Livestock Marketing and Risk Management

Ranchers face a variety of risks on a continual basis, with production risks rising to the forefront most often.  It is understandable that significant management time is focused on production risks as they are often extremely time sensitive and the consequences of ignoring the risks can be catastrophic for an individual producer.  

Producers implement practices to help mitigate risks.  

A producer may choose to stock at a reduced rate to guard against reductions in forage availability as a result of drought.  A producer may choose to calve in the most sheltered area on the ranch to reduce death loss from severe weather, or a producer may choose to implement a herd health program to protect against poor weight gain as a result of sick calves.  These are just a few examples of common mitigation plans that ranchers use to combat production risks.  

Unfortunately there are other risks to plan for, as well, including market or price risk.

The expected price for a 500 pound weaned calf can easily vary more than $20 per hundredweight from the time the calf is born until it is marketed in the fall – that is a difference of $100 per head.  Even at the time of sale, prices for the same weight cattle may vary as much as $10 per hundredweight at a local auction – a difference of $50 per head.  

Although many, if not most, producers are familiar with strategies for mitigating production risk and actively implement these strategies on a continual basis, some of these same producers feel there is little they can do to impact the price they receive for their calves.

However, while it is true that individual producers can have no impact on the overall price level for calves, feeder cattle or lambs, individual producers can have an impact on the prices they receive.  

Is it just a matter of luck when certain producers continually top the local sale or even the latest video auction?  Probably not. Perhaps he or she is devoting some management time into making sure to market uniform lots.  Additionally, they could also be developing traits in their calves that are desired by the buyers, or they may be raising their calves under protocols, such as source and age verification, that can add value at the auction.  

Would you like to be able to price your cattle in July but not deliver them until October?  That is possible with forward contracts of the futures market.  You probably insure your truck against a traffic accident and yourself against poor health, but have you thought of insuring your livestock against a price risk?  That is possible using either the options market or specific insurance products specifically designed for that purpose.

Recently I collaborated with my brother Dillon Feuz, who is department head of applied economics at Utah State University, on a university bulletin to outline the market and price risks that ranchers face.  The bulletin has four specific objectives: to quantify price risk over time, across markets, and across sale lots; to outline the pros and cons of a number of alternative marketing methods; to discuss various pricing strategies to reduce the risk faced by producers; and to analyze historical data comparing alternative marketing and pricing strategies.  

Every other week for the next several weeks I will summarize each of these focus areas in the Wyoming Livestock Roundup.  If you wish to read the full bulletin it can be found at uwyoextension.org/ranchtools by clicking “Fact Sheets” and selecting “Livestock Marketing.”