Investment into the Canadian resource sector suffered and capital was flowing into more lucrative economies such as the U.S. When President Trump took office, the positive fiscal policies of personal and corporate tax cuts caused equity markets to soar to fresh record highs. These tax cuts, combined with fiscal stimulus in infrastructure along with deregulation in government red tape for resource development, attracted capital from around the world.

The U.S. Federal Reserve was concerned about inflation and started raising rates in December of 2015. On December 19, 2018, Chairman Powell made the ninth increase resulting in the Federal Funds rate growing from 2.25 per cent to 2.50 per cent. While the Federal Reserve was raising interest rates, the Bank of Canada kept their rate 0.75 per cent from July 15, 2015 to July 12, 2017. The premium of U.S. bond yields over Canadian bond yields was increasing thereby keeping pressure on the Canadian dollar. Since July 2017, the Bank of Canada has made five upward adjustments of 25 basis points. The Bank of Canada rate is now 2.00 per cent. Bank of Canada Governor Stephen Poloz has stated he is not eager to lower rates and the current rate of 1.75 per cent is appropriate for the improving economy and the bank’s goal of realizing steady inflation. At the time of writing this article, the U.S. Federal Reserve rate was 2.50 per cent and Chairman Powell has stated a rate cut is likely at the end of July and then again potentially at the end September. The U.S. interest rate premium over the Canadian rate is now eroding. The U.S and Canadian central banks could have a similar rate by the end of the year.

The U.S. bond yield premium over Canadian bond yields is eroding. The Canadian dollar dipped to a low of 73.75 U.S. cents on May 31. On Friday July 12, the September Canadian dollar closed at 76.65 U.S. cents which is a gain of 3.9 per cent. The narrowing of the interest rate spread between the U.S. and Canada is positive for the Canadian dollar. We now find the Canadian dollar entering a new fundamental trading range.

On July 10, U.S. Federal Reserve Chairman Jerome Powell testified before Congress. He stated a rate cut was likely at the end of July and one more cut should be expected by the end of 2019. U.S. inflation is too low and this could hurt the economy longer term. The U.S. labor department stated that the consumer price index increased 1.6 per cent in June from a year earlier, which is down from 1.8 per cent in May. Core inflation, which excludes food and energy, was more constructive, experiencing a month-over-month gain of 0.3 per cent and a year-over-year gain of 2.1 per cent. Chairman Powell’s “light bulb’ moment came when he stated that the relationship between unemployment and inflation “has gone away.”

The U.S. is in a new era where the U.S. contends with self-sufficiency in oil and becomes a major exporter. In the past, strong energy prices were synonymous with strong equity markets. Energy prices increased as equity markets rallied enhancing inflationary pressures. We now find that lower U.S. gas prices are a main factor contributing to the weaker inflationary data. Average hourly wages were up 1.5 per cent from a year earlier after adjusting for inflation. Two months ago, Chairman Powell stated weak inflation was due to transitory factors; however, the U.S. is increasing oil production and weaker energy values may be here for some time. Bank of Canada Governor Stephen Poloz reflected a neutral to dov-ish tone at the July meeting; however, there was no signal that the Bank of Canada would follow its U.S. counterparts with rate cuts.

In conclusion, the U.S. monetary policy is dov-ish while fiscal policy is neutral. In Canada, monetary policy is neutral while fiscal policy remains negative. There may be some hope on the fiscal front with the federal Conservatives leading in the polls. In most cases, currencies don’t like uncertainty and tend to weaken until election time. I’m looking for minor strength in the Canadian dollar over the next couple of months. By the end of the year, we could see the Canadian dollar near 80 U.S. cents if the Bank of Canada leaves its target rate unchanged at 1.75 per cent and the U.S. Federal Reserve lowers its target rate to 1.75 per cent to 2.0 per cent.

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It’s equally important for custom feeding and grazing operators to see a return on their labour and investment, and yet some custom operators sell their services short accepting cost-per-pound-of-gain (COG) agreements that leave them struggling to stay afloat, says Bruce Viney, a risk management specialist with Alberta Agriculture for 12 years before taking a position this summer as director of the rural utilities section.

A custom operator’s ace in the hole is the ability to manage production risk. Viney says experienced cattle-feeding clients know how to use all of the tools to manage price risk, but they have no control over production risk beyond their choice of where to place the cattle. They totally depend on custom operators to take care of the production side and even though they will squeeze for the lowest possible COG, most investors do know the value of production risk management.

“If there is one thing you can do for clients, it is to better manage production risk and you’ll be one step ahead of the competition. How, is by making better cost-of-gain and yardage estimates and better forecasting. I say better, because there is always room for improvement,” Viney explains.

