Economists Zeb Gray and John D. Lawrence note that because cattle feeders purchase cattle and corn, and sell cattle at various times throughout the year, they are exposed to both input and output price risk. Feeder cattle and corn prices account for a significant share of total cost and are volatile, adding to the producer’s risk.
Managing the “crush” margin between the fed cattle revenue and the major input costs – feeder cattle and corn – that change with market conditions is very important.
The term “crush,” Gray and Lawrence say, originates from the soybean market, where futures on oil, meal, and soybeans influence the margin derived from crushing the beans into components. Similarly, prices for fed cattle, feeder cattle, and corn can be managed to protect a margin for a feedlot operator.
The margin is the remaining revenue used to pay all other costs and, hopefully, return a profit. The crush margin provides an indicator of return that takes into account the variables with the greatest price risk. It also is tied to the futures market, which can be used to manage the price risk for several months before the cattle are sold. The crush margin calculation, the specialists say, can serve as a quick indicator of risk management opportunities or pitfalls and help feedlot operators monitor the cattle and corn market for current and future marketings.
For more information on using Crush Margins to manage risk, and to use the ISU tool, visit the Iowa Farm Outlook Web site.