How to protect beef profits

‘There’s going to be a lot more volatility going forward than there has been in the past,” predicted Brett Crosby of the Wyoming-based consulting firm Custom Ag Solutions. Crosby spoke on managing price risk in a volatile market during the South Dakota Cattlemen’s Annual Convention in Pierre.

“In eight of the last 10 years, we’ve seen price fluctuations of over $20 at a level never seen before 2003,” Crosby said. He attributed the volatility to the uncertainty in the market, such as grain supplies and prices, demand, weather, and even availability of coproducts.

But Crosby said volatility is not all bad. He noted it also offers opportunity, and said, “Use volatility to your advantage.”

Key Points

Learn how to use the coming market volatility to your advantage.

When prices are high, use marketing tools to lock in prices, expert says.

When prices fall, don’t try new contracts that you don’t understand.

To do so, Crosby emphasized capitalizing on the high and low price swings, and said, “In a volatile market, the rule of thumb is when you have a profit, take it.”

While Crosby does not know what the future market will bring, he said there is one forecast he can make: “If you aren’t managing your risk, you should start, because prices aren’t always going to be this high. Protect your profits.”

He pointed to several pricing tools available that can help producers manage risk, such as forward contracting, Livestock Risk Protection insurance and the futures market.

Of forward contracting, Crosby offered this caution: “In a volatile market, my suggestion is you don’t forward contract all your cattle in one day. I suggest you do it on different days.”

He added, “It isn’t worth the chance to put all your eggs in one basket to get the highest price of the summer, because you could get the lowest. Be careful when you are contracting and do it over a period of time.”

Regarding the futures market and options, Crosby said, “I use it all the time because it offers a good way for me to protect my prices out farther than I can do with a forward contract. It gives me some ability to protect my prices out a long way.”

For those new to futures and options, Crosby said, “You have to have a broker, and you should rely on your broker. If you are going to be in the futures market, I recommend getting in slowly. You don’t want to dive in.”

For producers with smaller numbers of livestock, he suggested Livestock Risk Protection, or LRP, insurance, which he called similar to a put option. “If you are a smaller producer, you can buy LRP on any number of animals,” Crosby said.

When prices are good like they currently are, Crosby suggested that is a good time to look around at tools to manage risk. He reiterated, “Prices won’t stay high forever.”

He also emphasized the need to have a plan and stay with it.

“When we get into a marketing situation where things turn bad, we tend to make it worse and jump into things we don’t understand — such as adverse forward contracts. My advice in this volatile market is that if things start to go south, stick to your plan. It’s not a time to try something new.”

Gordon writes from Whitewood, S.D.

This article published in the February, 2012 edition of DAKOTA FARMER.

All rights reserved. Copyright Farm Progress Cos. 2012.