There's never been a time like the present to place risk management at the top of the priority list. As the industry morphs into new business arrangements, health programs become mandatory and retained ownership grows, managing all risks will be essential for survival.
That's according to Bill Helming, owner of Bill Helming Services in Olathe, KS. The long-time industry consultant and analyst says the direction of change in the industry is placing a greater emphasis on risk management.
"Risk management, as it relates to the ownership of cattle, should be given an increasingly higher priority than ever to optimize success, minimize losses and enhance chances for survival in the industry," he says.
Helming sees the traditional risk management tools such as futures and options falling to the lower end of the range on which people will rely. Instead, he views the practice of retained ownership as a viable risk management device.
"I think the cow/calf sector is going to benefit greatly from this," he says. "As the industry evolves, it's going to become more integrated. Among other things, this will result in a greater proportion of the ranchers who currently ship about 25 million head into feedyards, retaining ownership. It's a very advisable risk management strategy."
The forecaster envisions an abundant supply of low-priced corn over the longer term. Though Mother Nature will periodically interrupt the supply, he says it makes sense to send calves to the feedyard via preconditioning.
Clem Ward, agricultural economics professor at Oklahoma State University, echoes these recommendations.
"Retained ownership is a good tool because it meets current economic realities and enables the producer to accomplish two other goals," Ward says. "First, he can more directly participate in alliance programs that offer carcass data. Secondly, an operator can use this carcass data to make genetic and management improvements to his herd resulting in a higher probability of long-term profitability."
Risk Management Defined Ward and Helming concede retained ownership by itself won't ease all concerns. But, combined with proven practices, it can be the cornerstone to profitable returns.
"It does matter the type of cattle on which you retain ownership," Helming says. "If you're buying them, buy straight from the ranch as much as possible and on the basis that the calves are a specific weight and meet requirements such as having all vaccinations and are in good condition.
"Secondly, based on where we are in the cattle cycle and in view of supply/demand relationships, the trend for the next four or five years will be toward lighter-weight cattle, even perhaps just-weaned calves."
These lighter calves and more time will actually allow better incorporation of hedging, futures and options, or forward contracting to one or more packers. By owning the calves about 180 to 210 days, feeding customers can do two things:
* Buy cattle at a lower price, and
* Buy corn cheap and put on weight at lower cost than using wheat or grass.
"Knowing where you are in the cattle cycle and using information from organizations such as Cattle-Fax will put you closer to profit goals," Helming says. "In this kind of supply/demand trend, you want to own inventory and own it longer, whether you're a rancher or feeder. Plus, have a marketing arrangement. The general bias of the cattle market over the next two years will be an upward trend."
Helming says this better positions feeding customers toward value-based marketing, which he sees as a certainty.
"Feedyards should be oriented toward value-based marketing. This means being paid on a carcass cutout value as opposed to a live bid basis," Helming says. "The Chicago Mercantile Exchange will soon offer a carcass beef cutout contract," he adds. "It will be far more effective at determining value than live prices."
Branded beef programs and technology shouldn't be left out of the mix. Helming says branded beef has opportunities for certain industry players, and technology will impact every aspect of the industry. Primarily, it will lower costs and increase accuracy at every juncture.
No matter what tools are used to handle you or your customers' risk factors, Ward says not to eliminate anything.
"Increasingly, there are more options than fewer ones," Ward says. "It becomes a question of what is most attractive to the feeding customer, the specific situation and feeding goals."