RANCHING Business
Putting It Together
Consider factors affecting feeder cattle value, basis, futures, cash market in your economic risk management plan
By Mike Murphy, CattleFax, Denver
T
HE MARKET HAS TAKEN QUITE A RIDE OVER THE LAST FEW months when evaluating both the fed cattle and feeder cattle market.
The fed market advanced nearly $20/hundred pounds
(cwt.) near the fi rst of the year. On a 1,300-pound fi n- ished steer this is $ 260/head. Yet the value of feeder cattle went from the mid
$160s to the low $170s, roughly $7/cwt. On a 750-pound feeder steer this is approximately $50/head. At the same time corn remained in the same range
of $4 to $4.40 per bushel from November through January. This really reinforces the importance of this 3-article series that began with the January issue. In “Why Are Feeder Cattle Prices So Good Right Now?” I discussed what drives the value of feeder cattle. In January, I wrote that the deferred live cattle
futures were the driving force behind the value of feeder cattle. That held true during the December/ January period. The spot fed market — “spot” is a method of mar-
keting fed cattle in which a buyer inspects cattle at the feedyard and submits a “spot” or “cash” bid, often on a live weight basis — advanced $130 per head, and spot feeder cattle advanced only $50 per head. This was because the deferred live cattle did not advance $130/ head higher. Instead, the deferred live cattle contracts advanced closer to $35/head. My point is the direction of the feeder cattle market
is heavily infl uenced by the deferred live cattle futures market, more so than the spot cash fed cattle market. Roughly 80 percent of the impact of feeder cattle value is associated with the deferred live cattle futures. In February’s article, “The Importance of Basis,” I
defi ned basis as being the difference between the cash feeder cattle market and the feeder cattle futures market. Basis is impacted by multiple factors. Economic
58 The Cattleman March 2014
condition is one of those factors. Quoting from my February installment, “Historically, when the cattle feeding segment is not profi table for extended periods of time, they attempt to buy feeder cattle at a bigger discount than when they have been profi table for a long period of time. The swing in equity for cattle feeders should be closely monitored because of the impact it can have on feeder cattle basis.” A positive swing in cattle feeding profi tability has an impact, too. The positive feeding margins experienced by cattle
feeders during the fourth quarter of 2013 and early 2014 infl uenced feeder cattle basis. Feeder cattle cash basis has been stronger or more
positive, meaning cash, on average has been higher than the futures market. I saw this in measuring the CME feeder cattle index and in reports from Oklahoma City on the value of 750-pound feeder steers. Knowing what to monitor, what impacts basis, and
how the feeder cattle market has traded since late 2013 should help the producer to begin to develop a risk management/marketing plan. The next part of the plan is to identify the tool you
want to use to manage your risk — futures for hedging, options or basis contracts. This is really an individual decision that should be carefully considered. But once you identify the tool, use it for a couple of years. This will create some consistency that will allow you to measure your results over time.
Put it on paper The fi nal and most important step in building the
plan is writing it down on paper. Having a hard copy of your plan will help you to remain disciplined if, or when, things are not quite going as expected. Here are examples of the things that should be writ- ten down. If you are marketing feeder cattle in May
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