There are many risks facing farmers and ranchers today. Uncontrollable weather, increasing land costs, variable crop yields, volatile commodity prices, labor challenges, elevated input prices, and machinery pose issues for the producer. Price risk is one of the biggest challenges facing farmers—especially cow/calf operations. Success follows operations that identify and manage risks using tools such as insurance.
The cow/calf operation is the agriculture segment most challenged with price risk options and adoption. This is mostly due to selling their cattle at auction barns, which bring together buyers and sellers but doesn’t provide a future cash contract like elevators do for crops. There are many reasons to be bullish on cattle prices, but it is unlikely that the current high prices reflect long-term supply and demand equilibrium, meaning there is plenty of price risk facing cow/calf producers today.
The previous price channel for feeder livestock has been between $1.30 to $1.60 shown in the chart below. Today’s November feeder cattle futures are around $2.56 per pound. We don’t know what the next long-term channel will look like but let’s assume it’s above the previous channel at $1.60 to $2.00. This would indicate a 50-cent pullback is likely at some point, albeit we don’t know when or if this will occur. A 50-cent decrease on a 750-pound steer amounts to a potential revenue reduction of $375 per head. This is a substantial risk that the producer doesn’t need to accept.
LRP is a great tool for risk mitigation that provides a subsidized price floor with limited basis risk as the contract is settled with an indexed cash price. It provides numerous options with target weights, number of head, and end dates. LRP quotes are easy to read and understand compared to futures and option contracts. Adding an insurance policy like LRP is a great tool for risk mitigation. Contact your AgCountry office to learn how an LRP policy can work for you.
