Lunacy Of Cattle Prices
DR. ANDREW P. GRIFFITH
KNOXVILLE, TENNESSEE
It is dangerous to write an article about something that changes daily when the article will not be published for at least three to four weeks after it is written. However, cattle futures prices and price risk management are the topic of the discussion. Why are they the topic of the discussion? Because, they have been extremely volatile, and they have presented a learning opportunity for everyone.
At the time of this writing (August 5th), August feeder cattle futures had spent the past three trading days plummeting from an extremely strong price level. Over that time period, the August feeder cattle futures price declined nearly $16 per hundredweight, which would equate to a decline of $128 per head for an 800 pound steer or $8,000 on a 50,000 pound load of feeder cattle. Similar declines were experienced across all of the deferred feeder cattle contracts. The first thought to come to mind is that feeder cattle futures are simply following live cattle futures, which saw about a $9 per hundredweight price decline. However, this then brings one to the question of what caused live cattle futures to decline. This type of thinking results in running deeper and deeper into a black hole that one may not find their way out of.
In today’s price environment, many of the price changes experienced in commodity markets could be classified as complete lunacy. Traders make decisions on both factual and whimsical data and ideas with the hopes of making a few dollars trading paper. People cannot be blamed for trying to make a dollar the easy way, because they take the risk of losing it the easy way. One could also find themselves going down the road of complaining how the futures market and those who trade in it caused prices to decline in a short time period. Alternatively, these same people rarely say anything when the market price increases without any apparent reason.
Despite the many rabbit trails one could go down and where all the blame could be thrown due to lunatics in the market, the only place a person can place blame is on themselves. Knowing a market can react to information abruptly or change without a hint of warning is completely on the person who made a decision or failed to make a decision. In other words, the lunatic may actually be the person who did nothing, because that person knew the market could and most likely would make an abrupt change without notice.
Since markets have proven their ability to act in the aforementioned manner, cattle producers should use the tools available to protect against such price changes. In the case of price volatility, cattle producers can use futures contracts, option contracts and Livestock Risk Protection insurance (LRP). Since futures contracts and option contracts are 50,000 pounds contracts, they are not feasible for every producer. However, LRP can be used on as few as one animal. In brief, LRP is an insurance product where a premium can be purchased to set a price floor. This means a person can protect against market prices declining by paying a premium and at the same time allow the top side to remain open if the market were to escalate.
There are several resources available online to help educate a person as it relates to LRP. It would be well worth a person’s time to understand how it works, how to apply to use the product, and contact an entity that sells LRP. It is not some black box in which some person is selling snake oil. Essentially, cattle producers should consider it as part of the cost of doing business. Managing risk has always been the name of the game in farming and ranching. It just so happens that price risk is gaining steam. Thus, this is the time to start doing something to manage that risk.
By the time this article becomes available to readers, the market could have experienced further declines or it could have skyrocketed. There in is the problem, because no one knows what it will do. ∆
DR. ANDREW P. GRIFFITH: University of Tennessee