CATTLEFAX TRENDS
RISK MANAGEMENT MENU Because outside events continue to have a greater impact on cattle markets, and reliance on ever-changing international outlets has grown the last couple decades, it is important for producers to thoroughly evaluate their current risk management plan. If nothing else, everyone needs to be aware of what it is available for price protection. While the outlook over the next few years is for higher trending calf prices, being able to act quickly could be the difference between red or black ink on your bottom line. The following discussion is not intended to promote one strategy over others, but instead give a broad overview on what is available. The most basic form of risk management is understanding the typical seasonality of markets. A “seasonal” year occurs about eight out of every ten. For the calf market this means the annual highs occur in late winter or early spring, before breaking to a low in the fall when peak numbers are sold. Eighty percent of the time producers are better off selling prior to or retaining ownership/weaning after the fall-run, to avoid receiving the lowest prices of the year. As with anything there are some exceptions and why the odds are about eight out of 10 for a “seasonal” year. Given what is known today,
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2021 may not perfectly fit the seasonal pattern. Because of smaller calf numbers and the long-term expectations, the break into the fall will be limited, if it occurs at all. Understanding the market seasonality for all segments of the industry is important and necessary to make sound risk management decisions. To avoid selling in the spot fall market, producers can forward contract calves for future delivery. There are a few ways to achieve this. Consigning to a summer video sale or marketing calves via private treaty/direct trade are a couple of avenues. The 10-year average premium for calves sold on summer videos for fall delivery versus those marketed in the fall spot market is $58/head. It is not a guarantee a higher price will be received, because like a seasonal year, the advantage occurred in eight out of ten years, with a wide range of less than $10/head to over $330 in 2015. Also, accuracy of the projected base weight is one of the most important variables when forward contracting calves. A big miss can be detrimental, depending on the slide specifications. Another form of forward contracting is entering into a basis contract. As a reminder, basis is the difference between the cash price and futures price. While this is not real popular for calves due to the basis volatility and uncertainty from year to year discouraging buyers to make an offer, it can be useful for those who retain ownership. The buyer and seller agree to a basis level against a specific feeder or live cattle futures contract and delivery period. Once the basis is set and prior to the delivery period, the seller will price the cattle using the specified futures contract. The primary advantages of basis contracting are eliminating all basis risk, reducing market emotion once the price objective is set, and no margin calls.
