CattleFax: Cattle Market Analysts

Randy Blach, CEO of CattleFax, took the time to meet with the CRMER Risk Management Fellows on the morning of Thursday, March 12. Although several risk management fellows were forced to miss the presentation due to pre-Spring Break midterms, those present engaged in an exciting discussion of future trends in the cattle market. Blach explained the role of CattleFax in the beef industry; provided a cattle market outlook; and left the group with some words of wisdom.

CattleFax serves as an industry leader in market analysis through a vast array of market data and information on the beef industry that dates back several decades.  Through theircattlefax massive data collection and expert analysts, CattleFax provides its members with market reports and forecasts to help them make critical management decisions. Blach emphasized that without over-regulation, the market provides clear signals that make forecasting possible. In Blach’s words, “markets are more predictable than ever because we have more data than ever.” Cattlefax translates this data into meaningful, easy to understand reports that members can act upon.

Anybody following the beef industry knows that 2014 was a record setting year in terms of prices and profit margins for much of the cow/calf and cattle feeding sectors of the industry. However, the higher the market rises, the higher the risk in prices swings. Thus, a sound risk management strategy is crucial, even in the good times.

Cattlefax and many other market analysts now believe that we saw prices peak at the end of 2014. Several factors play into that conclusion. Last year, the markets were out of alignment with normal profit margins and now they are beginning to normalize. Blach also emphasized that markets are beasts of momentum. The cattle market used up its powerful momentum last fall, forcing the market into what Blach describes as a contraseasonal market. In this contraseasonal market, no spring rally is expected. However, Cattlefax believes that increased supply this summer will cause a shift in leverage in favor of packers. This will return the market to its seasonal trends.

Blach also expressed concern over the impact that Avian Influenza may have on the cattle market. As Blach put it, “Markets hate uncertainty.” If the loss of poultry export markets leaves an over-supply of domestically available poultry, the decrease in price of poultry to the U.S. consumer could decrease the domestic demand for beef.

Blach urges that everyone involved in the industry form a disciplined process for making market decisions. Several factors that should be included in this process are supply/demacowsnd trends; seasonality; money flow; spreads; and basis. He made it clear to never overlook basis, because that’s what is actually being traded. When looking at seasonality, he rationalized repeating market trends as a result of people repeating themselves in management and practice.

Finally, the Risk Management Fellows were left with some words of advice regarding the development of a good relationship with your banker; because the value of credit in the longevity of a business should never be underestimated. Stepping away from financial advice, Blach urged students to always keep improving their communication skills.

Perhaps most importantly, Blach stressed that in order to reach their full potential people must be teachable, accountable, and willing to bury their ego, regardless of the success they’ve experienced.

Thanks to Randy Blach and Cattlefax for all that they do to support the CRMER and its student fellows.

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Union Pacific: Enterprise Risk Management

On Wednesday March 4th, Mike Bernard, Director of Capital Planning and Finance for Union Pacific, met with the CRMER Risk Management Fellows  to discuss the many factors that go into Union Pacific’s enterprise risk management policy (ERM). Since the beginning of established business, a major risk for companies has always been the opportunity for failure. Union Pacific (UP) has established a continuous process to identify, assess, manage, and control potential events or situations that might threaten the longevity of the company.

The level of risk associated with certain events fluctuates over time and environments. The number one risk for UP is safety.  Included in that is the transportation of union pacifictoxic inhalation hazard materials (TIH), such as anhydrous and chlorine gas. However, the recent oil industry boom from fracking technology has created another rising risk. Without enough pipeline capacity, much of the crude oil produced in the U.S. is transported by rail. The primary threat from hauling oil and other hazardous materials is the possibility of a dangerous mishap that could endanger both UP employees and the public.

Yet, with this new risk, comes new opportunity. The oil fields require fracking sand, pipe, and equipment that is transported by UP. This has caused a shift in UP’s primary routes. Originally a major East-West railroad, North-South routes have become crucial to meet the demand of the oil fields. Business in connection with the oil industry now accounts for 6% of UP’s revenue.

Bernard listed several other threats included in UP’s ERM, including: Terrorism (associated with both TIH and economic impact); Oil price fluctuations (UP is the largest consumer of diesel in the world); work stoppages (the labor strike at west coast ports caused huge disruptions in rail and other shipping industries across the supply chain); the European economy; the U.S. debt crisis; regulation; etc. In response to all these scenarios, UP has protocols and procedures aimed at preventing and mitigating their potential damage; even as specific as using technology to measure the quality of bearings as the train rolls down the tracks.

