Many of you whom I have consulted with personally have heard me say, "What you really have for sale is grass not cattle." The summer of 2004 will be long remembered for the mild temperatures and unseasonable rainfall pattern. The rainfall was unseasonable in that May was unseasonably dry, June, July and August were unseasonably wet and September was unseasonably dry. Even though May was dry, the above-normal precipitation received June through August resulted in an abundance of warm-season forage "for sale" on many operations. The abundance of forage, combined with excellent cattle prices, has different repercussions for different operations. If you are predominantly a cow-calf producer, then you have to be concerned about a potentially higher-than-normal taxable income. If you are a stocker operator, then you have to deal with much higher input costs. There are ways to manage through both situations.
Last year about this time, we talked about the high fed cattle prices and the amount of profit being generated from retained ownership through the feed yard. I discussed several ways that producers could manage taxable income. Many of the income tax management options from last year are still available.
Remember, the first step in determining what your potential tax liability will be, for any year, is to complete a tax estimate. This is usually done in mid-to-late November or early December. The information required to complete a tax estimate is an account of all income by source to date and all expenses by category (preferably) to date, plus an estimate of these same items for the rest of the year. An estimate of taxable income can be determined, and then an appropriate tax rate can be applied to arrive at a preliminary tax obligation. When these computations are done before the end of the year, it allows you some time and flexibility to manage your taxable income. Your tax preparer or your Noble Research Institute team agricultural economist can help with these calculations.
While many cow-calf producers are concerned about inflated incomes, stocker operators are concerned about inflated expenses. This fall, the market value of 400-500 pound calves is roughly $100 per head more than in the fall of 2003. This extra $100 translates into an increase in risk of 20 to 25 percent for most stocker operations. With calf prices moving upward almost relentlessly the last 18 months, ownership of cattle was about all that was required to generate a healthy profit. Risk management was of little concern for many producers. Now, the general consensus of outlook economists is that the upward trend in cattle prices may be flattening out. With the 20 to 25 percent increase in risk and the cattle outlook weaker or maybe more uncertain, stocker operators should give more attention to ways of reducing price risk.
You may recall that in the summer of 2003, the U.S. Department of Agriculture's Risk Management Agency (RMA) initiated a Livestock Risk Protection (LRP) program. It was a pilot program with several restrictions that was not very appealing to many livestock producers. For example, the program did not include heifers nor was the program available in much of the traditional cattle feeding area for any kind of fed animal. However, for the geographic area and type of livestock that it covered, some people who chose to purchase coverage did receive indemnities. Then on Dec. 23, 2003, a dairy cow in Washington state was identified as having BSE. This announcement caused a huge number of producers to attempt to purchase coverage. The program was quickly discontinued in the evening hours of Dec. 23.
RMA has since changed the coverage, the geographic area and times of the day when coverage can be purchased, and the program became available on Oct. 1, 2004. Coverage can be purchased for both heifers and steers if the cattle are located in any one of 19 mid-western states, including Texas and Oklahoma. Also, coverage can be purchased for both heifers and steers fed for slaughter in these same states. Producers can apply for the coverage through federal crop insurance agents.
LRP offers producers another tool for use in managing price risk. If you do not feel comfortable with using the futures market, then the LRP program may be just what you are looking for. There are many more details to the program that I did not discuss in this article. Give your Noble Research Institute team agricultural economist or your local crop insurance agent a call to find out more about LRP.