2015 calf crop: To protect or not protect
July 28, 2015
If you polled a group of South Dakota farmers and ranchers and asked what the most challenging part of their operation was, I am guessing a large percentage would say marketing. Production agriculture is one of the very few industries (if not the only one) where you have little to no control over the market price for the commodity you put your blood, sweat, and tears into producing. To say the least, this creates a challenging environment to operate in, especially as cash flows and profit margins have gotten tighter. So it is more important than ever to be a good risk manager.
I know a number of cattle producers who protected their calf crop for the first time this past year. Depending on when you bought the protection and when you sold the calves you may have gained anywhere from $0 – 25 per CWT. Some folks were bitter because they "lost" $4 or $5 per CWT on the cost of the worthless option. These folks need to realize that you are out the cost of the option either way, but if the option expires worthless, that is usually considered a good thing as the market stayed above (or below, depending on the option) your strike price. Options are nothing more than an insurance policy and it is estimated that approximately 85 percent of all options expire worthless.
Looking forward to the 2015 calf crop, the prices are not as strong as a year ago, but at the time I write this, you can still lock in feeder cattle over $210 per CWT for fall 2015 or $200 for early 2016. During a recent conversation with a local commodity broker, he feels that August appears to be a good time to protect your 2015 calf crop as we should be coming off a dip in the market in July and should see an increase between now and Labor Day. This protection can be accomplished by using options, futures contracts, or a combination of the two. In order to make this decision you first need to know your cost of production, because how can you lock in a profit if you don't know your cost to produce? Once you know this number, you need to thoroughly understand your choices and seek the assistance of your local commodity broker if you don't. It concerns me how many producers use these tools without truly understanding what they are doing, which can tend to turn into a costly method to learn the mechanics of how these things work.
I strongly encourage all producers to take part in marketing courses when they are offered. Last spring, we had about 30 producers attend a four week commodity market basics class at Mitchell Tech. Many were experienced producers that had been using the various marketing methods for years while admitting they did not completely understand them. We plan to offer the course again this year in Mitchell and Hot Springs or we would encourage you to take similar courses when offered by your local marketing firms.
At the South Dakota Center for Farm/Ranch Management our instructors do not claim to be marketing experts, however we do understand the importance of a good risk management plan and can assist you in putting yours together. If you feel our program would be a good fit for your operation, please contact us at 995-3098 or firstname.lastname@example.org.