Bernard mentioned that a major component of risk is the velocity of risk. The more time available to prepare for risk, the less potential for damage. Thus, correct monitoring systems can never be underestimated. The ability for a company to remain adaptable and agile can also steer businesses from disaster.

To demonstrate the effectiveness of UP’s ERM strategy, Bernard gave the example of two different hurricanes that affected Houston, a major hub for UP. Hurricane Rita struck 100 miles north of Houston in 2005, before their current ERM plan was in place. As a result, UP’s Houston activity was shut down for 13 days.  By the time Hurricane Ike directly hit Houston in 2008, UP’s ERM was well in place and the hurricane only caused a 3 day shutdown.

Yet again, listening to the perspective of an industry leading professional on the subject of risk management proved a great opportunity for the Risk Management Fellows. Especially interesting was gaining perspective on all the different economic, environmental, and industry elements that impact the railroad industry every day. As Mike Bernard put it, “expect the unexpected.”

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MetLife-Risk Management Techniques and Challenges

The 2015 CRMER group had their first off-campus visit on Friday, March 3rd in Kansas City, Kansas. The group was invited to meet with several key figures from MetLife at their KC headquarters. Once there we received a wonderful presentation that provided us with an overview of MetLife and their agricultural investment department. In addition, the CRMER group was treated to an opportunity to speak with a panel consisting of: Jack Espenmiller, Kevin Hershberger, Brian Culpepper, Barry Bogseth, and Peter Headley. This provided the group with an in-depth look at how MetLife actively ensures its investment risk is properly managed.

MetLife

The 2015 CRMER Group visiting MetLife headquarters in Kansas City, Ks

Agricultural is one of the key sources for MetLife to invest in secure, fairly liquid assets and maintain a predicted return. MetLife utilizes its deep credit expertise to grow its already 12 billion-dollar Ag portfolio, and with 97 years of experience it has a myriad of loans. That’s one way it limits and controls some of its risk; diversity. MetLife focuses on three areas of Ag loans: agriculture production sector, food and agribusiness sector, and the timber sector. In the agriculture production area they mainly make loans to large CAFOs (confined animal feeding operation), large dairy farms, and row crop farms. In the food and agribusiness area its key interests are packing plants, grain mills, processing plants, and large cooperatives. And in their final sector, timber, they loan to timber mills and lumber processing plants. This geographic and enterprise diversity helps insulate MetLife from large shocks to their investments. Another risk management technique that was discussed was internal checks and balances. MetLife has monthly portfolio reviews to check for discrepancies or warning signs that an investment may be in danger. They use these to maintain their structured investment regiment and allow for warning signs to present themselves.

Following the presentation and breakdown of their risk management techniques, the panel also provided the CRMER group with some insight into how the “Great Recession” effected the company, their thoughts on equity investing, and how they handle international challenges.

As with many companies the “Great Recession” had a negative impact upon MetLife, but unlike many of its competitors MetLife was able to weather the storm with more dignity and strength. The company’s greatest challenge moving forward will be addressing the impact of the Dodd-Frank Act. This in turn led the discussion to equity positions in their investments, which the panel quickly concluded wasn’t likely in the foreseeable future. Only in extreme cases, even in the past, were equity positions taken, and often that was caused by a default on the loan. Now with the Dodd-Frank Act in place the required capital holdings would make it very difficult for MetLife to justify most investments of that nature. The final question discussed was the challenges that MetLife faces as a global company. The panel touched upon the importance of understanding a country’s culture, estimating political groups effects on the country’s economy, government policy and trade agreement stability, and lastly they discussed exchange policies and their impacts.

MetLife has made a name for itself by becoming an insurance giant. With over 100 million customers in more than 50 countries, the company faces monumental challenges related to the company’s longevity and continued prosperity. To help ensure its continued success the company must continue to seek out investments, which will allow it to utilize its funds to reinvest them in calculated risks. With a company of this magnitude the risk management program must be very disciplined and highly diversified. It was a wonderful opportunity for the CRMER group to receive a brief education of how MetLife tackles their challenges.

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CHS Visits CRMER Student Fellows

CHS FoundationOn Monday, February 16th the Risk Management Fellowship played host to Patrick Hessini, Vice President of Transportation and Distribution for CHS, Inc. Hessini, a K-State graduate of Industrial Manufacturing and Systems Engineering, oversees 600 employees for the international commodity cooperative based out of the Minneapolis area. With over 11,000 employees across 24 countries and customers in 65 countries, CHS deals in the production and distribution of energy, grains, and foods on a global scale. Specifically, Hessini and the Risk Management Fellows discussed the business structure of CHS and how the company manages the risk and volatility associated with supply chains.