“Risk is defined as ‘uncertainty that matters.’ Uncertainty about feed conversion and average daily gain and death loss are things that matter to clients,” he says. At the end of the day, they want results close to your initial forecast, acceptable death loss, and the highest-value cattle that have the weight and flesh conditions to hit their target market.

“What clients don’t want is bad surprises,” he stresses. Be conservative in your forecasts, spend time analyzing interim performance data and keep in touch with your clients to reduce the risk of having to deliver bad surprises at the end of the feeding period.

• Read more: Backed by a business plan

Agriculture is different from other stock and commodity markets where price volatility is the measure of price risk. In agriculture, volatility is only part of price risk where predictability and prediction-error are another important measure. The theory is that if the future price can be accurately predicted then the pen of cattle should be low risk.

The same logic can be applied to production risk. If, for example, you use your best knowledge to predict COG and death loss, then the pen of cattle should be low risk. On the other hand, the very common practice of asking neighbours or others in the industry to try to get a handle on a going COG rate for custom feeding might work for your clients, but it’s risky business if it doesn’t happen to cover your needs.

Knowing your goals, financial position, and cost of production underpins custom feeding agreements that are in the best interest for you and your clients whether you use a COG or cost-plus formula. It’s about meeting or exceeding expectations to build relationships and trust, Viney sums up.

Cost of Production

The Ranchers Risk and Return (RRR) calculator, a free download from Alberta Agriculture’s website, works equally well for custom feeding operations to figure out cost of production and break it down into cost per pound of gain.

Following are some of the tips covered in Viney’s 2017 publication, Business Fundamentals for Better Feeding Agreements, which includes example tables from the RRR calculator and outlines points that should be covered in COG and cost-plus agreements.

Start by importing your expenses from your accounting program. If yours is a grain and cattle operation, use your best judgement to decide on enterprise splits for each expense line. For example, if you designate wages as 60 per cent for cropping operations and 40 per cent for feeding operations, the calculator will split the total wage expense accordingly and show the dollar value transferred to the yardage calculation. Expenses related to growing and landing hay, silage, and grain in the feed yard need to be split out to the cropping side to calculate feed costs in a later step.

The yardage calculation is based on your entries for the number of animals you plan to feed and days on feed. Line expenses transferred from the financial statement include items such as fuel, machinery repairs, building/corral repairs, utilities, custom and consultant work, paid labour and benefits, interest on operating and capital loans, taxes/licences/insurance, non-paid management, equipment and building depreciation. The calculator breaks each expense into dollars per head for the feeding period and dollars per head per day to arrive at totals for each of these columns.

It’s not wrong to include the cost of bedding, veterinary/medical and other services in the base yardage amount, but these consumable types of expenses are most often added when the prices for them can be better estimated at the time of making an agreement.

Death loss and medical expenses are significant risks in forecasting, and working through some what-if scenarios will give you a better understanding of those risk levels. Your past records are a starting point, but it’s important to know the source of the cattle and a potential client’s reputation. It’s best to make reasonable forecasts on the high side to reduce the odds of having those bad surprises.

The feed cost calculation begins with knowing feed quality and cattle type to formulate the rations.

Clients need to tell you the type and quality of cattle they plan to place with you and what they expect for average daily gain (ADG). From this, you will be able to forecast dry-matter conversion.

Let clients know right away if the calves that arrive aren’t what they said they would be. All new arrivals should be weighed after they’ve had time to eat and drink. Ask your clients for pay weights for comparison and consider rejecting stressed cattle with shrinks over three per cent because they are likely to be poor doers right off the bat that could add up to a bad surprise for your client at the end of the feeding period.

CowBytes, a ration-balancing program available for $50 from Alberta Agriculture, is great for initial feed-cost budgeting.

“Play around with it and learn from it,” Viney says, “but never ever bypass the services of a nutritionist to fine-tune the ration. They can shave pennies off the cost of gain and can help manage health and performance risks.”

Forecasting performance is the biggest risk when estimating COG and many nutritionists have firsthand knowledge of the relationships between ADG, dry-matter conversions, types of cattle, and feedlot systems.

Again, run what-ifs for possible gain and conversion to decide whether a client’s proposed COG rate is high enough to account for some of the bad what-ifs.

RRR will calculate the feed cost per pound of gain from your entries for all feed ingredients in the ration, prices for each, moisture contents and amounts to be fed.

The final step adds together feed costs, base yardage costs and other charges, giving you the grand total and breaking that down into dollars per head for the feeding period, dollars per head per day, and the dollars per pound of gain.

