RANCHING Business
Why Are Feeder Cattle Prices So Good Right Now? 1
By Mike Murphy, CattleFax, Denver
O
PERATING A BUSINESS UNDER THE VA- garies of weather means cattle
producers need creative, yet sound, production management strategies with specifi c attention to feed and water resources. They also need unwavering sup-
port from their lenders. Lender sup- port will allow producers to rebuild their inventories after this most re- cent drought. But with calves worth $900/head, feeder cattle worth more than $1,200/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 fi rst 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.
34 The Cattleman January 2014
What drives the value of feeder cattle? The fi rst 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-re- cord-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 feed- er 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 in- formation?” The next article will spend more time specifi cally ad- dressing that question, but a good fi rst step is understanding what drives the value of feeder cattle, which we just discussed. Second, it is important to under-
stand 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 illus-
trates the seasonality of June live cattle based on the last 10 years of
thecattlemanmagazine.com
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