So many of us were still waiting, hoping and assuming that the turn of summer into fall would bring the only thing we could practically fathom: higher market prices for beef cattle.
Instead, the market ended its historic climb with a freefall, and those producers who focused on doing all the right things to add value and get the most out of their calves found themselves selling more equity for a lower price than those who sold bawlers in August and September. That caused widespread pain and shockwaves felt from sea to shining sea.
The recent history lesson serves as a reminder – though we do everything we can to educate ourselves and do what we think is right, even if we think we “know” what the market will do, we cannot be certain. Our industry is keenly aware (again) that there are things we cannot control. The market can always find a black swan to dive with, beyond all our best predictions, hopes and charts.
So what is there to do but be at the mercy of the uncertain? The answer is an old one, and it’s not easy: "Cowboy up." Control what you can and manage the manageable. In the realm of market prices, there are ways to introduce certainty. Most are familiar with forward contracts and at least the idea of futures contracts, but what if you don’t want to lock in a singular price months ahead of time? What if the market had kept going up instead of turning down last fall? What if you wanted to protect the downside risk of your cattle price without limiting upside potential?
The tool you’re looking for is a price floor. It sets a worst-case scenario, or a minimum price for your cattle, not a final price. Therefore, you can still capitalize on any market rises that come.
This provides certainty, and the question to ask yourself is, “What could I do with that certainty?”
- Plan. Imagine knowing the minimum price of your calves in advance when faced with that opportunity to purchase more grass or borrow from the lender to hold your calves and put more pounds on.
- Focus on the cattle. Now you have a floor underneath you, there are fewer things that must slip through the cracks on the day-to-day. Go mend that fence, train your help so you are more equipped and have time to take on that hayground. Go put your efforts into your health and supplement program or implement intensive grazing because you have the time now and know you can cover those costs.
- Leverage your floor to maximize opportunities come marketing time. How differently could you negotiate or maneuver with a guaranteed minimum to measure against?
- Sleep at night. Price floors are even better than melatonin.
All this might sound great, but what is the cost? There are two types of price floors available to the cow-calf producer. One is a bought put option through the Chicago Mercantile Exchange, and the other is a Livestock Risk Protection endorsement through the USDA. Both are like any other insurance you would buy, in that there is a premium cost to purchase the protection. This is not a commercial for either, but a challenge to know what’s out there and use tools that are advantageous to you. If you want to find out more about price floors, find a risk management consultant who primarily deals with cattle.
You're not completely powerless; you don’t have to just be a price taker. Control the things you can, and picking the top of the market is not one of those. Doing nothing is still a decision. If that is a strategic decision, great. If that is a decision made from fear, then dust yourself off, learn from your mistakes and get back in the saddle.
