Livestock price fundamentals still appear to be strong despite recent woes in the futures market, according to a market analyst, but for those buying stocks, a little risk management can go a long way.
The bovine influenza A virus has infected one person so far, but the risk to humans and cattle appears to be low, says Brian Perillat, agricultural specialist at Bullseye Feeds. However, it has brought an unwanted risk to a red-hot livestock market.
“Some of these people bought very expensive calves and expected the prices to be much higher. And now the question arises as to whether these high prices are actually achieved or not.”
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The question is whether fears of cattle flu will impact demand, Perillat adds. The old saying goes that supply determines price movement, but demand determines the magnitude of the price change, he says.
At this price level, “mistakes or market changes become all the more costly.”
Perillat says people buying calves should have a plan and know their breakeven point. Even though markets have fallen, producers could still use price insurance to break even on a grasser program.
Some may have locked in profits, but without knowing the break-even point, it is “quite difficult to create a risk management plan.”
Price insurance is similar to a put option in that both hedge the downside, says Perillat. Some people buy put options on feeder cattle futures directly on the Chicago Mercantile Exchange.
Puts have to be bought in increments of £50,000 and can still be quite expensive. However, they offer flexibility as they can be sold during the feeding period if market or risk management strategies change.
According to Perillat, producers also bear all of the risk surrounding the Canadian dollar and the basis with puts.
Feeders can sell yearlings immediately if the risk exceeds their tolerance and “rent out the grass,” Perillat says. Or they can sell forward, although that means they are tied to the market.
If people want to profit from rising markets, they can buy call options. They could also sell their calves and buy futures, although Perillat notes that few people do this and it's not necessarily something he recommends.
“You’re just shifting the risk from owning livestock to a futures position,” he says, adding that he’s hesitant to even bring it up. But it is a technical option for those who are oriented towards the base levels and understand the specifics of the market.
Even running yearlings don't necessarily have to commit to one option, especially if they have a large number. For example, you can purchase price insurance, sell some calves forward and purchase a put option, or any other combination thereof.
Cow-calf producers have fewer risk management options than most livestock producers or feedlots.
It's a challenging time to sell calves in advance, but cow-calf producers might consider it, Perillat says.
Ideally, a producer would have a consistent, large group of similar calves to sell, or perhaps a neighbor with similar cattle to team up with and generate interest. However, when the market recovers, producers are locked into the weaker price.
The good news is that cow-calf producers are still in a strong position. Although insurance coverage has dropped due to bovine flu, cow-calf producers can still make a profit, Perillat says. He often suggests purchasing price insurance in small chunks, 10 or 20 percent at a time.
“Maybe you don’t like this price today, this coverage. But if you’ve set 20 percent and it gets worse, at least you’ve set some.”
If there is a market rise next month, producers will be able to secure more at a better price. Put options can also work for cow-calf producers, he adds.
Perillat, a former Canfax senior analyst and manager, remains a big supporter of the organization, which provides “great market intelligence.” It is also helpful to follow the futures markets.
Don't start hedging right away, he advises. Perillat recommends that producers first follow the trend and see how it compares to the previous month, how much the futures move from day to day, and how they look in 2025 compared to today.
Given the risks, some beef producers may consider hiring a cattle market consultant, Perillat says, or finding a peer group to focus on marketing.
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