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Volatility demands decisive action

Volatility demands decisive action
Do you have a marketing plan that includes price risk management? Remember, it needs to include the total cost of production.

“If you’re placing the hedge, place it as soon as you’ve established the feeder cattle purchase price,” says Ted Schroeder, agricultural economist at Kansas State University. “Don’t wait two days, because who knows where you will be. If you’re doing this in the morning, don’t wait until the afternoon. You can’t work off averages; an hour from now that average could be at a different point. There’s that much variability.”

Earlier this month, Schroeder was addressing overall market volatility and the within-day swings that have become common.

Schroeder used live fed steers as an example. They were bringing in the mid-$160s per cwt about this time a year ago. They dropped to $115 in late December last year; they averaged $137 the week of March 11.

“That magnitude of price movement across just a few months and that kind of volatility is something we haven’t seen historically in terms of total dollar magnitude in fed cattle markets,” Schroeder said. “Anytime a market is in rapid movement, whether it’s upward or downward movement, there’s going to be a tendency for within-day variability to also escalate.”

In this week’s In the Cattle Markets, Kate Brooks, agricultural economist at the University of Nebraska, encourages producers to develop and maintain a marketing plan that includes price risk management, which she says starts with knowing the total cost of production.

“This will help producers establish their price risk, and how to go about managing it,” Brooks explains. “Producers should find a level of risk and pricing method they can accept. The best pricing methods may change from year to year and what your neighbor did may not be the best choice for you.”

No matter the specific risk management tools employed, Brooks says, “Understanding your cost of production will help establish your pricing objectives and the triggers that make the marketing plan more valuable.”

Although Schroeder doesn’t believe market volatility like that experienced in the last year to be a new normal, he does expect it to hang around for a while.

“As we move through the first part of 2016, volatility has continued and the long-term price outlook has continued bearish with the increasing size of the cattle herd,” Brooks explains. “As market conditions have changed, producers need to again consider their marketing strategies and consider managing their price risk.”

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