Risk management helps farmers find the right balance | State and Region

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For livestock producers, high grain prices along with other high input costs are making profitability more difficult, said Lee Schulz, a livestock economist at Iowa State University.

“It’s not just food costs that are going up, it’s also diesel, propane, gasoline, the cost and availability of labor, as well as machinery, equipment and repairs. Everything costs more today than it did,” he said.

While meat prices are up, they’re not up nearly as much as the costs of raising feeder cattle and hogs, Schulz said.

In 2014, also a period of rising costs, profits hit record highs.

“In 2022 it’s getting closer to equilibrium,” Schulz said.

Rarely so many costs are high at the same time

“There are a lot of risks to manage,” Schulz said.

Some costs will remain high. For example, labor costs will not go down.

“People aren’t going to work for less,” he said

On the other hand, feed costs will likely decline at some point as the supply of corn and soybeans increases. And fuel costs are likely to fluctuate over the next few months.

There is upside potential for beef producers as supply dwindles and demand remains strong, Schulz said.

The agricultural economist notes that yields vary from farm to farm.

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“Some producers make money in the worst times and some lose money in the best,” he said.

Breeders strive for a profitable cost/market ratio. They cannot feed heavier weight cattle. The value must be taken into account. A producer can earn more money by putting the expensive grain into the next batch of cattle, because its rate of gain is better than that of fattening the heavier cattle.

“It’s better value for money,” Schulz said.

Successful farmers also find the right balance in fertilizer applications. Using a little less fertilizer may reduce yields slightly but not benefits if the higher costs outweigh the yield benefit, Schulz said.

Knowing the cost of production to make these decisions is essential.

“You can’t manage what you don’t measure,” he said.

Puts and hedging can be useful tools now.

Basis risk management can allow producers to take advantage of the upside, he said.

“For grain producers, high input costs have increased break-even points,” said University of Illinois agricultural economist Gary Schnitkey.

But at the same time, commodity prices are also high.

“As long as prices remain high, farmers will make a profit this year,” he said.

Many farmers locked in fertilizer prices last year before prices spiked, which will help make this a profitable year, he said.

But there is the question of when corn and soybean prices will drop.

“Let’s hope it’s not this year. Maybe not next year,” Schnitkey said.

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