Forward Pricing can Mean Stability
It’s no secret that the weight of your calves sold and the price received is the main
source of income for most ranchers, but differing strategies, and picking the right one, can help you weather
any storms in the market.
Old Habits Die Hard
Auction is still the most popular method used to sell steers, followed
closely by private treaties. Smaller steer producers tend to gravitate more toward the auction than large
operations, which seem to favor video or sales on a carcass basis. Recent studies indicate the same is true for
heifers sold for slaughter, with the smaller operations relying on the auction as the most popular method to sell
their heifer.
Of course, the market can change on any given day, and marketing on
a good day or a bad day can make a world of difference in the success of your herd. Because price is largely
dictated by forces outside of your control, it’s important to employ a variety of marketing strategies to make sure
you can survive any downturns.
Traditional auction is still the most favored, because the return is immediate and the
cash is usually in hand at the end of the day. To be successful at auction, you need to have a deep understanding
of the current market.
Forward pricing
This method allows a producer to lock-in a price before the calves are marketed.
This provides a predictable stability and can all but eliminate pricing volatility. It also means you do not have
to rely on one, single market. But often the price locks can be detrimental to the smaller producer, who may lock
in at what seems like a good rate only to learn the market has taken a turn for the better, and they will find
themselves losing money. Larger operations that deal in larger herd numbers have found the most success.
A cash-forward price is the most popular form of forward pricing, and involves the
buyer and seller coming to agreement on a fair price and agreeing to sell at that price in the near future. Often,
a sliding scale is developed based on the number of calves and their weight at time of delivery.
Forward contracts offer you the advantages of being relatively easy, flexible in quantity
and reducing your price risk. For ranchers looking more to steady income rather than larger profits, forward
pricing is a way to successfully manage income levels and plan your budgets and pay the bills.
Disadvantages?
Some of the disadvantages include risk of non- performance, not being able to
capture higher prices once the contract is signed, and it is not very price efficient. Before signing agreeing to
the buyer’s price, make sure you do an extensive study of the current market and discuss other forward contracts
with other area sellers. Also, make sure you explore every marketing option for your particular herd or product.
While forward pricing offers a nice, reliable way to ensure stability, there may be other methods which will get
you a higher rate of return in the long run.
Marketing Outlet
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