CHS takes pride in its cooperative status; with farmers, ranchers, and local co-ops making up the company’s owners and customers. A major goal of CHS is to help grow the businesses of their customers. CHS itself is comprised of 14 business units from agriculture and energy, to finance and transportation that collaborate to better accomplish the objectives of the company and its customers. This business structure also helps spread the company’s risk over multiple industries and economic environments. CHS also uses forward contracting and futures strategies, along with a fiscally conservative business model to handle its global risk.

CHS Speaker

Hessini explained that transportation and distribution contributes a great deal of volatility and risk for continued business success. Designing logistical plans to cope with infrastructure issues pose a major challenge for ensuring timely and efficient movement of goods. He went on to add that U.S. manufacturing growth; changes in international trade balance and routes; and political issues have had a major impact on transportation demand. A few examples of current events that have had, and will have, a major impact on the dynamics of the distribution industry include the Ukraine-Russia crisis; the updating of the Panama Canal; China’s slowing economic growth; and labor disputes in west coast ports. All of these events have altered the cost, demand, or efficiency of transportation routes enough for distribution companies like CHS to reevaluate how goods are moved from place to place.

To deal with this ever-changing environment Hessini described how important it is for CHS to forecast before high demand seasons; analyze all elements of the supply chain; and create options with business partnerships before they’re needed. Furthermore, CHS implements what-if analysis and scenario planning to develop strategies to deal with potential challenges. CHS also utilizes optimization models to determine the best solution to these challenges. The Transportation and Distribution department of CHS is comparable to a “supply chain control tower,” concludes Hessini.

I’m sure I speak for all of the Risk Management Fellows when I say that it was a pleasure to hear how a K-State graduate manages such a major component of a leading company like CHS, Inc. We all look forward to meeting with CHS again.

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Chris Haverkamp–Paragon Investments

This past Friday, February 13th, the student fellows of CRMER had the privilege to spend a small portion of the afternoon with a hardworking and insightful man—Chris Haverkamp founder of Paragon Investments. He is a K-State alumnus with a feed science degree. As founder of Paragon Investments he has built a very successful and multi-faceted company in the investment and risk management arena. We are all thankful that he has taken time out of his demanding schedule to visit with us.

Chris Haverkamp, began the event by educating the CRMER group on his personal methods for success, including his risk management techniques. Located in Silver Lake, Kansas Paragon Investment’s is driven by the purpose to teach their customers by equipping them in the area of risk management and providing them with valued suggestions to make decisions as a business or producer.

Chris Haverkamp shared with us a little bit about himself and how he made his first trade at the age of sixteen which compelled him to pursue a career in a field that included his passion for agriculture, financing, and business. His first experience with commodities at a commission based firm largely affected the way he would pursue business in the future. Realizing his desire was to consult, Chris Haverkamp founded Paragon through the lens of what he “did not want to do.” The premise behind this was generated by the previous experiences he had been a part of in trading. He felt that commodities and futures operated with a stigma, or expressed by the analogy, “used car salesman” feel. From there, Haverkamp started Paragon by strengthening the standards of business through consulting and building personal relationship that would prove his desire was to genuinely be a friend to his customers. As a company, they operate to do all the record keeping for a business, equip them with tools of the market, and strive to help customers become good investors.

A couple of the most compelling lessons Haverkamp stressed to the CRMER students was the importance of hard work, doing the right thing for his customers, and maintaining good ethics within his business. If one is to be successful, he stated, “you must set customers expectation right the first time…if not it will be futile to your success.” He emphasized the importance of focusing on the customer’s wellbeing instead of being solely driven by profit, and in turn, he has found that a company’s success will follow.

As the afternoon wrapped up, we ended with several intriguing question as Chris shared with us his management strategies as he operates over many different locations. He revealed that as a business you need to prove your keeping up, utilize today’s technology, remain personally connected (through visits and handshakes), and keep everything on record to control risk within the company. This was an insightful way of thinking as CRMER students look to pursue business opportunities in the future.

Overall, our time was extremely valuable as we listened and learned about Paragon and the foundation it was created on. Thank you, Christ Haverkamp, for your willingness and generosity toward the Risk Management Center. For us Student Fellows, we are tremendously thankful for people and companies like this that give us an opportunity to learn and grow while we are still in the classroom.