The cost and performance summary table includes your feedlot break-even per pound fed.

“If you can accurately forecast all of these things, you are doing your client a good service,” Viney says.

The calculator does get into financial risk management with a price and profit forecast table that requires entries for futures, exchange rate and basis to predict a market price per pound, break-even futures price, maximum purchase price of calves to break even, and hedgeable profit. These are important if you are buying calves or pen sharing with a client to decide on price insurance or hedging strategy.

Between the lines

Cost-plus agreements, with clients paying the actual cost of feed, yardage and other fees regardless of weight gained, are often used by full-service feedlots with equipment to weigh feed and cattle and because the owners tend to have their cost of production pinned down.

Viney says COG agreements are very common among smaller feeding operations because they are easy and don’t require sophisticated on-farm equipment. The downside is that the client transfers all of the performance risk to the feeder. Operators who don’t know their own true cost of production to cover that risk in the rate they charge can easily be left on the short end of the stick.

He knows many of those horror stories, but says there are also many success stories. Here are a few additional tips for establishing positive relationships and better feeding agreements.

Keep accurate feed and production records to help improve future forecasting and settle disputes that may arise.

Learn from your successes and failures. Don’t waste time on clients who don’t appreciate your good work. Figure out your cutoff line and if a COG rate proposed by a client; isn’t going to cover your costs and the production risk you are taking on for the client, there’s always the option of letting some pens sit empty and waiting for a better opportunity. Better yet, go out for business by arming yourself with records of past results and approaching potential new clients.

Agreements should be simple and straightforward. If you need a lawyer to assess a client’s proposal so be it, but instead you might be better off looking for a new client.

Do consult with your lawyer about technicalities if there is a possibility that a client will default on feed bills and if a client asks you to sign off on rights under your province’s animal/livery/stable-keepers act to comply with a lender’s conditions. Viney recommends not waiving your rights because these acts provide a way to recover costs of boarding, feeding and caring for another person’s livestock in the event of payment default. There are various types of waivers in use by feeder associations and your lawyer will be able to advise you on the most suitable option or alternatives.

Keep communication lines open. Aside from letting your clients know incoming weights on their cattle and sending your feed bills out on time, stay in touch by occasionally giving them a call.

Attention to detail helps build client confidence. The state and cleanliness of the bunks, watering bowls, penning, feed storage, handling and hospital areas, equipment and even your offices will leave a lasting impression with clients. Always pay attention to drainage to prevent buildup of ice and mud, which cattle owners take very seriously because of its negative impact on performance.

Clean and well-maintained can have limits when it comes to equipment because seeing too much old equipment in use could shake clients’ confidence. On the flip side, they know that a lot of new equipment means higher costs that will ultimately be passed their way. Try to strike a balance between keeping up with capital improvements and not stretching your finances too thinly.

The quickest way to find Business Fundamentals for Better Feeding Agreements, the Rancher’s Risk and Return calculator, and the CowBytes ration balancing program is to search for them by name, or call the Alberta Ag-Info Centre at 403-742-7901.

The post Competitive cattle feeding agreements appeared first on Canadian Cattlemen.

1. We are always planning in the future. We would complete our financial plan before the year begins.
2. We set our profit before the year begins.
3. We spend our expense money more wisely.
4. We monitor our plan monthly.

Steps to financial planning

9. SUCCESS!!!!
8. Monitor, control, replan.
7. Ending net worth.
6. Do a cash flow.
5. Plan and sort your expenses.
4. Identify the weak link.
3. Set your profit.
2. Plan your income.
1. Start with net worth.

1. Start with net worth. This is a statement of your assets and liabilities at a given point in time. This would normally be at the start of your fiscal year. It is important to know where you are so that you can track changes in your net worth. There are a few things to watch. Assets that will be sold in the current year should be listed at a realistic value. When dealing with assets that are not likely to be sold very often (land and cows) it might be wise to list these at a relatively low constant dollar value for a period of years. By doing this you will be measuring real change in your net worth not just tracking inflation. If for any reason you want to use current values for your land and cows that is fine. If you do this be aware of how much of the increase in your net worth is due to the operation of your business and how much is due to inflation.

2. Plan your income. At this point you plan a full year’s income. You require a date, a weight and a price. When planning use realistic projected prices. A general rule of thumb might be to plan your income realistically but somewhat conservatively. Write down the information you used to plan your income. Every number should be backed up on a worksheet. This will be of great value when it’s time to monitor your financial plan.

