Sustainable beef production is categorized into environmental stewardship, economic opportunity, and social diligence, which means everyone within the beef value chain has a role to play in sustainable beef production. Sustainability research has primarily focused on environmental and social sustainability, but there is a need for economic sustainability research in the beef cattle industry. Economic sustainability is often defined as a farm’s ability to survive or to be economically viable in the long-term, which includes making profitable short-run decisions. An important component in economic sustainability is having access to and using effective tools and strategies to reduce economic losses when unexpected events occur. Cattle producers encounter many forms of risk (e.g. production, financial, technological, legal, casualty, policy), but price risk has become prevalent. Research has investigated the effectiveness of tools to mitigate price risk, but producers’ adoption of these management tools has been slow. The events occurring in 2019 (Tyson Holcomb fire) and 2020 (COVID-19) strengthen the argument that managing price risk is vital for long-term economic sustainability for beef cattle producers. The specific objectives of this project were to: 1. Determine the positive attributes of currently available price risk management tools for beef cattle including futures contracts, options, and livestock risk protection insurance; 2. Determine the attributes of currently available price risk management tools that lead to nonuse or fail to mitigate risk; and 3. Provide discussion from producers about ways to improve risk management tools and strategies for cow-calf and stocker producers. The goal of this paper is to provide a comprehensive summary of research on risk management tools for beef cattle producers and help guide continuing education to beef cattle producers as well as inform policy makers and private industry on ways to improve price risk management to enhance economic sustainability for beef cattle producers.
An extensive literature review was performed to evaluate the previous findings as it relates to the effectiveness of futures, options, and Livestock Risk Protection Insurance (LRP) in the cattle industry. Cattle producer focus groups were held to obtain a better understanding of use and nonuse of futures, options, and LRP while also gathering input from producers on what would promote the use of price 2 risk management tools. In addition to the focus groups, LRP data was analyzed to determine the probability of receiving an indemnity payment and to determine the size of the indemnity payment. Futures price data was also analyzed to determine how many days a specific contract traded higher than the close of the contract, which provides information on the likelihood a producer could have established a higher price using futures compared to not using futures.
Producer focus group meetings were conducted in Tennessee to better understand the effectiveness of risk management practices in the cow/calf and stocker cattle industry and to determine reasons for use or nonuse of risk management tools. A variety of price risk management tools were utilized by focus group participants including futures, options and LRP. Reasons for using price risk management included locking in a profitable price, limiting losses, and offsetting risk. Reasons for not using price risk management can be synthesized into a lack of knowledge and understanding coupled with the fact that there is a cash expense when using these tools. Focus group participants also provided recommendations of what might increase use of risk management tools including increasing the affordability, making them easier to use, further developing education on these tools, and ensuring they will benefit from its use.
Volatility in the marketplace and the inability to hedge a profit in some situations is a concern, but volatility also offers pricing opportunities. Thus, it is possible to determine if producers could have achieved a higher price if they would have used a price risk management tool compared to not using a tool. The six-year average (2015- 2020) shows it is typical to have more than half (138 to 164 days) of the life of a contract to trade above its final closing price. Thus, the futures market could have reduced losses from price declines in the feeder cattle market. Similarly, LRP data (2014-2020) demonstrates opportunities for successful price risk management of feeder cattle in some instances. A visual inspection of the likelihood of receiving a premium from LRP between 2014-2018 ranged from 13% to 35% across the months. Focusing on 2019 and 2020 when the market was influenced by the Tyson Holcomb fire and COVID-19, results clearly demonstrate LRP was effectively setting a price floor in months when prices dramatically declined.
Cattle producers tend to start managing price risk when cattle are near the time of being sold, because they have a better idea of production. However, cattle producers have made long-term investments into land, facilities, fences, and other inputs. Thus, short-term price risk management strategies do not provide producers with risk protection they need to remain economically sustainable in the long-run. Providing stocker and cow-calf producers with a long-term price risk management tool would benefit producers in making more profitable expansion and replacement decisions. This would also help them keep operating during economic shocks. Thus, it is evident many producers need more education to increase their understanding of and to reduce their fear of using currently available price risk management tools. At the same time, some of the available tools may be cost prohibitive to some cattle producers. Given that the currently available price risk management tools are all short-term, it may also be beneficial to evaluate longer term alternatives that accommodate longer production cycles that are inherent in the beef cattle industry. For the beef industry to sustainably operate, innovative solutions must be developed to meet these challenges. Next steps include a nationwide survey of cattle producers on their price risk management needs and shortcomings of current products. This will further develop innovate ways to improve economic sustainability through price risk management.