Volatile cattle markets call for risk management planning
Shortly after a fire in the Holcomb, Kan. Tyson beef processing plant devastated the beef industry in September 2019, disruptions from the COVID-19 pandemic entered the scene. Both events, among others, have allowed for unprecedented risk for many business owners, but especially for those in the cattle business.
A recent episode of the National Beef Cattlemen’s Association (NCBA) Cattlemen to Cattlemen series featured a panel discussing tools available for producers to manage risk and set themselves up for success during these challenging times. Cattlemen to Cattlemen Host Kevin Ochsner says this volatile climate has tested even the most skilled and prepared producers.
The panel consisted of Greg Ibach, U.S. Department of Agriculture (USDA) undersecretary for marketing and regulatory programs, Don Close, senior vice president of food and agriculture research for Rabobank Agrifinance, Jim Fryer, incoming chair of the NCBA live cattle marketing committee and Tanner Beymer, NCBA director of governmental affairs and market regulatory policy.
Both the Holcomb, Kan. fire and the ongoing pandemic significantly impacted the cattle market, leading NCBA and other organizations to call for an investigation into the markets.
“USDA Packers and Stockyards Division is in charge of watching the markets and any activity and movement in the market all the time,” says Ibach. “As calls for an investigation came out, we were able to analyze the data we collected throughout the year, and we released a report discussing both scenarios and sharing recommendations Congress is looking at right now.”
“One of the recommendations standing out the most from the report was the recommendation to work with the beef industry and help producers understand risk management tools available and potentially work to develop new risk management tools,” he continues.
Fryer notes the cattle market has seen big changes over the past two years, but this is not the first time the industry has experienced volatile markets. The most recent events impacting the market are fresh on producers’ minds.
“If 2020 and parts of 2019 have taught us anything, it’s that uncertainty is the only certain,” adds Beymer. “I think in the foreseeable future as we start to work to normalize some of these levels, we are going to see market effects hit hard for cattle producers. How do we mitigate the effects of that?”
Risk management planning
A more aggressive look at risk management is inevitable, says Close.
“Risk management is just part of this environment, not only for the survivability of an individual business, but also for the relationships of the producers with the lenders and end users,” he continues.
“Often, images of breakeven spreadsheets and a comprehensive suite of futures and options contracts pop into producers minds when talking about mitigating risk,” says Beymer. “That is certainly a part, but tweaking the calving season schedule and making adjustments to grazing rotations are also tools falling into risk management that are much easier and probably more intuitive to cattle producers.”
Risk management planning benefits producers by establishing a stronger relationship with lenders, a marketing plan to follow and the opportunity to manage leverage and equity better, all while taking a proactive approach in marketing their cattle, says Fry.
“Producers will also be able to spread their marketing decisions out over time,” he notes. “Diversifying the marketing window is a major point of lending and financing.”
Ibach shares the most important tool as a producer working to manage risk is knowledge.
“Understanding what the prices are and what is going on in the current marketplace is imperative,” he says. “USDA offers a lot of different tools where we collect prices on a voluntary basis and on the mandatory basis. We give producers access to reports so they can tell what prices are and what they could expect from their cattle.”
Close explains Rabobank Agrifinance works on an extensive amount of research to provide their clients with information, as well as provide agents for loan and insurance programs through the government.
“The bank also offers a full lineup of over-the-counter products very similar to futures contracts, but some versatility with margin flow,” he shares. “These products enable producers to structure loans so everything is settled when the livestock are sold.”
The USDA has massive amounts of data available to producers to understand the market and compare their herd to current cattle prices, says Ibach. Close adds in the United States, the amount of information provided through USDA is often taken for granted, compared to other countries around the world.
Commodity-based pricing adds value to products to help mitigate price risk. Fryer shares there is a long list of programs available for producers to participate in listed on the USDA website.
“The Agricultural Marketing Service (AMS) launched MyMarket News, which allows producers to customize a report,” says Ibach. “In the next couple of weeks, we are going to be rolling out a self-help video letting producers customize their education.”
The CME Group is announcing a pork cutout contract in early November, according to Close. He calls this an excellent example of what the beef industry might be able to pick up to incorporate individual carcass merit, rather than depending on traditional cash markets.
Ibach adds mirroring the grain industry with an opportunity for smaller contracts for those producers who don’t want to commit large percentages of their yearly production at one time is something the industry should discuss with the CME Group to benefit cow/calf producers.
“The fed cattle exchange is a good platform for trading, but there needs to be some tweaking to incentivize participation by all of the major packers and some of the regional packers to make the tool more of a price discovery tool,” notes Beymer. “We have also talked about the need to increase negotiated trade in the form of negotiated cash or a negotiated grid so producers can still have negotiation contributing to price discovery but also get to realize premium for high-quality carcass traits they put on the rack because of improvements in herd genetics and every step along the way in the cow’s lifecycle.”
Beymer adds incorporating all of these tools into an online platform could provide producers with real-time access to real market information at any given time.
In the end, Fryer says having a sound risk management program will really help to solidify a producer’s business, but the program doesn’t need to be complex. The risk management program is a daunting task, Beymer adds, but it can be as simple or as complex as a producer wants to make it as long as it makes sense for their operation.
There are resources out there to help inform and make decisions, including county Extension agents, land grand universities, the USDA and NCBA, they add.
Averi Hales is the editor of the Wyoming Livestock Roundup. Send comments on this article to firstname.lastname@example.org.