By Casey Mabry
No matter what way you look at it, cattle ranching is a risky business.
Uncertainty follows us at every step of the supply chain, from cow-calf producers to commercial cattlemen, stockers to the feed yard. Market dynamics are ever changing, and there’s so much that lies outside of your control.
So, as cattle producers, what can we do to manage risk?
I like to remind folks that just like the market has two directions, there are two components to risk management. It requires being covered for upside and downside risk. Our ultimate goal is equity preservation — and equity growth. But that doesn’t happen overnight. We don’t look at only one load of cattle. It’s a long-term perspective that shapes a profitable business for you and your family for generations to come.
This begins by making a plan. And sticking to it. There’s no cookie-cutter approach to risk management, so this will look differently for every operation. It’s important to consider your herd goals, risk tolerance and what competitive advantages you bring to the table. Are you looking to retire in the near future? Or are you a younger producer looking to build equity over time? Both will require a specific risk management approach.
It’s no surprise that since cattle producers are paid on pounds per calf weaned, having a consistent herd inventory is absolutely essential. You can’t make money without animals grazing your pastures. This is important to keep in mind when your balance sheet isn’t quite as in the black as you’d like it to be. Because of the nature of the cattle business, it’s likely we won’t make money every year. Then on the backside of losing money, typically that’s the upside gain on cattle. So if we get fearful and sell our cows and lose inventory on calves, it takes years to rebuild that inventory — and it might be at a much higher expense.
The good news is that there are a lot of risk management tools available today.
If you’re a large-scale producer, you can look at exchange-traded futures and options through the Chicago Mercantile Exchange. Options there include Live Cattle Contracts and Feeder Cattle Contracts, or managing feed costs through a CME Live Exchange-Traded Futures and Options Corn Contract.
USDA’s Livestock Risk Production Insurance (or LRP) is an extremely beneficial program that, I believe, every producer should take a look at. It can be written on fed cattle, stockers, cows, calves or even unborn calves. A policy can make an impactful difference when it comes to managing downside risk, and it doesn’t limit you from upside growth — that’s the absolute key.
Since most cattle producers are subject to the price given at sale day, LRP insurance can help you take advantage of higher prices. It’s not enough to cross your fingers and hope for the best on the day you market your calves.
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