Use Risk Management to Protect Cattle Profits

Re-check your profit levels and see if it is time to implement a price-protection strategy.

Published on: May 2, 2006

Cattle producers might find this a good time to use risk management tools to protect profits, a South Dakota State University specialist says.

SDSU Extension Risk and Business Management Specialist Matt Diersen says cattle prices are lower, though inputs are higher due to increasing pasture rents and interest rates.

Meanwhile, price volatility is up, meaning cattle producers will pay more for insurance, Diersen says.

"All of this pressures profitability," Diersen says. "Price levels are probably at action points for many producers. That is, many producers would like to do some risk management before the profits get any smaller."

Diersen's latest update on the cattle markets can be found at the SDSU Economics Department's Web site for current market analysis, http://econ.sdstate.edu/Extension/CMA.htm. The site also has SDSU specialists' updates for corn, soybean, wheat, hog, and dairy markets.

Here's a closer look at points producers should keep in mind:

  • Cash and futures prices for fed and feeder cattle have declined sharply in recent months. However, stocker cattle prices have remained steady while cull cow prices have trended higher, Diersen says.
  • Various trade disruptions, including the new BSE case in Canada, and sharp price declines have combined to increase current market volatility or day-to-day price movements of fed and feeder cattle. The same factors have carried over into the futures and options markets. Thus, the prices for options have gone up during the past month, Diersen says.

The take-home message for producers is to re-check their profit levels and see if it is time to implement a price-protection strategy, Diersen says.