Ross Wahlert is 16 years old and is one of our Stockmanship and Marketing students. He entered a National FFA Risk Management Contest with the following essay.
Controlled Risks
Risk Management is just one crucial part of the agriculture industry that must be understood. There are many risks involved in Agriculture, such as droughts, diseases in crops and animals, high fuel prices, and many other situations that could cause a loss of money or could cause you to be less profitable. Identifying and minimizing these risks can make the difference between a profitable year and a break even year.
Among my Supervised Agriculture Experience (SAE) in which I trade thirty head of calves, several risks may be found. The three risks that pose a large threat to me and my SAE are: sickness and death, cattle not gaining well, and not enough net dollars on a trade. Managing and minimizing all three of these risks has required skill, determination, and the willingness to learn from my mistakes.
Sickness like foot rot, pneumonia, and other diseases in a calf can cause a large number of problems for the time you own the animal. These diseases can lower the quality of the animal or lead to death. My strategy for preventing sickness starts as soon as I bring the cattle home from the sale barn. I begin by vaccinating; then I work the cattle in the pen, giving them exercise and relieving them of any stress. The vaccines I administer, along with the de-wormer, are now better able to defend against detrimental diseases since the animal’s stress has been reduced. When animals are stress free or have a very low amount of stress, their immune system will be able to fight off most sicknesses and diseases.
My work is not done, however. I must keep these animals healthy by working and exercising them often. It is crucial that I work them properly, reading my cattle and pressuring where they want to be pressured, then releasing some of the pressure at the proper time. If I were to work my cattle improperly, doing things they told me not to, I could possibly get mad and start hollering. Then, I may have many problems, such as confused cattle that don’t know where to go. They could also get riled up and the stress level would rise. Once the stress level rises and they are not comfortable with the situation, sicknesses are very likely to occur. To fix this problem, I must realize my mistakes and work the cattle properly, which relieves the stress. To really work them properly, I must be able to know what my cattle are telling me. I have to know what angles to pressure at, how much to pressure in, when to relieve some of the pressure, and I must always work in straight lines.
For example, I had a group of about thirty calves earlier this winter. I was feeding them some good starter pellets and some good grass hay. I had been working them properly and the health was good; so when they were ready, I changed their feed and gave them a more advanced ration along with the grass hay. All thirty calves made the switch fine and they were looking great. A couple of weeks later, I had six heifers get out. As I put them back in, I didn’t pressure my cattle correctly and caused one heifer not to go through the gate. Then as the last heifer was alone, I did not work in straight lines and I pressured her improperly, causing her to run back and forth a few times before going through the gate. As she ran off to the other cattle, I could tell she was riled up and needed worked; however, I did not take the time to do it. That night she bloated on the feed and was dead the next morning. Had I been willing to settle her that night, the outcome may have been different.
Since then, I have learned from my mistake. Whenever cattle get out, I really focus on doing everything correctly: working in straight lines, at the correct angles, and applying the proper amount of pressure. When I do these things, they all go in. If something needs settled, I take the time to do it. I can drive them around the pen and work with them until I can see they have settled down and the stress has been removed. This prevents any objection to the feed and minimizes the risk of sickness developing.
Another risk I must learn to control and minimize is poor gains. Cattle that don’t gain as much as desired will often have a higher cost of gain. This risk is not one that will put me out of business, but it could shrink profits by a great amount. Therefore, I have to have a plan for keeping this risk from posing a threat to me. Just like keeping my cattle healthy, making sure my cattle gain well depends a lot on my stockmanship skills. When I am handling my cattle correctly and keeping stress at a minimum, they have shown better gains. Many uncontrollable forces such as harsh weather can have an effect on gains if the cattle are not handled properly all of the time. A sudden change in weather can put stress on cattle and effect how much weight they gain during a certain period of time. Handling my cattle properly during these weather changes can keep that stress level very low and allow the cattle to continue gaining well.
Just as it is my job to be a responsible stockman, it is also my job to choose feed that my calves will do well on. There are many different types of feed rations available for cattle, some are effective but costly, some are not effective but still costly, and others are effective but not as costly. I have to sort through and find the most economical good quality feed. By doing this I am able to keep my cost of gain lower and still have feed that my cattle do well on. At different times throughout the period I own a set of cattle, they may need a different feed ration. Whenever I see that my cattle need a different type of feed, I look at all of my possibilities, choosing another feed that is cost effective yet still produces good gains.
While my calves are gaining well and their health is good, I must focus on profiting in a volatile market. I have to profit on my trades so I can put some money aside for college. In order to profit, I need to create a sufficient amount of net dollars on every trade. Any money that I spend and do not use to buy feed or maintain inventory is cash flow. Generating cash flow is important, so I must have a good marketing strategy in order to create that cash flow.
