Are You Protecting Your Bottom Line?
Learning Lounge session focuses on livestock risk management.
SAN ANTONIO, Texas (Feb. 6, 2015) — “Every sector within the industry has inherent risk. Your choice is to accept it or mitigate it,” Tom Clark told cattle producers attending the “Learning Lounge” session convened Feb. 6 in the trade show hall during the Cattle Industry Convention & NCBA Trade Show in San Antonio, Texas. Clark is director of agricultural product for the CME Group.
“Back in the day, producers simply looked at production (i.e., the calf crop) and would hedge it and be done,” he pointed out. “They didn’t have to think about inputs too much” — because the prices didn’t change much.”
Today is a different story. Inputs like feed, energy and transportation all have volatile prices. Thus, producers should take “a more holistic view” of the marketplace, Clark suggested. “Volatility is always going to be here.”
He noted the importance of risk management and offered this definition: Risk management is a structured approach to managing uncertainty.
Potential strategies to manage that uncertainty include:
- transferring the risk to another party;
- avoiding the risk;
- reducing the negative effect of the risk; and
- accepting some or all of the consequences of a particular risk.
“You need to have a mix of pricing tools, and at various times you will use more than others,” he added. Pricing tools include cash sales, forward contracts, futures or options hedging or OTC (over-the-counter) markets.
He also emphasized the importance of including a lender in the marketing plan.
“You, your broker and your lender all need to be involved and on the same page,” he emphasized.
He concluded, “The marketing plan will change over time. It’s a living document. If you put it in the drawer and don’t change, it’s not going to work for you.”
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