Risk management is always a good idea, but the COVID-19 pandemic has illustrated the importance of that strategy for livestock producers.
Lee Schulz, Extension livestock marketing economist at Iowa State University, says if the pandemic taught the industry one thing, it’s to be prepared.
“For example, March through May fed cattle are offering a $70 per head profit, with profits of $100 per head in April,” Schulz says. “There is an opportunity to make a good profit there, and we all remember what happened this past April. Play offense when you can.”
He sees similar opportunities in the hog market this spring.
A possible disruption in the supply chain should also be considered.
“As I make marketing projections, what if we get something that constrains supplies. You need to be aware of that possibility,” Schulz says. “I’m not suggesting that you make fundamental changes in marketing, but you need to be prepared if something like that would happen.”
He says developing a sound marketing plan should help manage potential risk.
“It can be as formal as you want. Do what makes you comfortable,” Schulz says. “You don’t want to totally lock your prices in. Make sure you maintain some marketing flexibility.”
Producers could look to the futures market for price protection, says Don Roose, president of U.S. Commodities in West Des Moines, Iowa.
“There is no poor time for insurance,” he says. “Ask yourself if you are margin- risk adverse, and if you are, there are multiple strategies you can use.”
Roose says producers can do something such as buying options to give them a type of high-deductible insurance against low prices.
He says some producers may elect to lock in a profit, but may still seek some sort of insurance strategy “in case the market gets well to the upside.”
Roose encourages producers to seek advice while developing some sort of marketing plan. He says producers should make sure all their questions are answered and share their goals.
And although it’s tough to think about, they need to be prepared for the worst.
“If there is a black swan event, are you prepared?” Roose says. “You need to make sure you have a plan for it.”