Cull cow values have become a more meaningful source of dairy revenue as beef demand and beef-on-dairy breeding add dollars to the balance sheet.
With prices near historic highs, producers have an opportunity to protect part of their expected cull cow income through Livestock Risk Protection, or LRP, coverage.
Will Babbler, principal of Babbler Risk Management, discussed the program during a recent Dairy Signal webinar. He urged producers to consider beef revenue alongside milk price, feed costs and margins.
“The dairy business is now the dairy and beef business,” Babbler says. “They’re conjoined at the hip.”
Beef Revenue Takes a Larger Role
Historically, dairy risk management centered largely on milk and feed. Cull cows generated revenue, but beef often received less attention in long range financial planning.
Higher cattle values have changed the equation. Dairy farms are earning more from both cull cows and beef cross calves, making beef market exposure more important to manage.
“We spent a lot of time over many years thinking about how do we manage milk price risk, how do we manage feed price risk, how do we manage our margins, and beef was an afterthought, and that is no longer,” Babbler says.
The broader beef market has supported cull cow prices. Beef cow inventories remain low following years of drought, economic pressure and herd liquidation. Consumer demand also has held up better than many expected.
“We are at long term lows on these inventories, and the demand has been good,” Babbler says. “The consumer wants beef.”
Cull cow values do not move exactly with feeder cattle or fed cattle markets, yet Babbler says they have generally followed the strength in beef prices. He describes current values as close to historic highs.
Risks Remain in a Profitable Market
Strong prices do not remove market risk. Babbler points to uncertainty around trade, tariffs, imports, animal health issues and packer capacity as sources of potential volatility.
Plant closures and weak packer margins also could affect demand for cattle. Producers have watched developments surrounding Mexican cattle imports, screwworm and government action in beef markets.
“The beef market’s on pins and needles out here,” Babbler says. “The first sign of trouble, people are running to get protection.”
Cull cow supply could also grow. Dairy cow numbers are at a multi decade high, while replacement heifer numbers have started to increase. Farms may be holding cows longer to capture the value of another beef cross calf or to maintain milk production, limiting cull numbers reaching market today.
“If we’ve got a very plentiful, 30 plus year high in milk cow numbers, and heifers turning up, could you see a flood of culls hit the market?” Babbler says. “Quite possibly.”
Coverage Reaches Farther Ahead
Cull cow LRP is designed to place a floor under future cattle values. The coverage uses feeder cattle prices along with a multiplier established by the Risk Management Agency to calculate an expected cull cow value.
The product does not lock a producer into a cash sale price. If the market rises, the producer can still receive a higher cash price, less the insurance premium. If market prices fall below the selected coverage level, the policy may issue an indemnity.
“We’re coming at this to try to catch the downside,” Babbler says. “We’re not trying to get that basis risk down to the last nickel.”
Beginning July 1, cull cow LRP became available as far as 52 weeks ahead, compared with the prior 13 week window. Babbler says the change makes the tool more practical for dairy farms planning future cull sales.
“It gives you downside protection,” Babbler says. “We can go up to 52 weeks forward.”
Government subsidies cover a portion of the premium. Babbler estimates many producers may receive roughly 40% support, depending on their chosen coverage level. Beginning farmers and ranchers may qualify for additional help.
Premiums also are not due until after the coverage period ends, offering farms a way to secure protection without an immediate expense.
Matching Coverage with Cow Sales
Babbler used an example of a dairy marketing 100 cull cows per month at an average weight of 1,400 pounds. A policy extending into the following year could offer a minimum value near $1,900 per head after a subsidized premium costing only a few dollars per cow.
“If cull cow prices get cut in half, your minimum is $1,871,” Babbler says. “If cull cow prices go to $3,000, great. You paid your premium.”
Producers can choose a coverage level and end date based on their anticipated cull flow. Cattle do not need to sell on the policy end date. LRP allows cattle sales within 60 days before or after the end date for claim purposes.
“If they’re willing to give you plus or minus 60 days, I think you should just take it,” Babbler says.
The window gives farms flexibility around truck schedules, breeding plans and normal variation in monthly cull numbers. Still, producers need to insure a realistic number of cattle and maintain sale records.
Records should identify the insured entity, buyer and animals sold. If a farm insures 100 head but only markets 95 head within the eligible window, it may not receive a payment for the remaining five head.
“Don’t be doing some wild numbers because you’re still going to have to find it out there somewhere,” Babbler says.
A Way to Protect Opportunity
Cull cow LRP is not a replacement for milk revenue protection, feed coverage or other marketing tools. It gives producers another option as beef revenue represents a larger share of dairy income.
Babbler encourages producers to begin with their typical monthly cull numbers, animal weights and expected marketing schedule. From there, they can evaluate coverage levels and costs before purchasing a policy.
“We know it’s a good opportunity,” Babbler says. “What can we do to capture it right now?”
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