Risk management seems to be the growing constant amid cattle feeding evolution.

Whereas market risk management was historically regarded as the adhesive to hold the money together, Good explains the risk management department is being relied upon more as a profit center.

“A lot of it is necessity,” Good says. “The tighter supplies, with the feed yard entity feeding a larger percentage of the cattle themselves. The capital requirement to feed more cattle is a lot greater. There’s a lot more risk associated with volatility. Therefore, out of necessity, we’re seeing a lot more interest in risk management.”

He points out markets still swing by the same percentage (high to low) during the year. But that percentage today represents significantly more dollars. CattleFax looks for fed cattle to average $126/cwt. this year. A normal change would suggesta low of $114 to highs in the upper $130s. That’s a swing of $300/head.

Good points out that profitable risk management sometimes revolves around minimizing economic loss.

Though most  risk managers are reluctant to hedge a loss, Good uses this past winter as an instance when that may have been the most profitable strategy.

“Futures were trading at $130 for summer contracts, but we had breakevens in the mid $130s and a lot of managers didn’t want to hedge a loss,” Good explains. “But the right decision would have been to hedge the cattle, experience the $10 down we had in the futures, put $10 in their pocket and, in a lot of cases, mitigate the losses in the cattle.

“It’s a tough decision, but equity preservation should trump the thought of making money at times…

“As you think about the volatility we’re seeing in the futures market, the swings not only in the futures but in the basis, within the cattle feeding period, there are typically some very good opportunities for the cattle feeding entity to take advantage of risk management and put some of the movement and volatility in their pocket,” he says.

Good adds that more cattle feeders are looking to manage different risks than in the past.

“Energy costs are something that we haven’t looked at a lot historically,” Good says. “With energy costs as high as they are, and it looks like they will stay that way, that’s caused a lot of folks to purchase energy further out – either physically if they have the facilities or in the futures market – because there is strong seasonality to the energy market as well.”

As more components – and more diverse components – impact the price of cattle feeding inputs, Good stresses the need for more information. But he emphasizes there is a mighty difference between information in general and the kind of timely information coupled with analysis that enables informed decision making.

“With risk management almost a must in the cattle feeding business today, how you analyze and look at futures trends, basis trends, cattle placement numbers, the fundamental trend, money flow, there are so many things we look at today compared to 5-10 years ago – the analysis of that information is becoming more and more valuable,” Good says.

 

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