Jenny Ifft, Agricultural Policy; Brian Coffey, Livestock Economics and Risk Management; Glynn Tonsor, Livestock and Meat Marketing
Feeder cattle markets have reminded everyone just how quickly things can change. In early October, futures were flirting with record highs. Two weeks later, prices dropped nearly $40 per hundredweight—about $350 to $400 per head for a 900-pound feeder. Periods like this highlight why price risk management matters. It’s not about predicting the market; it’s about protecting your business when it turns the other way. Many compare today’s market to 2014–2015. Prices peaked in late 2014 and then fell sharply through the second half of 2015—by more than $95 per hundredweight than the 2014 high. We can’t yet say whether today looks more like 2014 or 2015. In hindsight, you didn’t “need” to manage price risk in 2014, but you certainly did in 2015. The point is that surprises can happen at any time, and preparation helps avoid the pain producers felt in that downturn.
High prices have never lasted forever. Even when supplies are tight and fundamentals look bullish, new information—policy changes, inventory levels, feed costs, export trends, or consumer demand shifts—can turn the market faster than expected. Volatility is part of the current environment, and while prices may recover, they also may not. It’s worth keeping in mind that late October fall calf prices are still higher today than they were for producers that hedged in March or April.
There’s no one right approach to managing price risk. Some operations choose self-insurance—relying on off-farm work or strong balance sheets to weather market swings. Others manage risk through diversification, spreading production and income sources across different enterprises. Still others prefer to directly manage price risk through contracting, hedging or use of Livestock Risk Protection (LRP) insurance. The key is to have a plan that matches your risk tolerance, liquidity, and business goals.
Hedging and LRP insurance can play a role, with LRP use increasing substantially in recent years. The best choice depends on operation size, cash flow, and marketing strategy. LRP offers flexible coverage and an effective price floor, with smaller lot sizes with no margin calls. An LRP premium must be paid, but the cost is shared with the government and premiums are not due until the end of the contract period. Futures and options provide more flexibility for timing but require margin management. Some producers use a combination.
The goal of price risk management isn’t perfection; it’s reducing exposure. Over time, a consistent risk management plan helps smooth income and protect working capital so you can stay focused on production decisions rather than reacting to market shocks.
Even in strong years, ask yourself: what happens if the market falls $20, $30, or $40 per hundredweight? If that would create cash flow problems, it’s time to revisit your plan.
For current LRP tools, basis trends, and updated market charts, visit AgManager.info or see this recent Beef Tips review of LRP.
