Risk management plans are an important part of any marketing strategy.
“You have to look at risk management where you like the price, but you’re afraid of the risk,” says Don Roose with US Commodities in West Des Moines, Iowa.
The livestock market is filled with uncertainty ranging from the economy to the COVID-19 pandemic. Roose says in many cases, China is in the driver’s seat as a demand buyer.
“With all this, you have a market that can change very quickly,” he says.
Price forecasts also can throw a wrench into the system. Roose says USDA projections for 2021 differ somewhat from the predictions of analysts.
“USDA is saying $114 as an average for cash cattle in 2021, and right now hog futures are higher than USDA projections for each month next year,” he says.
Roose says producers can develop a strategy that helps protect the bottom price — for example, using options.
“You really can’t go wrong if you like a price. You can hedge and get some insurance to protect yourself,” he says.
Roose says while COVID-19 remains a concern for his livestock clients, feed costs are also becoming a concern.
“The corn basis is pretty tight so your risk is increasing when it comes to production costs,” he says. “You want to cover that cost, and you want to keep an eye on what’s happening in South America and China, as well as the drought we are still dealing with.”
The livestock industry continues to gain ground as it emerges from the COVID-19 issues last spring, says Elliott Dennis, Extension livestock marketing economist with the University of Nebraska.
“We have recovered quickly enough from the backlog we had in April,” he says. “We had what I call a false oversupply of cattle. We have worked through the backlogs and demand is starting to pick up again. But there are concerns with the COVID cases as high if not higher than they were in the spring. Does that mean another lockdown?”
Dennis says a risk management plan needs to be developed with such scenarios in mind.
“If the economy shuts down again, you need to have a plan in place that will help you remain viable,” he says.
Dennis says the hog industry has worked through its backlog. African swine fever has decimated the pork industry in parts of the world, increasing demand for U.S. pork.
“You want to separate risk,” Dennis says. “You need to be able to know which market signals are going to make you pull the trigger, and which trigger you need to pull.”