Even though feeder cattle supplies may be tight, Jay Gray doesn't worry about where the next yearlings are coming from.
“They're right outside my window,” says the manager of Graham Land & Cattle Co. And if there's an opportunity to hedge a profit, he's as quick to pull the trigger on buying the board as he is to buy the next set of lightweight calves.
Gray is general manager of the Gonzales, TX, feedyard expanding to a 30,000-head capacity. Located between San Antonio and Houston, the yard sits in a county that ranks among the top-five, cow-calf counties in the nation.
“We have about 120,000 mother cows in commercial herds in Gonzales County,” Gray says. The yard also has a 12,000-head pasture program that readies lightweight calves for the feedyard.
Nearly all the yard's cattle on feed are custom fed. Gray and his associates work to hedge about 30% of them as a part of the company's risk-management services to customers.
He prefers straight futures contracts over options to establish a more traditional floor price, but he'll use options spreads if a customer prefers. Futures, however, were his approach for cattle that will finish this October. In early April, October 2007 live cattle futures were $96-$98/cwt. With breakevens in the $85-$90 range, that spread offered a decent and hedgeable profit.
“If the October is $96 and your breakevens are lower, you have to hedge at least half of the expected production and maybe more,” Gray says.
Brian Roe, Ohio State University agricultural economist, says locking in August or October fed-cattle prices could be viable.
“If you look at live-cattle futures markets through December, all suggest a boost in beef production or live-cattle demand, based on USDA supply projections,” Roe says, noting that such demand also helped keep springtime fed prices in the $95-$98 range.
“August and October don't appear to be as strong in demand as December. So to be conservative, hedging in a price at the $95+ level could be a solid move.”
He says if cattle will be ready for slaughter in December, “you might hold off locking in a price,” unless USDA supply figures change. “If the U.S. gets some good news from (foreign) trading partners, beef demand could increase, and the $95 range still has some upside,” Roe says.
Dave Anderson, Texas A&M University livestock marketing economist, recommends watching the board closely for hedging opportunities. “The role of hedge and spec funds buying contracts has probably pushed fed-cattle contracts too high. I think that happened last year, as well.
“The funds do change their minds, leading to sharp declines on the board. But if there's a chance to grab a price that makes money, grab it.”
Anderson believes fed-cattle prices will stay historically strong through the year despite tight feeder-cattle supplies. “It would appear beef production is going to be below a year ago for the rest of the year,” he says.
“The spread between fed- and feeder-cattle prices has narrowed significantly, back toward historical averages, due to high corn prices. The narrowing is because feeders have come down closer to fed prices. Beef movement appears to be good, the cutout has been higher, supporting fed prices, and the drop credit has strengthened, adding a couple more dollars per hundredweight to the fed-cattle price as well.”
While live-cattle futures prices were at $100 for some contracts this spring, prices were also $90+ as far out as the August 2008 contract. The April 2008 was at $94-$96.
There seem to be solid marketing opportunities pretty far out, says Matt Dierson, South Dakota State University agricultural economist. “Guys are asking, ‘How far out can we price?’ You can price fed cattle (for a profit) on calves that have not even hit the ground. That's quite different from other times we've seen in the market.”
He says cattle feeders should consider locking in a distant price because “the fundamentals say you can't keep prices as high as the futures have gone.
“Because of the number of cattle coming in from Canada and Mexico, we should continue to see continued growth in cattle going into feedyards,” Dierson says. “However, if fed-cattle prices stay high, that should bring up calf prices a little bit this fall.”
Anderson adds that the long-term impact of prices, drought, higher costs and other factors could impact fed-cattle prices in late '07 and into '08. “It appears we're culling cows at a rate higher than a year ago,” he says. “While calf prices are at a level to encourage expansion and restocking, pasture and range conditions will dictate what happens there.
“It's difficult to construct a scenario where we get more calves next year, so it appears these prices will continue for a while. In addition, the desire to put more weight on calves from grass before going to the feedlots is going to make it tough to get calves for feedlots.”
Branded beef makes up a large portion of Graham Land & Cattle's production and helps generate a stronger price. Nolan Ryan Tender Aged Beef, an all-natural product, is the yard's biggest production sector. All cattle are off growth hormones and antibiotics at least 100 days before slaughter.
Another branded product, Heartland Beef, is a new Graham program, centering on Akaushi cattle, a Japanese breed numbering only about 5,000 total head outside Japan.
With the large numbers of lightweight calves year-round, Gray says he can have larger numbers of cattle finished to slaughter weight for July or August delivery. “We market a lot of cattle in those months, a time when numbers are often lower,” he says.
“That can help us get a better price for them. We usually hedge cattle that will go to the packer in those months. Also, since we often bring in calves weighing 200 lbs., we have plenty of time to view what the market does. We can also correct problems with the calves as they progress through the grower yard and on into a normal feeding ration.”
Most of Graham's finished cattle are marketed on carcass performance and usually generate a premium. Along with working to hedge in a profit, Gray says cattle are sold “in the beef” and have an average carcass yield of 63-64.5%.
“Our cattle are usually 1-2.5% over the plant average,” he says, noting most are slaughtered at Sam Kane Beef Processors, Corpus Christi, TX.
“If calves come from good bulls and good females, they will yield 65%. We can easily see a $3/cwt. premium.”
The volatility of the corn market has made hedging cattle more difficult, Gray adds. “It's made it tough,” he says, “because of the wider fluctuations in grain and cattle prices. You really have to do your homework when putting a marketing plan together.”
Larry Stalcup is a freelance writer based in Amarillo, TX.