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It’s a risky business: Learn to manage risk regardless of the source

Brian Williams for Progressive Cattleman Published on 01 November 2017
risk management clip board

Cattle producers are faced with challenges and worries that come almost on a daily basis. Before a calf is born, one hopes the cow is in good health and doesn’t abort the calf. When a calf is due, additional worries arise: Will the cow be able to have the calf on her own? Will the calf be alive and in good health?

Assuming a healthy calf is born, how well will it grow? At weaning time, what kind of prices can I expect? How about the financial health of my operation? What would happen if there were a fire or a tornado? What if I get hurt? What if land prices crash? There is also stuff going on in Washington D.C. that can impact producers: What is going to happen with the next farm bill? What will the EPA do with WOTUS? Will NAFTA be successfully renegotiated?

All of these challenges and concerns can be summarized with one very important word: risk.

Risk is formally defined as a situation involving exposure to danger. In agriculture, risk can come in many shapes and forms, but often involves the reduction in annual net income (lower yields, lower weaning weights, death loss, lower prices, etc.) or in net worth (natural disasters, injuries, declining land values). Risk can also come in the form of higher costs or changes in government regulations and programs.

While it would be impossible to completely eliminate all risk, there are several ways to manage or minimize one’s exposure to risk. For example, many in the cattle industry have vaccination programs to protect themselves against risk associated with disease. Risk can also be managed through selective breeding and genetics. For example, Brahman tends to do better in heat and humidity than other breeds, so many Southern producers have bred Brahman into their herds to manage risk associated with hot, humid summers. Other producers select for smaller birth weights to reduce the risk of dystocia.

Price risk is another important form of risk to consider. How can a producer protect him or herself from this type of risk? There are a few forms of price risk management. First, risk can be managed simply through timing the markets. Typically, cattle markets follow a cyclical pattern throughout the year, and in “normal” years, producers can try to hit near the market’s peak just by studying the annual cycles. However, timing the markets can sometimes prove difficult to do, and in some years this method may not work at all.

Another, perhaps better method of managing price risk is through the futures market. Using the futures market, cattle prices can be hedged months in advance. While one will likely not be able to get the best possible price by hedging, it allows producers to “lock in” a price at which he or she knows will make a profit.

As you can see, risk can come from many different directions. Fortunately, there are also many methods that can be used to manage risk, whether it be with insurance, management practices or by managing price risk using the futures market. Managing risk should be on the forefront of every producer’s mind. Those who are mindful for risk are also those who are most likely to be in the best financial shape when disaster strikes, regardless of the source.  end mark

Brian Williams
  • Brian Williams

  • Assistant Extension Professor
  • Mississippi State University
  • Email Brian Williams

PHOTO: In the beef industry, there are many different forms of risk. Producers should learn to manage the risk unique to their operation. Photo courtesy of Thinkstock.

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