Today’s cattle markets are more dynamic than ever with beef producers facing the fall out from major shifts in global trade as well as historic drought conditions in much of the western U.S. This kind of volatility often brings the conversation around to risk management, a topic that can get complicated in a hurry.
Production Risk
As producers, we’re dealing with two types of risk. Production risk accounts for things like conception rates, rainfall amounts, health and nutrition — all impacting the number of calves and pounds available to sell. This is where a well-balanced nutrition plan plays a critical role. Keeping cows in adequate body condition to lactate and rebreed is step one in a successful risk management plan. For the growing phase, distillers grain cubes serve as an incredible tool for not only adding pounds of gain, but also creating predictable gain regardless of other environmental factors.
Marketing Risk
With all our focus on optimizing production, it can be easy to overlook the next piece of the puzzle — your marketing plan. While the “do nothing and hope for the best” strategy might work when the market is good, building a solid marketing and risk management plan will not only protect both you and your business, but also build on that predictable income you started in the production phase.
Countless strategies and tools exist to manage market risk and having a solid understanding of your options and benefits is the first step in developing your plan. Before diving into that pool though, be sure you’ve calculated your breakeven price. Our MHM feed reps have a variety of tools and calculators to help you accurately gauge your breakeven to better manage risk.
Once you have your breakeven number, it’s time to evaluate your options. Jason Bradley, agricultural economist with the Noble Research Institute wrote an excellent article breaking down risk management tools into low, medium or high-risk categories. Read the full article here.
Choose Your Strategies
Riding the cash market is naturally the most high-risk method. You won’t incur any extra costs, but you’re at the mercy of the market. If it goes up you win, down you lose.
For those looking at lower risk strategies, Bradley suggests forward contracting or the futures market.
Forward contracting allows you to agree on a price and delivery date with your buyer, without any extra broker fees. This locks in your price above your breakeven but limits your ability to capture any extra profit should the market turn up.
The futures markets give you the ability to lock in that base price now even if you don’t have a buyer lined up. Working with a broker, you can manage your position to offset any by hedging, but you’ll also still be limiting potential gains in an up market.
Bradley classified put options as a medium-risk method that lets us prevent losses but not prevent extra gains.
“Options give you the choice but not the obligation of buying or selling the underlying contract. A “put” gives you the option to sell a contract. A “call” gives you the option to buy a contract. You can also buy or sell a put and buy or sell a call. A put is the best way to set a minimum expected price without limiting the potential income from the market going up.”
Livestock Risk Protection
Another option available for managing market risk is the USDA Livestock Risk Protection (LRP) program. LRP is available for feeder cattle and fed cattle and protects against declincing market prices. LRP is like a put option in that it allows you to establish a floor pice while not limiting potential gains. The program does not require a margin account or broker and is based on cash market index prices rather than futures. Coverage levels range from 70-100% of expected market value; plus, you have flexbility on the length of coverage and the number of head you can insure, including unborn calves. More information on the LRP program and a list of approved insurance agents can be found on the USDA website.
Each of the above tools has its pros and cons, so it’s important to evaulate them specifically for your operation and get help from a reputable brokerage or economist to make sure you fully understand the different strategies. At the end of the day, it boils down to how much risk you are willing to accept and finding the right combination of tools to give your operation the best chance at success.
