The last few weeks have been wild, even though most of us have been locked up at home. Bull sales have moved online and auction markets have been closed to everyone but buyers. Processors are adjusting lines to allow for social distancing and restaurants are closed to everything except pickup and delivery. These factors have all added to the risk of beef production (among other commodities).
This new state of affairs and whatever the aftermath looks like can all be added on top of regular risks like weather, animal health and personal safety, to name a few. There are a lot of good, formal risk management programs such as AgriStability, Western Livestock Price Insurance Program (WLPIP), forage, moisture and crop insurance options out there. These are important to examine and participate in if they fit your operation. However, it is fair to say that managing and insuring against all of this risk can put a real drain on cash flow and the business.
Most insurance programs are designed around price rather than costs. As an example, through WLPIP we try to insure the price or future value of our calves — we don’t insure their health or the cost of producing them. We insure revenue but we need to manage costs. A simple example (again using WLPIP) is that many producers will complain about the cost of coverage, but depending on how the program is used, we may not need to buy the highest coverage level at a point in time. We may be able to cover our risk at a much lower price point. Think of it as buying collision insurance on a $500 truck we bought at auction. It might not be worthwhile to insure at the highest levels, but some insurance is likely a good idea.
Some management tools
The part of our risk we can manage in the cattle business is the cost and production side. Hopefully, a few of these suggestions will get you thinking about ways to manage risk differently, or in addition to insurance products in your operation.
- Grow grass. This may sound crazy to some and obvious to others, but having a source of forage available is a tremendous advantage when it comes to risk management. It can allow us to time markets or hold on to cattle a bit longer at a relatively low cost if we need to. God forbid, markets and Mother Nature can collide — for example, a drought with markets tanking, but having stockpiled forage can be a tremendous risk management asset.
- Keep some yearlings. This is more for cow-calf folks than backgrounders or grassers, but having yearlings in your plan can help you a lot. They are easy to gather and market if you need cash, but they also provide a release valve for your pastures if you are in a drought situation and want to save forage for the cow herd.
- Buy more cattle. OK, I know you think I’m crazy, but in a falling market we can use dollar-cost averaging to reduce our cost of inventory and open some profit opportunity. This is a strategy that carries some risk, but it works as follows:
If you had 10 yearlings that cost $1,000 each and your cost to graze for the summer was $500 per head, you have a $1,500 breakeven. If the market drops and our projected price is $1,400, you stand to lose $100 per head. If the market is dropping, you may be able to buy an additional 10 head at $800. If your cost is still $500 per head, you now stand to lose $100 on the first 10 and gain $100 on the next group of 10. You are now in a breakeven situation.
In reality, it is much more nuanced than this, but you may be able to use the power of dollar-cost averaging to help your breakeven in a falling market.
It can also help reduce costs. If we use $200 worth of fuel over the summer to check our cattle and we have 10 head, that’s $20/head. By buying 10 more head we have reduced that cost to $10/head.
- Diversify your product line. As farmers and ranchers, what we really sell is fresh air and sunshine, or to put it another way, we use sunshine and CO2 from the air to grow grass. We feed grass to cows and sell the cows. Finding different ways to sell fresh air and sunshine is really what this is about. Can we add species or products that diversify market timing, change where our demand is from or alter our margins? Granted, any new enterprise has to have enough gross and marginal value to make it worthwhile, but if I think of the list of people I know who sell fresh air and sunshine in different ways. These could include grass cattle, bred heifers, bred cows, custom grazing, goats, sheep, pastured poultry (eggs), pastured pork, hay, grass-finished beef, weaned calves, tourism and several others. In reality, they are all selling the same thing, but using different methods to sell it. Diversifying may be a risk management tool that fits some operations. (Confession: we are looking hard at goats, but are still trying to sort through a fencing plan).
- Communicate and educate. One of the tendencies of human beings in crisis is to become human doing instead of human being. We can focus on doing tasks instead of looking at what tasks are we doing. Times of crisis are a great opportunity to talk to or learn from other producers and folks in industry (and outside of industry) on tools, tips and techniques they are using to work through a risky situation. The biggest risk to be aware of in this scenario is to make sure you are not just participating in a coffee shop complaint session, but finding folks that you can share with and learn from. That is subtly but very importantly different than just folks you can complain to.
Further to this point is that communicating with your lender/accountant/advisor during these times and during good times is one of the greatest risk management tools you can use. Lenders don’t like surprises, and often have good ideas on business structure, products and other tools to help through a market downturn.
Hopefully, some of these ideas will help us to think about different ways of considering risk and risk management in our operations. One of the biggest tools available to us is cutting cost, but I will leave a few ideas for ways to approach this to the next article. I would appreciate any feedback and ideas on what is on your list of risk management strategies that are outside of the traditional line of thought.