Cattle Risk Management

[bmj182]

Does anyone here use the futures
market to manage the risk on their
feeder cattle. Cattle trades can be
very complicated with several
different variables(exchange rate,
barley price, basis) interested in
hearing what other producers do in
this situation.

[melvill]

I've done quite a bit of work with southern Alberta cattlemen on this. Basically there are three risks when it comes to the Canadian finished slaughter cattle price - US Live Cattle futures, Canadian dollar exchange rate and basis levels.

Most feedlots, of the ones which do try to manage price risk, don't try to cover all three. The risk with the most volatility is basis but, other than entering into a basis contract with a packer, which can be tricky, there's not a great deal that can be done with that issue.

The second greatest risk is US Live Cattle futures and that one is relatively easy to deal with for slaughter cattle. A person needs an account with a commodity broker.

Canadian F/X - exchange rate risk - can be handled by hedging the Canuck Buck through a commodity broker or you can "forward buy" the exchange rate at most banks although most local staff won't know anything about it. My experience is that Cdn F/X is viewed by some in the cattle feeding industry as less important than basis risk or Live Cattle futures. I'm not certain if that perception is valid or not. What does anyone else think?

[bmj182]

melvil,
Thanks for your input, I guess one
question I have is what about the
price of barley? Does this factor into
your hedging? I'm new to the cattle
business and have lost my shirt for
the last two years(feeder cattle). Are
the wild swings in the market simply
due to the drought and Sept. 11, or is
this a "normal " occurence in the
feeder cattle market? Do you hedge
your cattle when they first enter the
feedlot, or do you let them ride and
hope everything falls into place? I'm
not looking to make big money, but I
need small profits at least to keep
doing this, any advice is greatly
appreciated thanks.

[melvill]

bmj, I'm a Market Specialist with Alberta Agriculture, not a cattle feeder of any significance.

Certainly prices for inputs, such as feed grains like barley and corn, are a important risk in the cattle feeding business. Some feeders that I've talked to hedge their incoming feedgrains although, not as many do it as I think should. One large feedlot in southern Alberta will have as much as six or seven months feedgrains needs hedged given the right opportunity. It certainly reduces their feeding risk. Last winter that strategy reduced their cost of gain to significantly below the average for the industry. They used the same strategy this year and are very happy with their cost of gain relative to the industry average.

However, hedging feedgrain needs often requires that the feeder know how many cattle will be on feed quite a while ahead of time. That may be hard to know for the small or seasonal feeder.

bmj, it's very hard to talk about this by keyboard. If you'd like to have a more detailed discussion, I'd suggest that you phone me at 403-362-1344.

Lee