The Angus Journal® is a monthly magazine known for in-depth coverage of American Angus Association® programs and services; the Angus business; herd management; and advertising reflecting genetics and herd philosophies.
Issue link: http://angusjournal.epubxp.com/i/529629
46 n ANGUSJournal n July 2015 Higher Prices = More Risk W hile it may be easy to put marketing plans on the back burner during periods of higher cattle prices, it's not a good idea. Record prices equate to greater price risk. Just consider the volatile activity in the cattle markets the last several months. Economists urge producers to understand the risk-management tools available, and which tools may work best for them. Some suggest cattle producers have been in a "new market" for the last fve years, with more moving parts than ever. The global marketplace appears to infuence prices more than in the past, and the economy and consumer demand are bigger market factors than cattle inventory. "It is a bit of a quandary. We don't know if the recent market relationships are transitory or a sign of the future," says Jim Robb, director and senior ag economist, Livestock Marketing Information Center (LMIC). "Most recently, beginning in December 2014, there was whirlwind discussion about the relationship between nearby futures and cash prices." Robb notes part of the shift may come from more investors in the commodity markets. Today, investors may own and exit a basket of commodities when stock prices and oil prices go down, as opposed to being invested in just one commodity. Also, there appear to be more spread positions — for example, taking simultaneous positions in live-cattle and hog futures. Producers need to understand how such investments operate, as well as their impact on cattle futures. Robb also says cattle futures have taken on a bigger role in price discovery now that government insurance programs are tied to them. While there is physical supply and demand in the cash market, there is paper supply and demand in the futures market. The two are linked by basis. "Other factors affecting prices beyond core supply and demand fundamentals include federal budget debates, national policy issues and regulations, public interest in food production, weather and a host of issues beyond the control of individual producers," adds Iowa State University assistant economics professor Lee Schulz. "There is greater potential for proft, but also greater potential for substantial loss. Managing price risk is essential for success." Further complicating risk management is the fact that equity and working capital necessary to operate the same volume of business has nearly doubled, adds Schulz. University of Tennessee Extension Cattle Marketing Specialist Andrew Griffth agrees. "Loan limits are not going up. Yet cattle prices are 40% to 60% higher, so producers can't run as many head. Producers have to protect prices to guarantee a per-head proft to make loan payments," he says. "Producers and loan offcers need to understand all marketing possibilities." Several tools available That education process includes defning the best tools available for managing price risk, and outlining for producers and loan offcers exactly how the tools work. "Risk can actually be increased if these tools are used inappropriately," says Griffth. "Producers should understand cash, futures, options and Livestock Risk Protection (LRP) insurance." Don't be complacent with marketing. by Barb Baylor Anderson, feld editor Fig. 1: Decision fow chart for choosing from livestock risk-management tactics Price outlook Expected basis Cash market Sell futures — or — buy (LRP) livestock risk protection Forward contract Synthetic puts — or — buy (LGM) livestock gross margin Put options — or — buy LRP Expected price Implied volatility Uncertain Certain steady to higher lower high low higher lower