– James Mitchell, Livestock Marketing Specialist, University of Arkansas
A few weeks ago, Kenny wrote about the downward trend in cattle prices that started in mid-September. This downward trend is driven by normal seasonal patterns in cattle markets and bearish news from a few USDA reports. These past few months are why we use price risk management even during times of high cattle prices. There are still market fluctuations and seasonal patterns to manage.
There are several tools available to producers to manage price risk. Each of these products has its’ own pros and cons. Hedging strategies with futures contracts is a risk management concept that most people are familiar with. Forward contracting is another strategy that is well-known. Options on futures contracts are another strategy, albeit more complicated, if you need to familiarize yourself with the terminology. Livestock Risk Protection (LRP) is a subsidized insurance product that is becoming more popular, especially among smaller operations and cow-calf producers.
Another approach to risk management is to do nothing and ride the market. There are plenty of people who do this. The wins from the do-nothing approach are substantial. The losses are also a lot more painful. As we have seen in the last couple of years, this passive approach to price risk is no longer a viable option. Formulating a price risk management plan should be at the top of your priority list in 2024.
I have two general points of advice for people formulating their price risk management strategy, perhaps for the first time. First, start slow and keep it simple. If you need to become more familiar with the above mentioned risk management tools, start with a basic program incorporating one product. For those interested in LRP, Kenny and Josh have a few recordings from last year that help understand the basics. Second, develop your own risk management strategy. Do not adopt a risk management strategy that someone else uses, e.g., a friend or neighbor. How much risk you want to take off the table should depend on your risk tolerance.