Evaluate Risk, Then Manage It
Realize vulnerabilities to manage them effectively.
“Evaluate your risk. Where are you vulnerable?” asked Tony Drake with the CME Group as he addressed attendees at a Learning Lounge educational session during the 2018 Cattle Industry Convention & NCBA Trade Show in Phoenix, Ariz., Feb. 2. “Getting cattle to the retail store, there’s a lot to consider in the chain. Market ups and downs represent a lot of opportunity, but also a lot of risk.”
Noting that all commodity markets are more volatile than they’ve ever been, Drake continued. “What blows up or can go wrong? Is it inputs like feed, energy, transportation or interest rates?”
Based on what you identify as the risk factors for your operation, Drake then advised incorporating risk management across the sectors of the operation to address those factors.
“Get help,” he added. “A broker can work through this with you to develop a big-picture plan.”
Drake defined risk management for his audience as “a structured approach to managing uncertainty with strategies including transferring the risk to another party, avoiding the risk, reducing the negative effect of the risk, and accepting some or all of the consequences of a particular risk.”
To effectively utilize risk-management tools, Drake advised that producers must evaluate the following information:
- Cost of production
- Breakeven levels
- Target prices
- Pricing alternatives, such as cash sales, forwards, futures and options.
Then, when target prices are hit, be ready to execute, advised Drake. Throughout the process, Drake added, “Review, review, review. It’s constant. You must do your homework — stuff changes. We saw it in May 2017, and you need to be prepared for that.”
All total, Drake calls futures and options another tool available to producers with many benefits. Those include opportunities to lock in or cap input costs, protect inventory, offer customers fixed-price contracts, reduce risk of regular seasonal moves, minimize damage from long-term cyclical moves, cover opportunity losses from forward pricing, control risks in other parts of the business, or capture windfall pricing opportunities.
Learn about the futures and options markets with a variety of online courses at https://institute.cmegroup.com/.
Editor’s Note: Kindra Gordon is a freelance writer and cattlewoman from Whitewood, S.D. This article was written as part of Angus Media’s coverage of the 2018 Cattle Industry Convention and is copyrighted. See additional coverage distributed through Angus Media channels including the Angus Journal, Angus Beef Bulletin, Angus Beef Bulletin EXTRA, The Angus Report and online at www.angus.org.