked by relatively high cattle prices.

Analyze overhead or fixed costs - the costs that go on in the short run of three to five years regardless of production levels. There is a great tendency for agricultural producers to allow overhead costs to get out of line over time. See if you can reduce variable costs per unit of production.

Be cautious about simply reducing variable inputs like fertilizer because production may also be reduced. Strive to increase production - the number of units sold - while holding overhead costs constant and efficiently using variable inputs. Plan to spend as much or more time managing as you do working. Finally, plan to save during good times to help make it through the next period of bad times!

Thought for the Month: "A wise man changes his mind - a fool never will." Spanish Proverb