Since 2013, FCC has proudly supported Canadian graduate student research through an Ag Economics leadership fund. We’re pleased to introduce guest bloggers Miao Zhen, along with professors , and from the who report on Miao’s graduate research on price volatility in Canadian cattle sector.
Cattle producers know the benefits of risk management are significant, and even more so when prices are falling.
What is price volatility and why should it matter to you?
High price volatility is a series of frequent price fluctuations with large up and down swings. When this happens, it can be hard to make good business decisions.
As prices decline, the price volatility of cattle can increase. Further, price volatility in one subsector of the supply chain can affect volatility in another. And last, volatility in feed grain markets (e.g., U.S. corn market) can also impact the volatility of cattle prices.
Planning for falling prices is important. Of equal importance is having the knowledge to deal with price volatility - in both the cattle markets and the feed grain markets.
What can you do to beat price volatility?
Use forward contracts
Sign forward contracts or other risk sharing agreements with suppliers/buyers. These help secure profits or limit losses during unexpected periods of high volatility.
Big, unforeseen events can suddenly change not only the direction of prices but also the magnitude of price volatility. Our research shows that, typically, price volatility is greater for cattle headed to the feedlot than for cattle headed to slaughter, but in 2003, that was reversed. And because volatility increases as prices drop (compared to volatility during times of increasing prices) a risk management strategy is that much smarter.
Protect your profits with hedging
Use hedging on both cattle and feed to help offset price volatility in related, but independent sectors. We found that as prices in one market increase, they may not increase in the other market.
Keep a watchful eye on the markets
Monitor markets throughout the supply chain to understand trends in each subsector. Knowing the risks can help you develop a better risk management plan. Volatility is “transmitted” up and down the supply chain. Factors that trigger price swings in the feeder cattle markets (e.g., quality issues, agent behavior like holding back calves and adverse weather conditions) affect volatility in the fed cattle market and vice versa. We also found that volatility in the U.S. corn market impacted the price volatility of the Alberta cattle market.
Building a risk management strategy that supports your business objectives is important.
Maio Zhen, Dr. Feng Qiu and Dr. James Rude, University of Alberta