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Lance Zimmerman Outlook
Lance Zimmerman Risk Mngmnt

Risk Management During Cow Herd Expansion

OVERLAND PARK, Kan. (Nov. 4, 2015) — The cattle cycle has not disappeared and neither is it broken. CattleFax market analyst Lance Zimmerman offered that reminder to cow-calf producers attending a risk-management workshop at the 2015 National Angus Convention. The workshop was part of a series of Angus University educational opportunities offered during the convention’s run, Nov. 3-5, in Overland Park, Kan.

Granted, drought and accompanying high feed prices confounded what most cow folk considered the “normal” cattle cycle. Liquidation of the U.S. cow herd brought numbers down to levels unseen for decades. Calf crops were smaller and demand for feeder cattle soared. Expansion was delayed, even when market conditions suggested the time was right. When moisture conditions improved, heifer retention began in earnest. It comes as no surprise.

“Profitability breeds optimism and fuels cow herd expansion,” Lance Zimmerman said, calling it evidence that the cattle cycle is alive.

“Profitability breeds optimism and fuels cow herd expansion,” nodded Zimmerman, calling it evidence that the cattle cycle is alive. “We’ve seen prices driven up for five years and now we’re in a transition phase, with prices shifting a bit lower through 2018. Then, prices will trend farther downward. A transition to stronger prices will come, but probably not until the next decade.”

Zimmerman called feedlot profitability a fair indicator of calf demand, but he reminded the audience that cattle feeders have experienced losses for 12 consecutive months. With more females in production and more calves coming to market, buyers will be more discriminating. Zimmerman expects plenty of market volatility — lots of ups and downs during the next couple of years. He looks for the price spread between northern and southern feeder cattle to widen. The spread between calves and heavier feeders should narrow.

“With expansion, feeder-cattle supplies will grow to the point that cow-calf producers lose their leverage over other segments,” said Zimmerman. “Those that expanded most in 2014 and 2015 will have the most equity at risk.”

To manage risk during a coming period of leaner margins, Zimmerman advised cow-calf producers to seek ways to be low-cost producers, without sacrificing product quality. Producers should consider management practices that add value to calves and market (cull) cows. Zimmerman said producers should sharpen their marketing skills, remembering and taking advantage of market seasonality. Don't forget the cyclical nature of markets.

“At the peak of the price cycle, sell more heifer calves. At the cycle’s trough, keep more heifers as replacements,” counseled Zimmerman. “That’s a basic strategy for navigating the cycle.”

Zimmerman said it’s not for everyone, but some producers may want to consider offsetting the risk of fluctuating cash markets by short hedging, using futures or options contracts. Retaining ownership of calves all the way to finish may be advantageous to some producers.

“Retained ownership is a challenge in a volatile market,” admitted Zimmerman. “It still might make sense, especially if you can capture data and enhance your long-term marketing position.”

Angus University was sponsored by Merck Animal Health.

Editor's Note: This article was written under contract or by staff of the Angus Journal, which maintains the copyright. To request permission to reprint, please contact Shauna Hermel at 816-383-5270.