Introduction to Risk Management
Managing risk encompasses more than just focusing on cattle prices.
by Kindra Gordon, field editor, for Angus Media
SAN DIEGO, Calif. (Jan. 29, 2016) — Risk management requires adopting a different mind-set, noted Tom Clark, director of agricultural product for the CME Group, as he addressed cattle producers attending the Learning Lounge session Jan. 29 in the NCBA Trade Show during the 2016 Cattle Industry Convention in San Diego, Calif.
He explained, “Conceptually, risk management is different from what you do in your day-to-day lives. You hope the market will go higher, so why would you lock in a set price?”
“Risk management is a structured approach to managing uncertainty,” CME's Tom Clark told Learning Lounge attendees.
But, he added, “To get your head around the concept that risk management requires a different mind-set, that would be a good thing.”
Clark emphasized the importance of not solely focusing on production risk — i.e., cattle prices — but realizing there is also risk in input costs, energy, transportation and other elements. “No matter what type of business you operate, within the chain, there are several things to mitigate. Each element has exposure to risk in the marketplace.”
Clark identified a list of several fundamental price drivers, including: seasonal and cyclical market aspects, weather, input costs related to feed and transportation, international and domestic supply and demand forces, government programs, consumer taste preferences and animal health issues. He also noted that random events can occur and introduce volatility to the market — drought, export bans or incidence of diseases such as bovine spongiform encephalopathy (BSE) or avian influenza.
“All of these things can cause aberrations in the market. Hopefully just for a short period of time, but can exacerbate price,” stated Clark.
In defining risk management, Clark said, “Risk management is a structured approach to managing uncertainty.”
Clark noted that the biggest mistake he see people make is deviating from their plan — their “structured approach.”
Said Clark, “It’s critical to keep within that structure, otherwise you find yourself speculating. When someone says ‘I wish’ or ‘I hope,’ that’s vocabulary speculators use.”
He added, “I’m not saying speculation is all bad. We need some of that in the market. But, when you have the cattle, to manage risk you need hedging, not speculating.”
The CME Group offers several resources to learn about risk management tools and strategies on their web pages at www.cmegroup/agriculture and www.cmegroup/livestock.
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