Market Them to the MAX
Published on Tue, 04/09/2013 - 2:25pm
Smart Marketing, Risk Management Widen Profit Margins
Market volatility, basis moves and narrow margins make smart marketing and risk management mission critical for beef producers. Producers need it, lenders want it and the times demand it.
Paul and Janet Riniker, Iowa producers, own an operation of about 1,300 head of Angus cattle. “On our farm, we focus on quality and grade,” Riniker says. Paying close attention to the cattle on the Riniker farm, meeting goals comes from hard work in herd health and animal care. “We’re all about doing a good job raising beef.”
“One challenge comes in with tight margins,” he adds. Producers of all sizes share the common concern of price risk. The markets show extreme volatility, and the industry trades thousands of cattle contracts every day, he adds.
“We feel very fortunate that we’ve got good contracts through Nexus, $300 - $400 dollars better than our local market. That’s $200,000 difference on just 600 head of cattle,” Riniker says.
“It gives you a sense of security once you have your feed locked in, cattle doing well and sales locked in,” Riniker says.
Some ranchers or feedlot owners opt not to use risk management tools, because of their market outlook. However, price risk management, in many cases, influences beef enterprise profitability because of lenders’ willingness to reduce interest rates or equity requirements when financing cattle.
Nexus Delivers Risk Management, Marketing Strategies
Riniker has been contracting cattle with Nexus for 12 years, most contracts for delivery, but also hedges. He credits the contracting successes with their ability to purchase new machinery, and buy land.
Riniker’s colleagues in Ohio, contributing to the cattle industry in a different beef marketing landscape, agree.
Brothers Tony and Randy Bensman operate in partnership, running an ag operation started by their father, Orville. Wives and kids all contribute to the ag to-do list. “It’s a family business,” says Tony Bensman.
They bring in 300 lb. calves raised by their grower for the first 16 weeks, and follow an attentive vaccination, nutrition and herd health program start to finish. A typical day at the Bensmans starts with feeding their Holstein beef herd around 6:30 a.m. They check calves, treat those necessary and finish feeding around noon. Factor in crop, facility, equipment and other business responsibilities through the day. They start scraping at 5 p.m., and out comes the feed equipment again. But marketing and risk management really rank at the top on their priority list, so they look to Nexus Marketing for professional assistance.
“Risk management for us just makes sense as far as receiving extra help,” Tony Bensman says. “We like having outside input as to when we should buy and sell, and breakeven numbers.”
They rely on the strategy that has worked well for their operation across time. “Typically we do a basis contract right away at the beginning, and see where we’re at. Then we figure out where we need to be for price, and go ahead and lock it in,” Bensman says.
A basis contract specifies that cattle will be priced at a fixed level above or below the futures price for a specific futures contract month, but doesn’t initially set a price. When a producer sets the price on that contract, that’s when he actually manages price risk. Sometimes producers wait to set that price, and use options to set a minimum price in the meantime.
Nexus Director of Operations Pat Lampert says producers recognize the necessity of tools like basis contracts, but often don’t want to handle that aspect of their businesses themselves. They want to focus on production and other management responsibilities.
“That’s where a staff like ours steps in, shares its experience and expertise, and ultimately becomes an important piece in the profit puzzle,” he explains.
Bensman agrees. “We’ve been working with Nexus now for several years, and we didn’t necessarily have the cattle groups we have now in the beginning, but risk management has really been a big plus for us,” Bensman adds.
“Having our Nexus rep helping us along with when to sell and contract requirements, it’s made us quite a bit of money,” he says. Bensmans send their cattle to a processor that’s well-matched to their animals, one service specialty of Nexus.
“Our Nexus guy is just so easy to work with for us. He just does a great job for us,” Bensman says. “He’s there for us. He’s great to work with.”
Nexus Marketing provides programs such as the Freedom Hedge, a variety of forward contracts and options. Hedging, though, comes down to entering the futures market to protect against adverse price movements. The hedger takes a position in the futures market opposite the position in the cash market.
“Hedge use needs to be timed correctly, and all the risk management tools lend themselves to specific situations producers are facing, so we look at producers’ circumstances thoroughly, then determine the best tool to use,” Lampert says. “It’s reassuring for the producer dealing with hundreds or thousands of cattle to have experienced professionals handle this aspect of an enterprise, while remaining informed during each step in the process.”
The Nexus Freedom Hedge frees producers from margin calls, and cattlemen don’t cover futures financing, either.
Lampert emphasizes, however, that risk management goes far beyond futures and options tools, and even crop insurance on the feed growing in producers’ fields. First, it starts with the right product — quality cattle, single-sourced with a full vaccination program.
Nexus represents producers throughout the Midwest, Plains, Northeast and Great Lakes regions, along with clients in California and Florida. With industry relationships with all the major processing companies and regional packers, Nexus services are within the reach of any cattleman.
The Phillips operation, also in Ohio, supports four owner families. Three brothers, Dennis, Scott and Todd, farm in partnership with their parents, Valgene and Janet.
The Phillips’ Holstein beef enterprise starts with calves at 80 lbs. and finishes them to 1,450 lbs. That finish weight may seem a little heavy to some, Todd says, but the cattle grade better at that weight, and it doesn’t take much more to get them there.
The Phillips, too, zero in on producing quality. So, fresh water ranks number one on the Phillips cattle care list, followed closely by fresh feed and a comfortable, safe environment.
They previously raised colored cattle, but have found the Holsteins, though more difficult to grade high, more profitable for their situation. “And you gotta treat ‘em like babies,” Todd says, smiling.
Often the Phillips operation relies on Nexus to negotiate cash sales for them, relying on their staff’s expertise in marketing timing and processor connections. But risk management matters for those black and whites to make the operation a nice stack of greenbacks.
“We use hedge and straight packer contracts,” Scott Phillips says. “We like contracting. That way your risk is spread out.”
Lampert agrees. “I can’t imagine a beef producer today entirely standing the risk the markets bring in our ag environment. The cattle industry brings a lot of opportunity, but margins are tight, and news stories that happen a continent away touch the U.S. industry too often. It just makes planning so much easier for our customers, too.”
Scott Phillips agrees. With risk management, you don’t get caught in a bad situation with no way out, he says. “It’s a guarantee or insurance for the cattle, knowing what you’re going to get when you’re putting them in.”
Nexus Marketing typically meets with feedlot owners and ranchers to determine what percentage they want to sell on the cash market, and the remainder using forward contracts, the Freedom Hedge or options, Lampert says.
“The whole point of our business at Nexus is helping beef producers make the most money and raise their revenue as high as possible,” Lampert says. “A lot of staff members bring decades of industry experience to this effort. We want to help producers by looking at all the angles, from the financial tools, to assessing their cattle and finally to placing the right cattle with the right packers. It all matters. And that’s what makes this all click for the producers.”
For more profit-oriented marketing information, call Pat Lampert at 877.207.1051.