For cattle feeders who placed calves in feedyards instead of turning them out to pasture in 2000, producing profits requires flexibility, diligence and staying power.

Most risk-management basics remain the same for producers feeding calves as for those who chose yearlings figuring realistic break-evens, knowing the local cash market, and exploring various hedging strategies. The biggest differences between the two simply relate to time, say the brokers at Klute Investment Services Inc.

For example, the first decision producers must make before they hedge is whether to background the cattle to sell as feeders after 120 days or so or whether to keep them through an entire feeding cycle to market as fats, explains Klute Investment Services senior broker Julie Yocam.

Both choices offer similar hedging opportunities-either selling futures or using options strategies to protect the price of the finished product. However, holding on to feeder cattle hedges for a few months may seem simpler than maintaining live cattle hedges up to a year.

The success of long-term hedges depends on the producer's ability to maintain the positions in spite of inevitable market fluctuations. Buying or selling commodity contracts requires deposit and maintenance of margin money, a small percentage of the value of the contract on deposit with the brokerage firm as a performance bond. That means producers, or the lenders who have financed them, must be prepared to pay margin to maintain the hedges in case the market moves up.

Ms. Yocam's worstcase scenario: First, a producer sells futures contracts as a potentially profitable hedge, but later can't make margin calls during a market upturn and must exit his positions by buying futures at a loss. Then, optimistic about the rising market and nervous about more margin costs, he fails to reestablish hedges. But by the time his cattle are ready to sell,the markets move lower and he sells cattle at a loss as well.

The futures markets recently set the stage for that scenario to play out for producers with lightweight cattle hedged for summer and fall 2001. The June, August and October live-cattle contracts hit new contract highs in mid-December, creating margin calls and likely tempting some to ditch their hedges.

But Ms. Yocam says producers should remember that no matter how promising those futures increases may seem, the summer months when most calves are slaughter-ready generally mark the lowest prices of the year.

"When you have the opportunity to hedge where your calves will make money, you need to be committed to the hedge instead of jumping out thinking you can outguess the markets," she warns. And she reminds that a knowledgeable broker can help manage the costs of a hedge in a rising market, for example selling options to collect a premium that helps offset the cost of maintaining futures contract margins.

So even after the risk management is in place, the producer should not ignore markets. The choice of hedging and selling as feeders vs. fats may need revision, reminds Dale Klute, Klute Investment Services.

For some producers who intended to feed out their lightweight cattle, recent market conditions favored selling those calves as feeders. The mid-December cattle futures rally included feeders with January 2001 futures hitting new contract highs for eight straight days.

For Klute Investment Services' clients feeding lightweight cattle, Ms. Yocam's advice was simple: "Sell them and let somebody else take the risk."

Contact Klute Investment Services Inc. at www.aginvestor.com

www.aginvestor.com