March 29, 2024

Managing risk for livestock operations

LINCOLN, Neb. — Risk management tools are available to livestock producers to help them during periods of price and income fluctuations.

“After the fire at the plant in Kansas and the COVID-19 outbreak, our efforts are focused on being able to look for answers to help the beef industry understand what happened and what we could do to keep the market swings from having adverse effects on producers in the future,” said Greg Ibach, U.S. Department of Agriculture under secretary for marketing and regulatory programs.

Finding solutions to help cattlemen is important to Ibach.

“Not only do I wear my hat as a government official, I also have a family farm in Nebraska where we are cow-calf producers,” said Ibach during a webinar organized by the USDA and the national Extension Risk Management Education Program.

“It is a very important topic for my sons and daughter on the ranch to figure out how producers deal with the market swings more effectively and also what USDA may be able to do to help out in times like that.”

The USDA has initiated several cattle centers.

“They are located at Colorado State, West Texas A&M and Clay Center, Nebraska, to provide educational opportunities to producers because we need to make USDA’s risk management tools better understood by producers,” Ibach said.

Livestock producers can use the Livestock Gross Margin Plan and the Livestock Risk Protection Plan to assist with managing risk for their operations.

“The LGM has been lightly used, but is designed to protect the margin between feed and gross revenue,” said Bill Northey, USDA under secretary for farm production and conservation. “The LRP has been used the most for feeder cattle.”

In addition, the Dairy Revenue Protection Plan is available to dairy producers.

“This program was very important to many producers this year as the price of milk dropped through the floor during April, May and early June,” Northey said. “They don’t want insurance to kick in, but when it does, it’s critically important.”

The challenge for cow-calf producers is they are trying to protect risk that occurs long into the future.

“There is almost 1 1/2 years from the time they turn their bulls out to the time they sell their weaned calves,” said Shannon Neibergs, director of the Western Extension Risk Management and Education Center at Washington State University.

“These producers have the risk of feed and health efficiency and it is infeasible to liquidate in response to adverse market conditions so they want to be able to protect their position prior to these events,” Neibergs said. “There are also extended runs of low profit margins so livestock producers can’t rely on increased prices in one year to offset periods of low profits from preceding years.”

Pre-planned risk management is important if an event shocks the market.

“If markets are shocked and they go limit down, that suspends the sale of risk management tools so if you think you’re going to be able to respond in time, that’s not going to work,” Neibergs said.

“Part of that preplanning management is knowing your cost of production,” Neibergs said. “Also incorporating the premium cost of the insurance tools into your cost of production so you can take action and make strategic plans.”

Only a small percentage of livestock producers have utilized the LRP and LGM plans for their operations.

“From 2003 to 2019, only 0.17% of all the cattle inventory used any sort of risk management from the Risk Management Agency,” said Elliott Dennis, livestock marketing specialist in the Department of Economics at the University of Nebraska.

“Most of the policies are sold in the Northern Plains of South Dakota, North Dakota, Nebraska and Kansas,” he said. “These four states comprise about 80% to 85% on a yearly basis for total LRP policies sold.”

The Livestock Risk Protection Plan is designed for smaller producers.

“The CME offers contracts for feeder and fed cattle and they have 40,000 and 50,000 pound weight limits on the contracts,” Dennis said. “That puts smaller producers at a difficult situation when they’re marketing 20 head in October and 30 to 40 head in January.”

LRP works like a Put option that covers the downside risk and allows the producer to benefit from upside prices, Dennis said.

“Currently, LRP is only offered as an at the money or out of the money put,” he said.

This risk management plan is related to time value.

“The further away you are from when you buy that product, the more expensive it becomes because there’s more risk,” Dennis said. “There’s a greater likelihood the price will fall below the coverage price and to compensate for that risk there is an insurance premium.”