Risk management in the beef feedlot starts with resources

Risk management in the beef feedlot starts with resources

Pratt Feeders in southwest Kansas knows about risk; they feed about 40,000 head.

The cattle business, like most agricultural endeavors, is filled with risk. And with fluctuating markets, fad diets and news media that is not “beef friendly”, cattle feeding is as risky as ever. With a volatile market, and prices declining compared to the past few years, cattle feeders are planning ahead, properly managing their resources and optimistic about the future.

Pratt Feeders in southwest Kansas knows about risk; they feed about 40,000 head. General manager Jerry Bohn says their customers all manage risk a little differently. Some will use the futures to hedge, some will trade in the options market and some have no definite plan in place. 

MARGIN PROTECTION: A Kansas State University risk management expert advises feedlot operators to do what they can to protect margins, even if it means running below capacity. (Photo: Darcy Maulsby/Thinkstock)

“Managing risk is going to be challenging in this environment in the short-term, and we must be very diligent in three key areas,” Bohn says. Keys to profitability in this volatile market include being conscientious of costs when buying cattle and feed, and watching the markets closely when it is time to sell.

“Our customers are here for a while,” says Skyler Martin, who manages Nordman Feedlot near Oregon, Ill. “More and more cattle are coming to Illinois to be finished since we have such abundant feed resources. In addition, some of the younger farmers are beginning to diversify their operations to include cattle feeding since they have the feed and can’t compete in the cash grain market.”

Nordman Feedlot has a capacity of more than 2,500 head, and Martin says about 80% of the cattle there are custom fed for other farmers. The remaining 20%, he owns and are primarily cattle he raised or calves he has bought back from his bull customers. He likes to buy the calves back from the bulls he has raised so he can track their growth and performance; both which help him and his customers.

When it comes to managing risk, Martin says the feedlot does not have a set plan in place. Rather, each customer has his or her own plan, since several of them also feed cattle in other yards. Martin says they raise all their own feed for the yard, other than byproducts, and thinks the feeding operation will continue to be profitable in the future.

Understanding risk

 “Risk is not a bad thing if it is recognized, understood, quantified, and managed accordingly. In risk lies opportunity,” says Ted Schroeder, Director for the Center for Risk Management Education & Research at Kansas State University. “The key to assessing and managing risk is recognizing what risk is present, what the major sources are, keeping options open to mitigate risk and determining how much risk one can afford to self-insure relative to how much and what types one is taking on for a given business decision.” 

Schroeder says he sees a lot of downside risk in fed cattle prices in the coming year and would be very careful betting on bullish market rallies while purchasing cattle to feed. He adds there might be some short price upswings, but says the prospects are not great for large upswings

“Without doubt, the best advice I can provide cattle feeders is to protect margins as cattle are purchased and placed in the yard. Be willing to leave feedlot facilities at less than capacity at times if the expected feeding margin is negative,” Schroeder advises. “You can run a facility covering just variable costs for a while, but this is not a viable strategy for very long and as we have seen this fall, if you purchase cattle to place on feed without protection on the selling price of the cattle, because, again, of the capital involved, you are placing the feedyard in an immensely risky financial position.”

At capacity

Bohn says that Pratt Feeders is running at full capacity, and he predicts it will continue to as producers are willing to own cattle through the feeding phase to try to capture some profit.

Pratt Feeders was a long-time Certified Angus Beef-licensed feedyard, and still strive to feed cattle that qualify for the CAB brand. Bohn says the partnership with CAB differentiates them from their competitors when the high-quality, black-hided cattle are sold on a grid, offering premiums to the owners. Pratt Feeders has vertically integrated, working closely with a handful of producers to buy and feed their cattle. As much performance and carcass data is collected as possible so the feedyard knows what genetics feed and grade the best to help with future purchases.

“Our biggest challenges are finding packers nearby since so many of the older plants have closed down,” Martin says. “And we have environmental challenges,” citing the increased, tighter regulations from the EPA.

- Grobosky writes from Illinois

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