Risk management takes form in a variety of ways on agriculture operations, but price risk management is specifically an opportunity to pay attention to.
“You don’t absolutely have to do price risk management, but you need to consider it and think about what it would do for your operation,” says Josh Maples, associate professor of agriculture economics at Mississippi State University.
Maples explains: “Cattle producers typically want to be in business for a while. Price risk management should be a key consideration for any producer who has these long-term goals.”
Knowing whether or not price risk management is the right option for you comes down to knowing your own tolerance for risk and the true financial position of your operation.
“How much risk can you tolerate?” Maples asks. “If you have very little debt, you can tolerate more risk than someone with lots of debt who will feel a greater impact of one bad year.”
He adds: “Ask yourself: can your operation sustain a 20% drop in prices this year?”
Don’t downplay the importance of knowing your own risk tolerance.
“Are you going to worry about cattle markets every single day? Risk management could generally improve your overall quality of life,” Maples explains.
Depending on the type of cattle being sold, cattle producers have several price risk management opportunities.
“There really are good tools, and they’re going to fit producers differently depending on what their risk preferences are,” Maples says. “The two main opportunities are futures and options and Livestock Risk Protection (LRP).
Futures and options have been around the longest and are most commonly used on feeder cattle, but they can also be used on calves.
“The reason you would use a contract like this is let’s say that you’re planning on selling a load of feeder cattle in March 2026. You would go out now and sell a feeder cattle contract. Then you would be short on your position in the futures market and long in your position with the cattle you physically have,” Maples explains. “If prices go up between now and then, that’s going to be great for the cattle you have sitting in your pasture. It’s going to be bad for your position in the futures market, but those two should offset. That’s the whole idea of hedging.”
He adds: “This is great in that you’re not paying a premium, however, you do pay a commission to a broker. The biggest downside is really the margin calls.”
LRP is the newer tool more and more ranchers are taking advantage of.
“LRP behaves pretty similar to a put option. You pay a premium, and if a bad thing happens, you get paid to offset that bad thing happening,” Maples says.
LRP is also friendlier for producers of all sizes.
“LRP is fantastic for producers with smaller numbers that don’t have 50,000 lb. of feeder cattle they’re planning on selling,” Maples says.
If you are worried about making a mistake with the strategy you choose, remember the biggest mistake is doing nothing at all.
“The most common mistake is just not having a plan. A risk management plan really should be something you think about every year,” Maples says. “We’re way too reactive on risk management when it really makes more sense to have a scheduled time to make a plan each year.”
You can listen to the full conversation on the Casual Cattle Conversations podcast.
