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PRICE ed. At the same time, The Midwest Cattleman · August 20, 2020 · P23
continued from page 3 feedyards with ample
— both grain and livestock — cattle ready for har-
manage both of these risks. vest were unable to
move those cattle to
Before the Coronavirus processing facilities
Managing weather risk since the processing
has been an ongoing concern capacity had been
of producers. However, the in- reduced. So live cat-
terest in managing price risk tle prices adjusted by
has been more sporadic. Pro- approximately 25%,
ducers, being generally opti- and the price soft-
mistic, are reluctant to lock in ness was felt down
a certain price that eliminates the production chain
the opportunity of a higher to yearling cattle and
price if by chance the market calves. No one in Jan-
offers it later in the produc- uary would have ever
tion cycle. The pandemic has thought the cattle
reminded producers of and market would experience this exist as to ways producers July 1, 2020, the subsidy has
heightened the interest in kind of decline. can pick and choose combina- been increased to 20-35% de-
price risk management. tions of put and call options pending on the level of cover-
If you are a cattle produc- Price Protection Has Potential to achieve a higher floor. age chosen. One of the more
er, think back to the outlook The chain of events that Livestock Risk Protection attractive features of LRP is
for cattle prices in late Janu- created the lower prices Around the turn of this that any size group of cattle
ary 2020. On Jan. 1, the U.S. caused cattle producers to century, RMA created a prod- less than 3,000 head can be
cattle inventory report esti- think back and wish they uct they named Livestock protected.
mated beef cow numbers to would have done some kind of Risk Protection (LRP). RMA Options Are Available
be down from the previous price protection. Nothing can provided a 13% subsidy on If the recent fluctuations in
year by 1.2%, the first decline be done for what has already the premium, hoping it would the cattle markets have made
since 2014. happened, but producers can entice producers to use it. The you interested in price protec-
The calf crop was esti- learn from the experience and product is sold and serviced tion, please become informed
mated to be down 0.9%. In a consider ways price protec- by private insurance agents. of the products available.
market where supply and de- tion can be used in the future. The use of the product has
mand determine prices, the Fortunately, there are several been disappointing. Effective www.noble.org
fundamentals were in place choices a cattle producer has
to support stronger prices. to help with price protection.
Projections in the fall for pur- Some of these products have
chased stocker calves or re- been around for a long time,
tained home-raised calves in- while others have been avail-
dicated a profit when sold at able for only about 20 years.
heavier weights in the spring. Hedging
Few producers who owned Hedging on the futures
yearling cattle thought much market by selling a futures
about price protection at the contract is very popular. This
time. strategy locks in a certain
Supply and Demand Disrupted price with no opportunity for
Then the pandemic caused any upside potential. Typical-
huge disruptions to both the ly, the only reason a producer
supply and demand for many would experience a different
food items, including beef. price would be that the actual
Consumers changed their basis was different than pro-
buying behavior due in part jected.
to many working from home The reason many produc-
and eating more meals at ers do not like hedging is mar-
home. The food service (pri- gin calls. Large margin calls
marily restaurants) demand can shake the emotions of the
dried up almost overnight and calmest producer. Purchasing
panic buying ensued at the options on futures contracts
retail level. Some cattle pro- is attractive because of the
cessors darkened plants due potential for a higher price. A
to surging cases of COVID- “put” option provides a min-
19, while others had to reduce imum floor price and leaves
capacity because workers felt the upside open. No margin
unsafe at work and stayed calls are required.
home. Food service products The reluctance by some
could not easily be retrofitted producers to use options is
for the retail market. With re- premium cost. If a “strike”
duced processing capacity and price close to the underlying
a product shortage, a much futures contract is chosen,
stronger beef demand was premium cost could be consid-
created at the retail level and ered pricy, especially in vola-
boxed beef prices skyrocket- tile markets. Many strategies
