Be Aware of the Probabilities

A key to risk management in cattle production is to be aware of the probabilities of price movements and make decisions accordingly. So said Dr. Elliott Dennis, a professor with the University of Nebraska Agricultural Economics Department, speaking to attendees at the Cow/Calf Symposium hosted by McPherson and Logan County Farm Bureaus last month.

Dennis spoke to the group about hedging, value-added marketing, and other risk management tools available to cow/calf producers. As an example of the probabilities to be aware of, Dennis noted that in examining CME futures prices for feeders between 1990-2019, the futures prices in March were higher than October prices 60 percent of the time. The greatest price losses, those of greater than $10/cwt., occurred in five years over the period, or 26 percent of the time. October prices were $11/cwt. lower than March prices last year, but the largest loss over the period occurred in 2016 at $31/cwt.

Knowing this kind of information on probabilities and price movements can help producers manage their risk. Dennis said there are two different types of triggers cow/calf producers can employ to manage risk: marketing mechanisms (video/forward contract, futures/options, insurance) and diversification (background, precondition, retain ownership). Survey results show that neither trigger is employed intensively by Nebraska cow/calf producers. Almost 58 percent of the survey respondents said they don’t use either trigger; 20 percent said they use only diversification alone; 17 percent reported they use some form of price protection; and 5 percent said they employ both diversification and price protection.

Risks are viewed differently by producers. Some risks are quantifiable; many risks are not. Producers must consider which risks they are willing to tolerate or accept, must appreciate risks are two-sided, and realize mitigating risk is not free. Risk management in not easy, but it is becoming increasingly important for successful operations. For more information on Dr. Dennis’ presentation, go to: https://farm.unl.edu/documents/dennis-fb_presentation_hedging-valueadd_2020_v2_final.pdf