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4 basic risk management strategies to consider after an uncertain year

Francisco J. Abello for Progressive Cattle Published on 24 December 2020

The ongoing health crisis has generated additional losses to cow-calf producers already suffering multiple years of low margins due to market prices below the average total economic cost of production.

COVID-19 is easily considered a black swan event, which had a massive impact around the world and for which most ranchers were not prepared. As we already know, this pandemic has created unprecedented disruptions in the beef cattle supply chain, increased demand uncertainty and negatively impacted prices for producers. COVID-19 has changed markets, consumer habits, frequencies, preferences and priorities. Will those changes remain in the future? Probably some.

This black swan event emphasized the importance of incorporating routine risk management strategies to minimize the impact of unexpected events that can generate high economic and financial losses leading to business failure.

Today, we are going to focus on four basic risk management strategies that will have a major impact on every ranch business’s future success. As ranchers, businessmen and CEOs, we are indebted to ensure the economic sustainability of our companies for the future of our business or future generations.

1. Management information system

As Peter Drucker said: “You can’t manage what you can’t measure.” To manage a profitable business, financial and production performance objectives must be established. Those could be profit objectives, rate of return on assets and working capital, equity growth, crop and cattle unit cost of production or grazing efficiency, among other measures.

The first and most important strategy to incorporate is a reliable Management Information System (MIS) to integrate and link financial, economic and production data to optimize business productivity. A good system allows the recollection of reliable information to analyze your business. A good MIS could simply be accomplished with today’s popular computer software commonly used by farmers and ranchers. Your system should provide real-time, reliable information to measure costs, profits, productivity and, most importantly, help to measure your yearly progress.

Beef cattle Standard Performance Analysis (SPA), developed by a group including Texas A&M AgriLife Extension economists, could be used to evaluate cow-calf production, costs and economic results following the Farm Financial Standard Guidelines. SPA has been used by many to develop a benchmark for cow-calf operations and costs to help them reach their goals.

Historical SPA data indicated that the top 25% of ranches, by net income, were operations with lower total economic costs per cow and per pound weaned. Production costs were the most significant variable correlated with ranch profitability. Weaned calf weight per exposed female and calf prices were important variables too; ranches with low production costs were almost always in the top 25% of ranches based on their net income.

2. Permanent cost control

Permanent cost control as part of your risk management strategy should be in place to help us navigate rough years. Permanent cost control is not a one-time cost reduction but is a system in our business that permanently is looking to optimize our resources to prevent costs rising. These could be implementing an efficient ranch grazing system that results in less feeding costs or choosing the right herd size that will keep costs low. Weighted average cost per hundredweight (cwt) weaned per exposed female has been increasing year after year since 1991. As SPA results also showed, feed and grazing costs per cow were always higher on those operation in the lower 25% net income quartile.

3. Marketing strategy

Price fluctuations due to market disruptions or weather events continually show the importance of having a well-founded marketing strategy using the available tools in the market. Livestock Risk Protection insurance (LRP) from the USDA is one of these tools that has not been used much but should be considered. LRP does not require a minimum number of cattle to be insured, meaning that small ranches with even one cow could make use of it. Producers choose price cover levels ranging between 70% to 100% of the expected price for steers or heifers weighting less than 600 pounds. LRP could be used to establish a floor price like buying a put option in the CME market, although premiums for LRP are often cheaper. Premium costs depend on the expected end price, the coverage level and the endorsement length. The LRP program could be incorporated annually to manage risk price fluctuations in almost every cow-calf operation.

4. Marketing programs

Do not be the last one in the pack. The market pays premiums for production with certain quality standards. Most of these programs are going to be a standard in the beef cattle industry in the future. These new marketing systems could be helpful to increase value as well as to secure production logistics in the supply chain.

As an example, there is a growth market for “program cattle” for weaned calves and feeder cattle. These cattle must be produced and managed using defined production practices particular for each program. Added value is received for following those guidelines and guaranteeing selling the quality sought by buyers. At Texas A&M AgriLife Extension, we have developed several Beef Cattle Decision Aids that will help any rancher to analyze the benefits and profitability of those decisions (agecoext.tamu.edu/resources/decisionaids). There are different programs around the country, so find the one that fits you. It is important to understand what those programs required in terms of production system, costs, investments and, especially, management skills.

Ranchers need to integrate these long-term strategies in their production systems to boost profits while giving the flexibility to react and respond to opportunities and threats. These are all strong routine management strategies to incorporate year after year until they are fully part of your ranch culture.  end mark

Francisco J. Abello
  • Francisco J. Abello

  • Assistant Professor and Extension Specialist
  • Texas A&M AgriLife Extension Service
  • Email Francisco J. Abello

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