Feed prices trending lower and feeder cattle prices trending higher may spark some interest in retaining ownership of stocker calves over the winter.
Feeder cattle futures price and projections from USDA-ERS send different signals for different times. Through the remainder of 2013 futures are above fundamental projection levels. Thus, there is an incentive to price feeder cattle to be sold in the short run. By the second quarter of 2014 the projections are above the futures price by $10/cwt. These prices, combined with new crop corn and hay prices remaining lower than last year, suggest profit potential for calves backgrounded throughout winter.
However, risk management tools should be considered despite the improved chances for lower feed costs as the risk of retaining ownership between fall and spring can be large in the feeder cattle market. During the winter months, particularly between November and March, futures have both risen and fallen by over $10 per cwt. in the last decade.
Someone with calves or feeders can use put options or Livestock Risk Protection (LRP) insurance to cover against a decline in feeder cattle prices. Such declines happened from November to March in 2003, 2005, 2007, 2008 and 2012. When making the decision on which of these tools to utilize, consider the number of animals you are covering, the cost of the product, and the length of time you will be covering your calves.
Other price protection tools such as forward pricing calves for later delivery either through internet auctions or direct sales to the feedlot could be considered. The downside of utilizing these tools would be that if the price projections are accurate for the first quarter 2014 there may be money left on the table come delivery day.
In order to determine which of these tools will work best, you first need to determine your breakeven costs for three months of feed, as well as determine your risk tolerance.
Source: Heather Gessner