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Cow-Calf Producers Should Develop Risk Management Programs

Consider some risk management as part of your calf marketing strategy this fall.

With a cattle market about as predictable at times as the weather, cow-calf producers should consider making risk management as much a part of their production scheme as a good animal health plan.

John Anderson, Mississippi State University livestock marketing economist, says major price bumps in June — to what had been a dwindling cattle market much of the first half of 2006 — are an example of how calf, feeder and fed-cattle markets can unexpectedly turn one way or the other.

With the strong prices seen for 500-lb. calves even before the June price run-up, Anderson was expecting many producers to opt to sell their calf crop this fall, especially commercial operators.

“2005 was probably as good as it's going to get for cattle prices,” Anderson says. “But '06 will still be a pretty good year for cow-calf producers. This fall should see a good strong market for calves, which encourages producers to sell their calves.”

That strategy could work for all cow-calf operators. However, those who retain ownership through the feeding stage may see advantages to the premiums they'll continue to likely see from the strong genetics bred into their cattle.

If you're committed to genetics and retained ownership, stick with it, Anderson suggests.

“Such producers usually aren't in the business of trying to pick the market. They're in a year-in and year-out program, usually with a well-defined calf and a good relationship with the feedlot and packer,” he adds.

Summer surprise

From Cattle-Fax on down, industry forecasters predicted lower prices early on this year for calves, feeder and fed cattle. Nothing like the prices seen in 2005 was expected, other than possibly brief spikes due to weather or other factors.

Cow-calf producers were projected to see lower prices, too, but fare better than stocker operators and feeders. Of course, when prices spiked in June, all the sectors welcomed the summer surprise.

It wasn't expected, says Jim Gill, Texas Cattle Feeders Association marketing director, Amarillo, TX.

“Many in the industry speculated the summer months would be lower with cattle-trading expectations in the low- to mid-$70/cwt. range,” he says. “For a spell, prices did fall into the high $70s.”

Prices then started up in quick reaction to several factors. There was a 30-40¢ drop in corn price from around the $2.80 December corn futures high of May. The market shot up even more after a bullish June cattle-on-feed report showed lower on-feed numbers, and 15% fewer placements and 9% greater marketings than the previous year.

Fed prices were near $85, and feeder prices were steadily higher at many markets, with Oklahoma City, for example, seeing its late June feeder steers at $3-$6 higher and feeder heifers at $3 higher. Four- to five-weight steers jumped from below $135 to over $145 in just a few weeks. Five-to six-weight steers went from just $120 to $133. Feeder steers in the 700- to 800-lb. range crept back over $115, nearly a $20/cwt. jump from early spring.

Managing risk

There was no guarantee June's price surge would stick. That's why risk management's extremely important, Anderson says.

“It's getting to the point in the cattle cycle where these prices will be breaking. You don't want to be stuck with a set of high-priced calves and see the market break on you,” he says.

He suggests looking at using video or Internet-type sales to cash-forward contract calves when prices are strong.

“Services like Superior Livestock Auction, or other satellite or Internet sales, make it easy to execute a forward-pricing arrangement,” Anderson says. “The transaction costs really aren't greater than a regular sale. They might present a good opportunity to price during a good market.”

Jim Kelley, Superior business manager in Fort Worth, TX, says 2 million head were marketed through Superior in '05. A 130,000-head sale in May was to be followed by a 250,000-head sale in July. Those were five-day sales. Two-day sales are planned from September to December.

“Many of those cattle are from cow-calf producers who forward contract through us,” Kelley says. “A large number of producers from Montana, Nebraska, Wyoming, Florida and other states start marketing their calves as early as May for delivery in October or November. They can price their cattle in an up market.”

Darrell Mark, University of Nebraska Extension economist, says Northern Plains calves forward-contracted through Superior in mid-summer were in the $130-$140 range, up to $15/cwt. higher than (feeder cattle) futures prices adjusted to the basis for calves.

“Producers should look for opportunities to forward sell in a cash forward market,” Mark says. “There's been good demand for fall delivery calves, and it will probably stay there for a while with the wider basis expected for corn.”

Though prices spiked between May and late June, Anderson says, “they can break. It's a difficult market to call. I feel demand is stronger, for sure on the live-cattle side, and packer margins have been better.

“On the supply side, I'm not convinced cattle came in (to feedyards) in an orderly manner. We had a lot come in early; not as many are left to go on feed now (in mid-summer).

“If prices remain this high in late summer or early fall, sale of commercial calves will most likely be the best option for most producers. But if calves are retained for backgrounding or to put on feed, they definitely need to look at the 2007 futures contracts for some risk-management opportunities,” he adds.

Will high prices remain?

Whether hedging calves or fed cattle, Anderson recommends producers look at locking in a reasonable profit instead of just aiming for the high.

As an example, in January 2006, the June live-cattle contract was at $88, low compared to some prices seen in 2005.

“Some guys weren't interested in protecting their cattle at $88 and didn't,” Anderson says. “But it certainly was a lot better than the $79 a lot of cattle traded at in early June.”

That $9/cwt. could have been the difference in a big loss, a small profit, or at least a breakeven, he says.

Despite the high prices seen as July approached, Anderson wasn't sold on those prices remaining through summer. In early June, when markets were low, he had the same opinion as many others — that prices would be lower in the fall.

Fall calf prices below $115 were foreseen by many in the early summer. If the market breaks back to that level, some big money will have been left on the table. That's money a risk-management plan would have protected.

Larry Stalcup is a freelance writer based in Amarillo, TX.