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As Prices Skyrocket, So Does The Risk

“Record-high prices do not mean record-high profits. The amount of risk is intensifying.” That’s how Randy Blach, CattleFax CEO, summed up the current business environment during that organization’s Outlook held in conjunction with the Cattle Industry Annual Convention and NCBA Trade Show earlier this month.

Just consider those eight-weight feeder steers stepping off the truck at about $1,000 a pop, or their five-weight counterparts at around $700. Blach explained that feeding cattle today requires access to 84% more capital than in 1995.

Trey Patterson, COO of Padlock Ranches based at Ranchester, WY, and Don Schiefelbein of Schiefelbein Farms at Kimball, MN, were part of a risk-management panel held that same week at the Cattlemen’s College sponsored by Pfizer Animal Health.

“The pressure will be on managers to identify and execute strategies that yield profits and control risks in the face of markets and prices never seen before,” Patterson said.

Most folks intuitively understand that the need for effective risk management grows with the ante. But, Schiefelbein explained, “To truly understand risk management you have to find yourself on the verge of losing it all.”

Having learned that lesson first-hand, Schiefelbein says rule number one of risk management for their operation is simple: “Avoid ‘game over.’ We always have enough protection to guard against that.” This is an outfit that runs more than 600 registered cows and sells about 300 bulls annually. In addition to an extensive farming operation, Schiefelbein Farms feeds 5,000 head of cattle annually, all calves from customers utilizing their genetics. They’ll place another 15,000-20,000 customer’s calves each year.

In a bull market, Schiefelbein explains they’ll leave more room open on the topside, but they are always positioned to avoid catastrophe. In a bear market, they’ll be satisfied to lock in a breakeven or a touch more. Related to their first risk-management rule, he says, “We maintain enough insurance that we can continue to make the decisions, rather than the banker.”

Of course, there are more ways to manage risk than futures and options.

At the Padlock Ranch, for instance, heifers are artificially inseminated (AI) one time; no clean-up bulls. These heifers are preg-checked by ultrasound at 45 days post-breeding; conception rates run 58-65%. The open heifers go to the feedyard.

“We let the heifers’ ability to conceive to one round of AI complete our selection process,” Patterson says.

Besides calving earlier, these heifers have the opportunity to raise calves on green grass. You see, the Padlock Ranch moved to May calving seven years ago in order to reduce some of the variable costs like hay and labor.

“If you can grow your own feed, that’s the biggest risk-management buffer to higher feed costs there is,” Schiefelbein says. As well, he prizes flexibility. “We buy and feed byproducts that other people won’t. We want at least 90% of our ration to be no more than 85% the value of corn.”

Those are examples just from the production side of the equation.

“We always buy value-added cattle,” Schiefelbein explains, “and every head we market sells on a value-based grid.”

“Marketing is integrated into the entire system,” Patterson says. Those heifers mentioned earlier are bred to Waygu bulls. In addition to calving ease, the Padlock Ranch contracts the halfblood calves to a branded value-added program.

These are sizable outfits. They understand that chasing the market is a fool’s game. “In the short term, no one knows what the market will be,” Schiefelbein stresses. “Nobody knows the market, and I mean nobody.”

“Focus on the margin, don’t try to guess the market,” Blach advises. “It’s going to be volatile. Have a plan. Be disciplined. It’s going to be easy to be wrong.”