Feeder cattle markets have reminded everyone just how quickly things can change, bringing into focus the importance of risk management.
In early October, futures were flirting with record highs, said a Kansas State University Extension release. Two weeks later, prices dropped nearly $40 per cwt — about $350 to $400 per head for a 900-pound feeder.
Periods like this highlight why price risk management matters, the paper’s authors said. It’s not about predicting the market; it’s about protecting your business when markets turn the other way.
COMPARISONS TO HISTORY
Many compare today’s market with 2014-2015, the paper said. Prices peaked in late 2014 and then fell sharply through the second half of 2015—by more than $95 per cwt from the 2014 high.
It’s too soon to say whether today looks more like 2014 or 2015, the paper said, but producers didn’t “need” to manage price risk in 2014, but they certainly did in 2015.
Surprises can happen at any time, and preparation helps avoid the pain producers felt in that downturn, the authors said.
High prices have never lasted forever, and even when supplies are tight and fundamentals look bullish, new information, policy changes, inventory levels, feed costs, export trends, or consumer demand shifts can turn the market faster than expected, the paper said.
Volatility is part of the current environment, and while prices may recover, they also may not, the authors said. It’s worth keeping in mind that late October fall calf prices are higher today than they were for producers that hedged in March or April.
NO “RIGHT” APPROACH
There’s no one right approach to managing price risk, the paper said. Some operations choose self-insurance — relying on off-farm work or strong balance sheets to weather market swings.
Others manage risk through diversification, spreading production and income sources across different enterprises. Still others prefer to directly manage price risk through contracting, hedging or through Livestock Risk Protection insurance.
The key is to have a plan that matches a producer’s risk tolerance, liquidity, and business goals, the authors said.
Hedging and LRP insurance can play a role, with LRP use increasing substantially in recent years, they said. LRP offers flexible coverage and an effective price floor, with smaller lot sizes with no margin calls.
An LRP premium must be paid, but the cost is shared with the government and premiums are not due until the end of the contract period, the paper said. Futures and options provide more flexibility for timing but require margin management. Some producers use a combination.
Over time, a consistent risk management plan helps smooth income and protect working capital.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $229.81 per cwt to $237.00, compared with last week’s range of $230.08 to $238.48 per cwt. FOB dressed steers and heifers went for $362.18 per cwt to $369.99, compared with $363.43 to $373.39.
The USDA choice cutout Thursday was down $0.88 per cwt at $373.57 while select was down $4.91 at $355.03. The choice/select spread widened to $18.54 from $14.51 with 109 loads of fabricated product and 21 loads of trimmings and grinds sold into the spot market.
The USDA-listed the weighted average wholesale price for fresh 90% lean beef as $398.85 per cwt, and 50% beef was $176.56.
The USDA said basis bids for corn from feeders in the Southern Plains were unchanged at $1.05 to $1.20 a bushel over the Dec corn contract, which settled at $4.41 1/2, up $0.06 1/4.
The CME Feeder Cattle Index for the seven days ended Wednesday was $342.42 per cwt, up $1.75. This compares with Thursday’s Nov contract settlement of $337.00, down $2.02.