3. Set your profit. Now is the time to set your profit. We do this before the year even begins. Profit is defined as an increase in net worth. It is a return on your investment and a return to your management skills. The classic example in H M is to hold your expenses to half your projected income. This leaves half of your projected income as profit. This is a lofty goal. Don’t let this discourage you, it is meant to motivate you to be serious about achieving profit. Let me share a personal story. A producer had taken the six-day course with us. He was keen and wanted to achieve a healthy profit. He was determined to reach the 50 per cent mark. I saw him a year later. His first comment was, “I am so frustrated, only 30 per cent of my total income is profit.” My comment was, what percentage of your income would have been profit if you weren’t challenged to shoot for 50 per cent? Chances are that without the challenge his profit would have been low or non-existent.

4. Identify the weak link. At this stage you identify the weak link in each enterprise in your business. There are three basic steps to each enterprise: resource conversion (growing), product conversion (harvesting) and market conversion. At a given point in time each enterprise will be weak in only one area. This is where you need to focus your time and energy. By strengthening the weak link you strengthen your entire business. Identifying the weak link will allow you to sort your expenses.

5. Plan and sort expenses. Sort your expenses into three categories: the “W” expenses (things that fix the weak link), “I” expenses (things that are essential and a constant dollar value) and “M” expenses (all expenses that aren’t “W” or “I”). Money spent on “W” expenses will strengthen your business. Money spent here is like an investment. Try to give “W” expenses all the money they require. “I” expenses are a short list and a set amount so just accept them and don’t spend any time trying to reduce them. “M” expenses are the ones to challenge. The more you reduce “M” expenses the more money you will have to shore up the weak links. Once your expenses are sorted budget actual dollar amounts, just as you did when planning your income. Document each expense with a date and dollar amount. Be realistically and somewhat liberal. By planning your income conservatively and your expenses liberally you are likely to do better than your plan.

6. Do a cash flow. At this stage you transfer the income and expense numbers from the worksheets to the cash flow sheet. This summarizes your income and expenses per category. It also gives you monthly income and expense totals. You are now able to see if you can cash flow your business or if you will require an operating loan. If a loan is needed the cash flow will show the amount required and how it will vary each month.

7. Ending net worth. You now list your assets and liabilities as they will be at the end of the year in light of the transactions you have planned. Now is the crunch time.

Does your increase in net worth match the profit number you set in Step 3? If the numbers match or are close enough for your liking you proceed to implement your financial plan. If the numbers don’t match you go back and redo the plan until you achieve the profit you desire.

8. Monitor, control, replan. This is one of the most critical steps in the entire process. By monitoring monthly you give yourself 12 opportunities each year to see how your plan matches up with reality.

Financial planning is one way to relieve some of the stress and worry in your life and help you create the future you desire.

Happy trails.

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Once I have determined profitability and weighed the risk involved, I then have to determine whether or not I can afford to do it. Can I finance it, or cash-flow it? For my finances, I run a simple business cash flow, which is linked to my personal cash flow as well. I have an easy to use Excel spreadsheet for my computer that keeps me on top of my finances throughout the year.

Economics and finances are two different calculations, which is again different from my income tax. We need to be careful in our businesses. I have seen many times that a bank will gladly lend you money if you can finance it, even if the venture is completely and totally economically unsound! It is your job to determine profitability; your banker only cares about finances.

I learned years ago the importance of being proactive on my cash flow. By pro­active, I mean looking ahead six to 12 months and predicting any shortfalls on my monthly net cash flow and having the time to adjust and replan to avoid any issues. This might be just selling something earlier or possibly even meeting with a banker early on to deal with a financial crunch. The alternative is to be reactive on my cash flow and have my banker calling me to tell me that I am overdrawn. Bankers are not so easy to deal with if you are always reactive. They are much happier if you are proactive.

My cash flow is simple. The top has a monthly breakdown of my cash inflow. Each profit centre will have a row with how much cash is entering the bank account and when. Some entries can be very straightforward and others can be more complex. The complex entries I will link to another sheet of the workbook and detail out the calculations that come up with that cash inflow.

As an example, for my custom grazing profit centre, I have a separate sheet that breaks down the different pastures and the number of animals that graze on them. I then add in my grazing rate and it automatically calculates the monthly revenue off of each pasture. It then totals up each pasture for each individual month and transfers that calculation back to the main page as one single entry each month. Each profit centre you have might have its own calculation sheet. Once all of the extra sheets are filled in, the main page automatically totals up each month in the columns and each profit centre is totalled up in the rows.

Next we look at our monthly cash outflow. (It is funny how there are always so many more entries in the outflow). Again, all of the cash expenses are detailed and broken down month by month. Similar to the inflow, the more complex calculations can be linked to another sheet. An example of this is that my land rent is detailed on a separate sheet showing who gets paid how much rent and when. The totals are then transferred back as a single monthly entry to the main page in the cash outflow area.