My marketing strategy begins with sell-buy trades. Instead of buying cattle and hoping the market goes up and I get a high price when I sell them, I sell my cattle when they are overpriced, then I replace them with cattle on the same market that are underpriced. To do this, I need to be constantly watching the market, seeing what cattle are overpriced and what cattle are underpriced. When there is some opportunity in the market and I can replace my cattle at a profit, I sell. This manages the risk of not getting enough money for my cattle.
Trading like this is not only limited to selling overpriced cattle and buying back underpriced cattle. I will not always own cattle that are the most overpriced, but I still can be profitable. If there are cattle on the market that are underpriced compared to the cattle I own, that means my cattle are overpriced. I can sell my cattle and replace them with the ones that are underpriced.
In situations where the market is down and almost every weight class of cattle is underpriced, I can still profit without waiting for the market to go back up. Even when all cattle are underpriced, not everything will be underpriced by the exact same amount. If the cattle I own are some of the least underpriced, I can sell them and replace them with cattle that are more underpriced.
When I figure my cost of gain, I add up all of the money it costs to keep the animal until it is a certain weight, which gives me my total cost, or cost to keep. The costs I add up will be feed, vaccinations, salt and mineral, ear tags, and anything else that I bought to help improve the animal. I will also charge myself ten to fifteen percent for my time. Knowing my cost to keep is very important so I can figure if a trade will be profitable. This piece of information is one of the most important parts of my trades being successful. In the following examples I will show you how I figure whether or not trades are profitable and why my cost to keep is so important.
If I sell 579 pound steers for $148.57 cwt that is $860.22 per head. Then if I buy back 361 pound steers at $174.63 cwt that is $630.41 per head. I will then set up these figures as follows:
Sell: 579# at $148.57 = $860.22 per head
Buy: 361# at $174.63 = $630.41 per head
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Once to this point, I will then subtract the difference in weight and dollars per head. This situation gives me a gain of $229.81 on 218 pounds. As long as my cost to keep is lower than $229.81, it could be a good trade. For instance, if my cost to keep was $150.60 per head, that is a good trade because I profited $79.21 per head. However, if I had a cost to keep of $243.55, that is a poor trade because I lost $13.74 per head. My cost to keep determines whether or not the trade is profitable.
In that example, the market is high, which can make it hard for small operators like me to buy cattle; however, I can sell my cattle and still buy back more for a profit in a high market.
One thing that almost everyone in ownership of cattle fears is a down market. Obviously in a down market, cattle prices are lower, which makes it hard to profit, right? Not for me. I can make just as much money in a down market as I can in an up market, if not more. Nothing in my marketing strategy changes; I keep sell-buying and profiting on every trade.
Making yourself sell in a down market can be hard, because you would like to wait until the market goes up so you can get a higher price. When the market goes down, I can make my sell-buy trades just as I normally would. If cattle are underpriced and I own cattle that are the least underpriced, I should sell them, replacing them with cattle that are more underpriced. As long as I do not buy back cattle that give me a gain of fewer dollars than my cost to keep, I can profit no matter where the market is.
My sell-buy marketing strategy has worked well for me in the past, managing all risk of losing money on cattle. It has completely eliminated the risk of getting a lower price for my cattle because what price I get does not make a significant difference. Here are some trades I made in 2010:
In March I sold 539 pound steers at $120.37 cwt and bought back 492 pound steers at $112.5 cwt with a $34.00 cost to keep. That looks like this:
Sell: 539# at $120.37 = $648.79
Buy: 492# at $112.5 = $553.50
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. 47# $95.29
I gained 47 pounds and $95.29 on this trade. Subtracting the cost to keep, $34.00, from the $95.29 gained gives $61.29 profit per head.
In April I sold 495 pound steers at $134.00 cwt and bought back 421 pound heifers at $129 cwt with a $60.00 cost to keep. The steers I sold on this trade were the same steers I bought on March’s trade.
Sell: 495# at $134.00 = $663.30
Buy: 421# at $129.00 = $543.09
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. 74# $120.21
On this trade I gained $120.21; therefore, $120.21 minus $60.00 cost to keep equals $60.21 profit per head.
I made a couple more trades in 2010 that were just as prosperous. None of these trades produced a gigantic profit, just a profit that was a little smaller. Taking multiple smaller profits is much better than trying to take one large one. By taking multiple small profits, you don’t have the risk of losing money by going for one big profit. Because I can sell-buy and make many small profits, I have been able to control the risk involved with marketing my cattle.
As well as my marketing skill, my stockmanship skills have contributed to managing risk in my SAE. Since I am able to successfully manage my risks by sell-buying and keeping my cattle healthy and gaining, I am able to reap profits off of thirty head of calves. With this risk management plan, I can set my goals high and look forward to becoming a prosperous rancher.
