Agricultural producers, though often characterized as risk-averse conservative managers, routinely assume immense financial risk. With overall production costs increasing, producers have become major capital asset and investment managers. Cattle feeding is among the most capital-intensive ventures in agriculture. I regularly track what I refer to as a barometer of “capital-at-risk” in feeding cattle. My measure of capital-at-risk to play the game is a simple calculation in $ per head:

Capital-at-Risk = Cost of the feeder steer + Feeding cost of gain + Interest

Coming up with the estimates in the above equation is relatively easy and it is a simple spreadsheet exercise. I use the Kansas State University Focus on Feedlot data compiled by my colleague Dr. Justin Waggoner to establish feeder steer placement weights and projected feeding cost of gain; USDA AMS KS combined market reported feeder steer prices; and interest rates for Kansas producers from the KC Federal Reserve Ag Credit Survey. My calculation is a barometer, as it is a hodge-podge of placement and finished weights for cattle harvested in the most recent month, projected costs of gain for cattle placed in the most recent month, and interest rates – so interpret my index with these associated caveats.

I refer to this calculation as capital-at-risk to play the game because it is the cash capital needed to put on the table to place cattle on feed and finish them. The capital cost captures mostly variable costs and does not include long-term capital investment of feedlot facilities and management.

For 100 head of cattle, Figure 1 illustrates capital-at-risk monthly over the last decade. The most recent capital-at-risk is around $2,850 per head placed on feed ($285,000 for a 100 head pen). Typically, just under 70% of this total is the cost of the feeder steer, 72% in December 2024. While the capital-at-risk has hovered around $2,800 per head, with a couple of exceptions, since July 2023, these values are way above (by about 40%) what was commonly around $1,500-$1,800 per head during 2016 through 2020. Consider how much is at play in a commercial feedyard with 10,000 or 50,000 or more head-on feed. The capital-at-risk is large for small and enormous for even moderate-sized feed yards.

A related calculation I track is what the fed cattle market shows us about how risky this capital-at-risk is at any point in time. The capital is at risk due to several things including cattle health, weather events, feeding performance, and most importantly fed cattle selling price. A continually growing body of research confirms over time that the price of fed cattle at harvest constitutes by far the largest segment of the risk at play in the cattle feeding game. That is, some proportion of capital-at-risk is recaptured through selling finished cattle several months down the road.

The fed cattle option market provides the market’s best estimate of fed cattle selling price risk – or the base price of fed cattle for cattle sold on a grid. For 100 steers placed on feed today with approximately $285,000 capital-at-risk, Figure 2 illustrates the probability distribution of base revenue outcomes using the implied volatility calculated from the August 2025 live cattle option market premiums for cattle placed on feed today and harvested in July to estimate revenue risk (assuming a 2% death loss). This was estimated on Monday, January 6, 2025, with August 2025 cattle trading at $189.58/cwt. The implied volatility of the August 2025 live cattle options contract was about 14% that day. This was used to calibrate fed cattle selling price uncertainty to inform us of the riskiness of the $2,850 per head capital investment for cattle placed on feed today.

The current August 2025 live cattle futures price adjusted for the expected basis of $3.30/cwt in July 2025 provides an expected gross revenue per head of $2,860 per head or $286,000 for the 100-head pen. Compared with $2,850 per head capital invested. This means we are expecting a $10 per head ($1,000 for the 100-head pen) net return. A lot of capital is at play for only a $1,000 expected profit.

To dig a little deeper, the 14% implied volatility priced into live cattle August options lets us calculate the market’s expected fed cattle selling price risk. Figure 2 provides the distribution of fed cattle revenue risk for the 100 head pen of cattle with the area under the purple curve representing the probability of risk (vertical axis) and the fed cattle sales revenue (horizontal axis). The vertical solid blue line near the middle (half a chance of being greater and half a chance of being smaller) of the distribution is the $286,000 expected revenue noted above. This would result in a $1,000 net return for the 100 steers placed today. The blue line is slightly to the right of the highest point in the probability outcome curve because cattle prices tend to have what is referred to as rightward skewness meaning the curve is not a perfectly symmetric bell-shaped normal curve but what is referred to as a log-normal curve with a longer right-hand tail. Therefore, the average, or expected value of the curve, lies slightly to the right of the peak of the distribution, being influenced by the right skewness of possible revenues.

The probability curve in Figure 2, also shows us probabilities of other outcomes relative to the expected value in the middle. For example, we calculate a 20% chance that the fed cattle revenue ends up being $262,000 or less (a loss of $23,000 or more). This is shown as the red dashed line in Figure 2 where the area under the purple curve to the left of $262,000 is 20% of the area under the entire curve. We can also calculate that there is a 10% chance (not highlighted on the chart) of only receiving $250,000 or less (a loss of $35,000 or more). On the other side of the ledger, the green dashed line shows there is a 20% chance of revenue being $311,000 or more (a profit of $26,000 or more). Likewise, there is a 10% chance (not highlighted on the chart) of revenue being $326,000 or more (a profit of $41,000 or more).

Capital-at-risk remains at historically high levels and fed cattle sales revenue is the major cause of the investment ending up either profitable or a loss. Potential losses and gains are sizable with important probabilities. How can one manage this risk? The capital-at-risk is what is needed to play the game, so if you are feeding cattle this is what you are putting on the table. The only way to avoid placing the capital at play is to not feed cattle, so that is unavoidable if you are feeding cattle. However, the risk of the capital at play can be largely mitigated. By forward pricing the cattle, much of the uncertainty of the fed cattle revenue portrayed in Figure 2, the predominant riskiness of investment return, can be mitigated. Through forward contracting, the price risk can be almost all eliminated (both upside opportunity and downside losses), whereas, through hedging, basis risk will remain. Of course, if cattle are valued on a grid then the risk of varying premiums and discounts and varying grades and out types of cattle also come into play in affecting net revenue risk. The downside risk of the return distribution can be eliminated while leaving open the top side opportunity through buying put options on August 2025 live cattle futures. The put option requires paying a premium upfront, which puts a little more capital at risk but greatly reduces the downside risk to the left of the blue line in Figure 2 while keeping the upside opportunity open. Or one could achieve similar, but less expensive, downside risk protection to a put option using federally subsidized Livestock Revenue Protection (LRP) subject to limitations.

Whatever one does, if anything, to protect the capital at risk is a personal choice. However, with the dollars being larger today, and the risk present in fed cattle markets being relatively high, the value proposition can change somewhat quickly. Price risk management may keep you in the game for the next round.