Financial broker discusses Livestock Risk Protection tools and considerations
In a recent Working Ranch Radio Show podcast, StoneX Financial Broker Craig VanDyke discusses Livestock Risk Protection (LRP) programs and factors producers should keep in mind when having conversations about marketing their operation.
VanDyke shares, in his experience, many producers are hesitant to enroll in risk management programs. However, he notes taking the first step is important to ensure producers are profitable.
“The first step as far as risk management is overcoming challenges – it’s a small hurdle for people to get involved with risk management because they don’t know who they are working with, or they don’t know the process or how the tools work. At the end of the day, this is probably 90 percent of the conversations I have with current clients and ranchers I meet looking to discuss risk management,” shares VanDyke.
“What I’ve come to learn is, it’s more important to learn three things which carry the most in risk management: discipline, execution and management,” he says.
His job as a broker is to walk producers through the steps in developing livestock risk management tools.
“I’m a market therapist and money therapist,” he adds. “It’s the producers’ job to be ranching, farming and to stay focused at the core of what they do. Sometimes opportunities come quick, fast and in a hurry. At the end of the day, it’s the producers call to say yes or no.”
A LRP policy protects produces from adverse price changes in the underlying livestock market.
“There are a variety of alternative marketing tools out there, but the core of LRP is starting to become a fantastic tool for the producer,” says VanDyke.
“LRP has become a fantastic tool because we can be more specific in what producers are trying to do as far as herd goals. We can get more specific with LRP programs, which is handy,” he adds.
The beauty of an LRP program is producers don’t have to pay the money owed until the expiration of the contract, VanDyke says.
LRPs have different pros and cons, he notes. Several advantages of LRP include keeping producers’ cash flow open, their borrowing base open and a LRP premium depending on where the market is.
A disadvantage of LRP is producers are unable to manage it – once a producer enrolls, they must stick to the program, he shares.
“If producers are comfortable where they have set the LRP level, profits are protected,” says VanDyke. “The hard part is when producers are looking at future options when the market is constantly changing.”
“It’s not to say producers can’t manage around an LRP position with futures, puts and calls,” adds VanDyke. “There are ways to manage around it. With as volatile as the market is, there are often opportunities to be able to work with a changing market.”
“As producers, we spend so much time and effort on being a good farmer or rancher, and yet we spend five percent of the time marketing our actual product,” says VanDyke. “Sure, producers will get paid more if performance is better or if they can get more bushels per acre, but if they are not on the marketing side of the equation, there is potential for leaving a lot of money on the table.”
It comes down to working with someone who is a team player and willing to understand the goals of the producer.
“When it comes to determining what kind of strategies to use with the LRP, the first thing to consider is where the market is,” he says. “With a LRP program we are setting the price floor – it’s an insurance premium.”
“At the end of the day, producers will likely make more money in the cash market if it continues to go up. If the cash market and prices begin to drop, producers can have a plan in place to offset cash loss,” he shares.
He notes the beef market is at an all-tine high, but rather than focusing on the long-term, he is focusing on the short-term, affects and changes – a lot of things can change in a hurry which can affect the cattle market.
By using LRP inputs and strategies, it helps guide producers with what works best for them.
In conclusion, VanDyke encourages producers to call, ask questions and don’t be afraid to reach out. He shares producers should look for individuals who understand the tools available and are able to explain the opportunities available.
The last advice VanDyke offers is for producers to get their feet wet and trust the process – there are different ways to manage the market as time moves along.
Brittany Gunn is the editor of the Wyoming Livestock Roundup. Send comments on this article to firstname.lastname@example.org.