A Few Thoughts by John Nalivka – Assessing risk

Risk management has become somewhat of a “household” term. Building packing plants has become somewhat of a household term – at least at the ranch. But I firmly believe cattlemen might want to think seriously about how your risk profile changes as you go down the road from being the owner of a ranch to the owner of a packing plant.

Every year as a rancher you face the risks posed by the market, the weather, government policies and regulation, the political environment, and family health just to name a few. These risks are generally common to all ranchers and managed not necessarily in any priority but managed in order to hold on to the ranch and remain in business. The impact of any of these risks mostly only concern the ranch and raising cattle on that ranch with no need to expand the risk roadmap beyond the road turning into the ranch.

So, now a group of ranchers decides to take greater control of their destiny and build a packing plant. This has become a fairly common conversation over the past 12 months as in light of volatile and often what seemed to be “unfair” markets to many. While I am sure these conversations have all included many aspects of risk in owning a packing plant, I think it is important to really think about how the exposure to risk changes significantly going down that road from owning the ranch to now owning both the ranch and a packing plant.

Once your cattle enter the knock box in that packing plant, the risk and liabilities change significantly. Managing that risk on the ranch to stay in business and raise the “right cattle for the right market” has now shifted to the number one priority – food safety. And food safety concerns consumers. One critical issue can shut a plant down or in the very least result in a massive lawsuit. Just this week, we are reading about just that.

Also, we all know the devastation and cost of range fires. That doesn’t change with packing plants. Packing plant fires pose the same risk. We have seen that in the last couple of years.

Cost management is critical to managing risk in a packing plant. Operating costs driven by working capital to purchase cattle, labor, trucking, and the cost of building and retaining markets are all significant. Thus, the drive to large, multi-plant companies and this is risk management. A client many years ago said to me, “if you own only one plant, your risk is increased several-fold.” Food for thought.