The spreadsheet then of course calculates your monthly net cash flow and rolls the balance from the end of the month to the beginning of the next month for a 12-month period. At a glance this can tell me of any upcoming shortfalls that I might have in the upcoming months. The negative account balances show up in red. If this is the case, I need to adjust and replan to get each month back in the black. I also have this linked to our personal cash flow as our wages and shared utilities can be linked along with the business.

It may take me a few hours to set this cash flow up at the start of the year but once it is up and running, a few minutes each month is all that it takes to monitor, adjust and resave it. It is the easiest cash flow I have seen and it only takes a little bit of knowledge in Excel to be able to operate it. As you adjust one entry to replan your current month, it automatically updates and flows that correction through to every month ahead.

Why run a proactive cash flow? Well, it not only keeps my banker happy and allows my business to run smoother, but I have found the most beneficial bonus is peace of mind. It takes a lot of the stress out of running a business. Even if there is a forthcoming financial issue, I am aware of it and have time to plan for it.

The reactive cash-flow plan is not a lot of fun and is not recommended for any business plan. Be proactive.

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Agriculture Minister Lyle Stewart’s launch of the province’s online premises identification (PID) database during his address to open the conference didn’t sway members set against mandatory PID. They narrowly defeated a resolution to support mandatory PID in Saskatchewan. This was in contrast to the vote on a similar resolution at the Saskatchewan Cattlemen’s Association AGM earlier in the year when the majority favoured asking the province to make PID mandatory.

Industry’s Cattle Implementation Plan committee, which has been working on a manageable road map to full traceability since 2011, is aiming to achieve 90 per cent PID in each province/territory by January 2016, regardless of regulations, according to Canadian Cattle Identification Agency chair Pat Burrage’s report to the conference.

SSGA members also took a stand against looking into the possibility of setting up a mandatory per-head levy to create a BSE testing fund. The purpose of the proposed fund brought forward and supported at the SCA meeting would be to encourage participation in the BSE surveillance program to meet Saskatchewan’s target by better compensating producers who submit samples for testing.

Much of SSGA’s work over the past year has revolved through legislative doors in consultation on land security, agricultural drainage, surface rights and livestock dealer regulations.

Two resolutions aimed at finding a balance on farmland ownership policy were defeated. Members don’t like the idea of Saskatchewan’s agricultural land being bought up by institutional investors and non-Canadian entities and are particularly disturbed about purchases by the Canadian Pension Plan fund, which they say pits producers against their own money contributed to the plan. However, they recognize the SSGA’s history is rooted in promoting free market enterprise and that the association’s standing policy supports the right of any Canadian citizen to own land in Saskatchewan. Members also respect the government’s desire to promote Saskatchewan as being open for business and that making the call on farmland ownership will be a tough one. The province created an online survey (now complete) to gather people’s thoughts on the future of agricultural land ownership in the province.

Members are firmly against the Nature Conservancy of Canada and other non-government organizations using public funds from the federal and provincial governments to purchase agricultural land and fully supported a resolution to lobby governments to end funding for this purpose.

They favoured a resolution to limit conservation easements to no more than 25 years on the grounds that easements held in perpetuity devalue property with no consideration given to future needs.

Protecting species at risk has become a prickly topic once again, particularly since Environment Canada issued the greater sage grouse emergency protection order. Members carried resolutions to lobby the Government of Canada to review or change the Species at Risk Act to be less onerous on landowners and land managers as well as to lobby all government ministers necessary to ensure that ranchers who enter into management agreements to provide critical habitat for species at risk are recognized as providing effective protection under the act.

The outcome of all resolutions along with the Ministry of Agriculture’s formal response to ag-related issues are posted on SSGA’s website. New this year are videos of presentations by the many high-profile speakers on the conference theme, “Connecting with Consumers.”

The SSGA board of directors returned its executive for another year during the board meeting following the AGM, June 9 at Swift Current. Doug Gillespie of Neville stays on as president, joined by Shane Jahnke of Gouldtown as first vice, Bill Huber of Lipton as second vice, Helen Finucane of Regina as finance chair and Harold Martens of Swift Current as past president. Stephanie Deg of Weyburn is the new Zone 2 chair replacing Helen Finucane, who was returned as a director at large along with Shane Jahnke, Roy Rutledge of Assiniboia and Kelcy Elford of Caronport. New directors at large are Paula Larson of D’Arcy and Don Peacock of Maple Creek replacing Jason Pollock and Fred Lansdall.

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