By Larry Stalcup Contributing Editor
No matter how high the finished price, marketing fed cattle at a strong profit is rarely easy. Even with low corn prices pushing $4/bu., the breakeven for an 800-lb. steer placed in August will likely be in the $200/cwt. range when it finishes next February. Even the late Paul Engler, cattle feeder extraordinaire, would’ve had a tough time making that work.
Feeding cattle is often either feast or famine. Tight cattle supplies like those lingering today don’t help. Mike Moroney, head of the beef margin management team at Commodity & Ingredient Hedging, LLC (CIH) in Chicago, expounds on the need for prudent price risk management for cattle feeders, large or small.
With continued tight cattle supplies, high feeder cattle prices put more pressure on feedyards. “There will be tremendous pressure on feedyards to keep capacity utilization high. Unfortunately, we expect this trend to continue for some time,” Moroney says. “Our recommendation to feedyards is to have a comprehensive risk management strategy with an emphasis on establishing a floor on price risk using LRP or put options on the exchange.”
Moroney has been a proponent of Livestock Risk Protection (LRP), a marketing tool from USDA’s Risk Management Agency (RMA). RMA manages the federal crop insurance programs but also offers price risk management tools for crops and livestock. LRP and other RMA programs added more tools to complement commodity futures and options programs provided by the Chicago Mercantile Exchange, better known as the CME Group.
An advantage to using LRP live cattle or feeder cattle contracts is that they are subsidized by RMA. The subsidy will pay 35 percent of the premium charged for a contract. The subsidy may be higher for lower risk coverage. LRP can sometimes enable producers and feeders to lock in a profit. In other cases, the LRP contract can help limit losses on cattle if prices plunge. The latter situation may apply now.
In mid-July, Moroney outlined an LRP live cattle strategy (see LRP live cattle chart). “For example, a live cattle LRP for a Dec. 3 end date could be purchased for $5.10/cwt., including the 35 percent subsidy,” he says. “That would protect a $185.20 floor.”
At the same mid-July period, the live cattle LRP with a Feb. 4, 2025, end date had an end value of $187.05/cwt. The premium for 100 percent coverage was $5.80/cwt., including the 35 percent subsidy. Moroney says the contracts would provide a wreck-prevention floor price.
“As market conditions evolve, look for opportunities to convert the floor price into a more fixed hedge using futures or forward contracts on market rallies,” he says. “If the market were to rally to, say, $190 to $195 [for the Dec. 3 contract], producers could then set price on the CME if they desired.”
Beef has been a demand-driven market for high-quality cuts, a testament to the enhanced production and management practices that producers and feeders have used to get the most out of genetics, feeding and marketing practices. But with high inflation, high interest rates and unrelated factors that can cause lower prices, managing price risk is imperative, Moroney says.
“Despite high breakevens, the risk to adverse market moves remains real,” he says. “We are at record-high fat cattle prices today, but demand is a big question mark with high interest rates, a fatigued consumer with stretched dollars, and a long time between today and when recently purchased cattle will become market ready.”
Seek Expertise
Producers and feeders should consider trusting professional marketing consultants to assist in the development and implementation of a price management strategy. “Just like any aspect of your operation, it is important to work with knowledgeable professionals, whether that be nutritionists, vets, accountants, etc.,” Moroney says.
“The stakes are too high and the dollar amounts too big not to give every aspect of your operation the time and effort to make it through what will undoubtedly be a few years of elevated price volatility. Working with an LRP agent as well as a broker allows producers to combine strategies on the exchange, adjust positions as volatility presents itself, and try to keep the cost of risk management to a minimum.”
He points out that while the live cattle LRP provides tools for managing fat cattle price risk; the LRP feeder cattle contract has been improved for the cow-calf sector and stocker operators.
“Cow-calf producers now can protect unborn calves, calves weighing less than 600 pounds, and feeder cattle up to 1,000 pounds,” Moroney says. “Working with a talented LRP agent and knowing the ins and outs of the program are important in capital preservation and ensuring revenue at these attractive prices.
“We all want the same thing – unlimited upside opportunity without any of the risk. The only problem is we can’t have the best of both worlds without making some tradeoffs, and in this case, LRP or option premium outlays may be the best alternative.”
Derrell Peel, Oklahoma State University (OSU) livestock marketing economist, contends supply fundamentals will continue to tighten for the remainder of the year and beyond. “Beef production will likely finish the year down 3 to 3.5 percent, less than previously expected due to continued heavy carcass weights,” he notes in OSU’s July 8 Cow-Calf Corner newsletter.
“Feedlot inventories and cattle slaughter will continue to decline, perhaps faster if heifer retention begins in a significant way. Baring outside shocks, cattle prices will remain at record levels and push even higher if herd rebuilding begins in the coming months.”
Moroney concludes that when the supply of a commodity becomes scarcer, the price volatility of that commodity picks up, and the need for sound marketing advice and strategy will remain high. “We all want higher prices, but as they say, the only cure for high prices is high prices. It’s truly impossible to know what this market has in store for us.
“But with the swings that we’ve seen in the past 12 months, let alone the past 10 years, it’s critical to have a mastery of the tools available. It’s critical to develop a game plan that fits each producer’s risk profile and is in alignment with their overall financial picture.”
Mr. Engler would likely have followed that advice.
