As beef prices fall, herd owners should check risk management
COLUMBIA, Mo. – As risk managers, cattle producers lag behind corn growers. That is, if a show of hands by producers means anything.
At extension meetings, Scott Brown, University of Missouri economist, asks beef producers if they think cattle prices will continue downward. Most hands shoot up.
When he asks if they have locked in current prices, which are still at historically high levels, the response is far different.
At a “Women in Agriculture” meeting at the MU Beef Farm, no hands went up—indicating no risk protection.
That opens the talk on beef-herd risks and protections.
Brown points to record-setting returns for herd owners in 2014, when return went above $500 per cow. That topped by five times the previous-year returns. As recently as 2008 and 2009, returns over annual cash costs, including pasture rent, were below zero.
“Returns of over $400 per cow for the last three years are phenomenal,” Brown says. “Producers have never seen anything like this.”
In spite of easing in calf prices, good prices can still be locked in.
Reasonable prices are still available for forward pricing options. “Starting risk management can bring better nights’ sleep,” he adds.
Brown says herd owners have multiple ways to lock in prices.
With the oldest, farmers can forward contract cattle for future delivery.
Feeder calves or fed cattle can be hedged in the futures market.
The newest protection is insurance offered by the Livestock Risk Protection program (LRP). Premiums are underwritten in part by the U.S. Department of Agriculture.
“It’s like buying crop insurance,” Brown says. “Agents who offer crop insurance often sell LRP. If they don’t sell it, they will know who does.”
Insurance can protect the entire calf crop, or part. Lowering protection levels lowers costs.
“Buying livestock insurance is like buying car or house insurance,” Brown says. “You don’t want to collect. It’s a cost of staying in business.”
A November trade report on crop marketing shows corn growers have sold 20 percent of their crop. Another 10 percent of corn is hedged, while 70 percent remains unprotected. That’s for next year’s 2016 crop, which isn’t near planting time yet.
Corn farmers went through a record-price boom followed by drastic drops. Herd owners can learn from that. “Cattle producers can handle things differently going ahead,” Brown says.
The MU economist points out many risks facing cattle prices that already trend lower.
Risks include a strong U.S. dollar that cuts foreign trade, a possible drop in consumer demand, or lower-price pork and chicken might sway consumers away. Also, growing cattle supplies could cut beef prices.
Then there are disease risks such as mad cow, which halted U.S. beef exports and cut prices.
A current slowing of export sales means U.S. consumers have more beef to eat.
Profitable prices are still available for protection, Brown says. “Going forward I worry more about downside risks than upside potential.”
Another long-term risk protection comes from improving the herd genetics, Brown says. Research in the cow herd at the MU Thompson Farm shows how new technology improves herd performance.
Timed artificial insemination results in higher quality and more uniform calf crops. Quality brings premium prices.
Brown points out that prices for higher USDA grade beef remain more stable than prices for lower grades.
Reducing price volatility is risk management. “Invest in quality technology and be prepared for what is coming down the road,” he says.
“Doing nothing is a strategy.”