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Lee Borck-An Innovative Cattleman

On Thursday, January 29 the CRMER group had the opportunity to meet with Lee Borck one of the giants within the livestock industry. Lee is the Chairman and founder of Innovative Livestock Services, a company that has grown into a diversified and well structured corporation. We sat down with Lee and listened to his insight on risk management and how he began working in the livestock industry.

As the evening began Lee spoke about his experience working as a credit agent and how he became involved with Ward Feeders marking his first partnership. One of the things he emphasized about the success of his endeavors was the quality of people he surrounded himself with, not completely due to any special gift he had. He emphasized the importance of how having highly skilled, intelligent, and driven partners allowed him to grow and expand ILS into industries as foreign to him as organic pet food. Time and time again during our conversation he stressed the importance of human capital and how having partners can bring in fresh perspectives to a company.

Over the period of two hours the group received an informal audience with him allowing us the opportunity to interact and ask questions. After Thursday night its easy see that Lee is much more than meets the eyes. The humility and sincerity that Lee conveyed truly showed his character and had everyone engaged in the conversation.  Throughout the evening he took time to answer any and all questions that we had for him, ranging from current environmental projects, such as the phosphorus reduction machine that refines cattle waste into a uniform fertilizer source; to his opinion of how the recent change in daily trading limits for Feeder cattle and Live cattle contracts impacts the industry as whole.

Lee also gave the group a first person account of how he put together the Beef Marketing Group and developed a new and innovative relationship with the meat processing companies. Ward Feeders along with 9 other feedlots formed the BMG to use their collective bargaining strength to increase the selling price of their cattle. Traditionally, large feeder operations in western Kansas were able to market their larger cattle numbers and get an additional 25 cents per hundred weights. This left small feeders like Ward Feeders out in the rain, in a manner of speaking. Lee saw an opportunity to change the entire structure of the Kansas beef market and he did, but he didn’t stop there. He brokered a system for forward contracting his cattle allowing him to focus on one of the true plagues in the cattle industry. RISK! The cattle industry was notorious for its boom and bust cycles throughout the 80s and 90s creating and destroying countless fortunes. Lee took his ability to contract his customers’ cattle and combined that with the futures markets and implemented a strict hedging program minimizing his risk.  Today risk management has become a cornerstone of Lee’s operation.

The evening concluded with Lee stressing the importance of Kansas State University and the role that it has played in his life. He explained his motives for giving back to the university as an alumni and spoke to us about the importance of family. His love for K-State and his love for helping others was evident in the way that he spoke about family. It’s not often in this world that a man as successful as Lee, someone who has literally built a company from the ground up, believes that the greatest achievements in his life have been a direct result of giving back to others.

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CRMER Student Fellows Attend the 2015 Van Trump Winter Conference

Last week, CRMER student fellows Lacey Ward and Mario Ortez had the opportunity to attend the 2015 Van Trump Winter Conference at the Madrid Theater in Kansas City, MO. The conference covered a variety of topics including the overall direction of agricultural markets, an energy outlook, transportation systems, big data in agriculture, and weather. This blog encompasses some of the main thoughts presented by the speakers.

The conference was opened by Kevin Van Trump, CEO and founder of Farm Direction and the Van Trump Report—entities both focused on improving farmer’s knowledge about the markets and marketing strategies. Kevin covered a host of topics that are influencing the markets’ directions these days, both domestically and globally. Among the most pressing topics was the decrease in oil prices, which is believed to increase consumer spending in other goods, but could instead increase savings which might not boost the economy as it is conceived. The Fed’s actions regarding the interest rates are most definitely a topic of discussion this year as it is believed that Ms. Janet Yellen, the Yale-educated economist that is leading the Fed, is going to place the economic outlook at the center of policy making in this regard.

Student fellows, Mario Ortez and Lacey Ward, pictured with former CIA Chief of Counterintelligence, James Olson.

Student fellows, Mario Ortez and Lacey Ward, pictured with former CIA Chief of Counterintelligence, James Olson.

The European Union situation is uncertain. Greece’s elections are coming this year with the socialist candidate proposal of re-negotiating their bailout terms and there is increasing discontent among Germans regarding German’s support not only to Greece, but other weakening economies among the European Unions. Different scenarios have been discussed among the media; some of them speculate that Germany won’t let Greece fail because this would hurt the EU’s economy by decreasing confidence among consumers and for other reasons. But, what is going to happen is not yet known.

