Cattle Call is an original production of the Nebraska Rural Radio Association and is presented by Blue Chip Herefords – Oxford, Nebraska.
As cattle markets become increasingly volatile, one of the industry’s primary risk management tools is becoming too expensive for many producers to use.
Scott Varilek of KKV Trading says Livestock Risk Protection (LRP) insurance is seeing less participation, not because producers don’t want protection, but because the cost of buying it has climbed sharply as downside risk has increased.
Last year’s market rally also changed how many cattle feeders approach risk management, he said.
“Last year, hedgers absolutely got slaughtered… There are going to be some guys that are under hedged because they never got a chance to lock in a profit.”
Varilek said many producers who typically hedge were unable to lock in profitable margins on recently placed cattle, leaving some operations with less price protection than normal.
While LRP remains available, he says today’s premiums have become difficult to justify.
“You’re talking $100 to $150 a head to kind of get a floor on a market that’s even below where the market’s at right now.”
Because insurance companies must also manage growing downside risk, Varilek said coverage has become significantly more expensive, reducing its appeal for many producers.
He also noted changes to federal subsidy rules have reduced opportunities to exploit the program.
“There has not been wide, wide usage of it… I’m not seeing LRP itself being the reason that we’re having some of this negative trade.”
Despite lighter LRP use, Varilek estimates only a small share of fed cattle are completely unprotected from market risk. With roughly 70 to 80 percent of cattle marketed through formula arrangements and many negotiated cattle still hedged, he believes perhaps 10 to 15 percent of market-ready cattle are fully exposed to price swings.
Other topics discussed in this episode:
- Packers using formula cattle and slower slaughter schedules to maintain leverage in the cash market
- Whether today’s historically strong cash basis can last through the summer
- How heavyweight cattle and hot weather are influencing marketing decisions
- Why beef demand is softening and what retailers are seeing at the meat counter
- How many fed cattle are actually exposed to market risk versus formula or hedged cattle
- The outlook for negotiated cash cattle trade in the weeks ahead
- Why the current seasonal window is traditionally one of the toughest times to market fed cattle
- The role beef imports from Australia, Brazil, Argentina and Mexico are playing in supplementing tight U.S. supplies
- What current placement trends suggest about longer-term cattle supplies
- Whether producers have begun retaining heifers and rebuilding the U.S. cow herd
