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OPERATING A BUSINESS UNDER THE VAgaries of weather means cattle producers need creative, yet sound, production management strategies with specific attention to feed and water resources.
They also need unwavering support from their lenders. Lender support will allow producers to rebuild their inventories after this most recent drought. But with calves worth $900/head, feeder cattle worth more than $l,200/head and bred females worth more than $1,800, there is some risk to being in the cattle business.
There is much to be excited about in the cattle business for the next several years, but the amount of capital required to stay invested continues to grow, and producers can't carry as much exposure to risk.
This article is the first in a 3-part series that to help producers address developing a risk management plan that will allow them to protect their investment. This month, we look at what drives the value of feeder cattle. Next month, we'll address the concept of basis. In the third article, we'll look at how producers can manage their margin.
What drives the value of feeder cattle?
The first step to developing a risk management plan is to simplify what is driving the value of feeder cattle and calves.
Ultimately, that value is driven by the deferred live cattle futures. Looking back a year ago, feeder cattle prices were near record highs trading at roughly $150/hundred pounds (cwt.) for a yearling steer.
Corn values were off their record high levels set in the summer of 2012 but were still more than $7 per bushel.
So, how can we get near-record feeder cattle values with near-record-high corn values?
The answer is the deferred live cattle futures, meaning the futures contract months trading for future time frames.
A 700-pound feeder steer placed on feed in January would come out of the feedyard roughly 6 months later. If you were buying those feeder cattle, you would look ahead roughly 6 months and then make a purchasing decision based on the price at which June and August live cattle futures are trading.
Clearly, you have to account for your cost of gain, but the driving force behind the value of feeder cattle is going to be the deferred live cattle.
How to use this information
One question you are probably asking yourself as you read this is "how do I make a business/risk management decision with this information?" The next article will spend more time specifically addressing that question, but a good first step is understanding what drives the value of feeder cattle, which we just discussed.
Second, it is important to understand the seasonality of the deferred live cattle futures. When something changes within the seasonal trends of the market, this will assist you in making a solid business decision.
The chart with this article illustrates the seasonality of June live cattle based on the last 10 years of seasonal fed cattle markets.
Seasonal fed market years are defined according to the cash fed market moving higher into the spring from the winter.
This chart also includes 2013 and 2014. The 10-year seasonal and 2013 lines are calculated as an index just to show the pattern; the line for 2014 is based on actual prices. The index shows that from November into March, June live cattle typically increase. Last year they actually moved lower.
Knowing that prices typically go up for June live cattle into the month of January is supportive to feeder cattle values. But if that trend changes, like last year, it will be negative to the value of feeder cattle. This is important to know in making an informed business/ risk management decision. As said earlier, the next couple of articles will continue this discussion and provide even more detail about risk management.
The bottom line is if the deferred live cattle futures contracts are rising, then there is less risk to the value of your feeder cattle and calves and vice versa. Knowing that seasonality is a key component, and if you would like to know more about this type of information, become a CattleFax member.
Editor's note: CattleFax provides the daily market report to users of The Cattleman NOW and The Cattleman Plus, our smartphone and tablet apps. The analysts at CattleFax are also providing a monthly column to further educate members of Texas and Southwestern Cattle Raisers Association (TSCRA). CattleFax offers TSCRA members a special price on CattleFax Select membership - a 2-year membership for $100, a 50 percent savings. Call 800-825-7525 for details.
By Mike Murphy, CattleFax, Denver