The political environment in Russia is raising concerns in the wheat market with Russia being the 4th largest exporter and producer of wheat in the world, according to the USDA (2014). Other major globally-important economic issues include the strengthening U.S dollar, change in demographics, changes in government actions towards social issues, and the decrease in the speed of growth in China’s economy.

Tom Williamson, President of Transportation Consultants Company, shared his perspectives on the U.S infrastructure situation. He emphasized that there is a big need to invest in infrastructure, especially bridges. Ocean freight costs are potentially decreasing in the future due to big investments in the expansion of the Panama Canal and the just-started construction of the Nicaragua Interoceanic Grand Canal, which is expected to allow bigger ships to sail from the Caribbean Sea to the Pacific Ocean.

Joe Jennings, Managing Partner of Jordan River Advisors, shared his knowledge regarding the changes in commodity trading since the beginning of his career when the majority of trading was related to supply and demand. New players have come into the markets, so now commercial hedgers trade with portfolio managers, proprietary trading firms, hedge funds, and market makers. The effects of these new players in the market is widely believed to be beneficial for the markets, given their role in increasing liquidity (get in and out of a position easily), but since 2005 there has been an increase in the demand for speed and a new series of traders that use algorithms has come into play. The presence of noncommercial traders in the markets is believed to have introduced non-fundamental factors that affect movements in prices. We believe that this assessment is debatable, ill-informed trading can come not only from non-commercial trading but from commercial trading too and for every player in the market is on their best interest to have their best assessment of supply and demand to be effective. As a final general advice Mr. Jennings suggested that players understand clearly the time frame of their actions, and not only understand the risk of the exposure, but quantify it.

Following Joe Jennings’ talk, Bill Krueger of Lansing Trade Group, Andy Daniels of Daniels Trading, and Kevin Van Trump joined as an expert panel for conference attendees to ask any questions they had to get the expert’s take on what was going on in the markets.  The first topic of interest was whether they would recommend planting more corn or soybean acres.  Kevin Van Trump made an interesting analogy for farmers saying that they have all their chips on the table when their grain isn’t priced, and when they have the chance to pull back those chips at a profitable level they should.  Other topics that were touched on were frac sand and the impact of lower gas prices on the ethanol industry.  Conference attendees inquired about the feeder cattle industry as well as the future prospects of the European Union.  This part of the conference was interesting because attendees could get an expert opinion on any question they might have involving the agriculture and energy markets.

After an amazing KC-style barbeque lunch, Drew Lerner, President of World Weather, gave a weather outlook for the major commodity-producing parts of the world.  Major points of interest was the size of South America’s crop as well as El Nino (ENSO).  Another interesting point he mentioned is how the weather is determined by the ocean water temperature 300 meters below the surface.  Later in the presentation, Mr. Lerner discussed the upcoming weather conditions for the upcoming planting season in the United States.

Steve Cubbage, President of Prime Meridian and Record Harvest, then took the stage for his presentation entitled “Big Data and What You Need to Know.”  He emphasized the need to make sure that one is getting good data out of his/her yield monitors.  Bad data only yields bad recommendations, and producers can find lost bushels by looking at big data.  Mr. Cubbage emphasized that yield data is a producer’s report card, and you can’t get better unless you measure what you are doing.

The next presentation was by Jeff Dema, President of Grower Services at Farm Link.  Farm Link has collected data from many combines across the United States, and now uses that data to estimate a field’s yield potential based on soil topography, weather conditions, etc.  Producer fields are divided into 150 square feet micro fields, and then the micro fields are benchmarked against the fields where data has been collected.  Subscribers are presented a “gap” map that shows the gap between the actual yield and the yield potential for each of the micro fields.  This presentation showed how important technology is in agriculture today.  Mr. Dema concluded with saying, “Farmers don’t have to adopt new technology.  They just have to compete with those farmers that do.”

At the end of the afternoon, keynote speaker, James Olson, came to the stage.  Mr. Olsen is a former CIA Chief of Counterintelligence.  He and his wife Meredith, worked a dangerous career as spies for the CIA.  Mr. Olson fascinated the audience with a recall of what life was like as a spy on overseas operations.  Later in his presentation, he took the crowd on a “mission” to Russia that left the audience with a feeling of patriotism and gratitude for his service to our country.

Overall, the 2015 Van Trump Winter Conference was an excellent opportunity full of network working and industry insight.   Thank you to Farm Direction for hosting this great event and allowing us to be a part of it and thanks to the Department of Ag Economics here at K-State for their support in making the trip possible. Companies like these allow students to gain valuable real-life experience while they are still in the classroom.

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