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Risk Management: How to get rich from drought and bad cattle prices

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Risk Management

How to Get Rich from Drought and Bad Cattle Prices

Someone should write a book by this title. It would either be a best seller among the ranching community or get the author committed to a mental institution. Indeed the risk of drought and/or an adverse market move have always been the two most ominous challenges faced by Southwestern Ranchers.

This is evident by the fact that, anytime two ranchers get together, the conversation always turns to one or both of the same topics--prices and rain--the two greatest risks faced by the livestock operator.

But then the conversation usually comes to an end with a dismissal of the situation. "Oh well, we don't have any control over either of them."

Malarkey! Maybe you can't control the phenomenon itself, but you do have complete control over how you deal with it. Here is how:

Drought Risk Control

One way would be to convert to a stocker operation. First because there is total flexibility in matching each year's annual forage production with the appropriate animal numbers.But, whether you run stockers or mother cows, you have to be willing to use a flexible stocking strategy.

We have developed a simple and rapid method for inventorying the amount of forage available at the end of the growing season. We then use this information (plus a drought reserve) in our dormant season grazing plan.

In this manner, we never get caught short of forage nor are we ever forced to sell livestock on a drought depressed market.

Market Risk Management

After we complete our forage inventory and know how many head days of grazing that we have available, we check to see if we can place an effective hedge on the cattle using the futures and/or options markets.

But don't yet rush to judgment. Even if we can place an effective hedge, we are still not ready to rush out and buy cattle.

Instead, we call on our vast network of producers and inform them as to how many head days we have available and inquire as to what they would be willing to pay for a custom grazing arrangement.

We then choose the most profitable alternative—own and hedge or take in pasture cattle.

Note that by using this process we, in effect, established almost total control over both prices and rain.

At the very least we have insured that profits are maximized each and every year consistent with sound long-term range resource conservation.

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