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Risk Management for Cow-calf Owners and Stockers

Risk management tips for a volatile year.

by Kasey Miller for Angus Productions Inc.

 

NASHVILLE, Tenn. (Feb. 1, 2012) — With no calf futures market, how do you manage risk and limit exposure as a cow-calf operator? Mike Murphy and Troy Applehans of CattleFax addressed this question at the 19^th Annual Cattlemen’s College hosted in conjunction with the 2012 Cattle Industry Convention and NCBA Trade Show in Nashville, Tenn., Feb 1.

 

Has the recipe for profit changed, Applehans asked the audience. It still requires managing fixed costs, marketing, seasonality, developing a plan and discipline.

 

“Good marketing strategies require knowing your breakeven costs of production,” said Applehans. He admitted that isn’t always an easy number to calculate, but it is imperative to the business. He mentioned that CattleFax is working on developing a cow-calf breakeven calculator.

 

With the low cow herd numbers, he said, cow-calf producers carry a big stick right now. Even so, managing risk is important. High-return producers don’t sacrifice on animal health, nutrition and genetics.

 

In putting together a sound risk-management plan, Applehans advised know your cost of production; calculate breakevens, and be conservative; analyze the cash fundamentals trend; analyze the basis trend; analyze futures technical trends; set realistic profit objectives/narrow losses; and have flexibility to change. The biggest thing, he said, is to have enough discipline to follow through and act on profit opportunities and trend chances.

 

Applehans suggested developing marketing strategies with a “whole operation” view; analyze costs on breakeven (dollar per hundredweight) basis and run the numbers; know the long-term, annual and short-term seasonal trends and use seasonal marketing; and stay plugged in with your CattleFax analysts to monitor trends, basis and price expectations.

 

Don’t leave equity just setting in the spot market, he warned, it will go away at some point. He also said don’t try to hit the highest part of the market; you will miss more often than not. Aim for a profitable market, but even with risk management, no one knows exactly what the market will do.

 

Murphy said that it will take 20% more capital and credit to operate in 2012 than in 2010, and 60% more than in the last decade. This increased need for capital “will separate some of us from the business,” Murphy conceded.

 

He admitted that sustainability equals long-term profitability, and the cattle business is no longer just about cattle. High costs of land, cattle and equipment make it necessary to think outside the box. Maximize your resources — know what you have and how you can use it. Consider forage, equipment, land base (long-term leases could be a possibility), equity and access to capital, knowledge and skills, and business relationships.

 

Equipment options include leasing for seasonal needs, sharing, and custom harvesting. Your land base also can have multiple uses, such as mineral rights, wind resources, water, hunting and recreation.

 

Most of all, Murphy asserted, get comfortable running the numbers. It all goes back to the old saying, you can’t manage what you don’t measure.

 

With this amount of volatility in the business today, cow-calf operators need to be thinking 10-15 years down the road. Recognize marketing opportunities, and have the discipline to act on them. The market moves way too quickly to wait till tomorrow.

 

Have a plan to help understand and manage volatility. Take emotion out of the marketplace, because without a plan, emotion can be a hindrance.

 

“Once you manage emotion, success will come a lot quicker and easier,” Murphy concluded.