Higher cattle prices produce greater risk

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An unprecedented market rally for all classes of cattle in recent months has created a new environment with new realities. Indeed, these are the good times for many ranchers.

The rapid rise in prices for feeder cattle and calves has been driven by shrinking supplies, a fact borne out by the U.S. Department of Agriculture’s annual cattle inventory report. The national herd is now 90.8 million head, the lowest total since 1952. In short, demand is off the charts from feedyards and stocker operators who need replacement cattle.

But with elevated prices comes elevated risk. Kansas State University agricultural economist Ted Schroeder says today’s risk significantly outweighs the risk feedyards saw just two years ago.

“In February 2010 we had June 2010 Live Cattle futures contracts at $88 per hundredweight,” Schroeder says. “Market volatility, based on live-cattle option prices at the time suggested we were 66 percent confident the fed-cattle cash price in June 2010 would be between $82 and $94.60 per hundredweight.” That implies traders were 66 percent confident fed-cattle values would range about $157 per head, from low to high, at the time 750-pound feeders were placed on feed.

Fast forward two years and we find June Live Cattle trading about $126 per hundredweight. “Today’s market volatility indicates we are 66 percent confident the price will be somewhere between $117.30 and $135.50 per hundredweight in June — a $227-per-head range from high to low for fed cattle,” Schroeder says. “That’s a 44 percent increase in revenue risk per head ($227 vs. $157) compared to two years ago.”

That risk is further compounded by the fact that corn prices are significantly higher than in 2010.

“Combining fed-cattle and corn price risk now with what it was just two years ago, my analysis suggests about a 44 percent increase in net return risk per head (the range from probably low to high return potential) for placing cattle early in February for harvest in June. And, with current feeder-cattle prices, we are starting with about a $60-per-head lower expected feeding return now compared to two years ago. Similar factors persist for elevated cow-calf producer and stocker operator risk.”

The risks for cow-calf and stocker operations, however, are tied more to production and cost management, rather than prices, according to Oklahoma State University agricultural economist Derrell Peel.

“High prices create good opportunities, but it will be production and cost management that will determine how much profit accompanies the current market environment,” Peel says. “I believe that marketing is relatively easy right now — most anything ranchers have to sell brings a good price — but managing production to have something to sell and, most importantly, to manage the cost of production is where producers need to focus.”

Peel suggests cow-calf and stocker operators have an advantage under the current market conditions. “The current environment is making forage worth more and providing more flexibility for producers to consider a wider range of production alternatives,” he says. “The market is generally encouraging any forage-based production, so there are good opportunities when selling weaned calves, retained calves or running stockers in place of cows.”

Local and regional conditions will determine which of those production strategies are best, Peel says, but he emphasizes that forage is now worth more and “there are more ways to market it than we have seen in a long time.”

Both economists acknowledge the current market offers substantial opportunities. And both emphasize that with those opportunities comes significant risk. These may be the good times for ranchers and stocker operators, but good managers will still examine their risks and look for ways to minimize those risks. Don’t ignore good opportunities to lock-in excellent profits with risk strategies such as futures contracts and futures options. Each individual operation should evaluate its financial situation and make the most of the current market conditions. 


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