Cow-calf producers often feel they are at the mercy of the market. Most producers execute the same strategy year after year and feel like they have no choices in marketing or pricing their calves. However, I’ve explained to many ranchers that they actually have the most opportunities and overall time in the beef industry.
Cow-calf producers spend most their time focusing on production, which is important. But, my dad always said the money on the farm is made after supper, when you sit down with a pencil and calculator and work through different marketing strategies and know your costs. So lets look at marketing options available to the cow-calf producer.
First, it is important you have a good handle on market conditions to plan your strategy accordingly. After this, you just have to execute your disciplined plan. Keeping up with market conditions is very important so you can alter the plan as the environment changes. For example, you can’t expect calf prices to be at record highs when the economy is going through one of the worst recessions since the 1930s. In my experience, many producers have no idea where we are in the North American cattle cycle and factors driving the current market.
Cow-calf producers with bred cows, know they will have a calves to market in the future. Very simply, from this point forward, you have to look at long term outlook for the feeder and fed cattle markets, and the beef complex in general. If feeder prices are at historical highs at this time, it may be prudent to start looking at some “put options” on the feeder cattle futures or take a short position on the futures market. Feeder cattle futures basically trade a year forward; therefore, this provides a price starting point for the unborn calves.
Once the calves are weaned and about 600 pounds, producers can start penciling out if they should put the cattle in a custom backgrounding operation or sell at the auction market. In some cases, producers have limited financial capability to finance further production so they have to sell. If the producer is still bullish on the feeder market after selling the physical cattle, then they may want to look at buying feeder cattle futures or purchasing some call options on the CME feeder cattle futures. This in essence still provides a long position or ownership of feeder cattle on paper.
Once the feeder cattle are 800 pounds, then the producer has another set of choices. It may be prudent to retain ownership and put the cattle in a custom finishing feedlot. If feeder cattle prices are strong, but fed cattle prices five months forward are rather soft, it may be wise to sell the cattle through the local auction market.
The cow-calf producer, the backgrounding operator and the finishing feedlot are all expecting to make a profit. This can be a 33-month period from the time the cow is bred to when the animal is slaughtered. Therefore, the cow-calf producer has potentially 33 months to price their production. At the beginning of each phase, the producer can pencil out if it is profitable to retain ownership or sell now. During each of the phases, the producer can also look at opportunities using options and futures as the market environment changes. If the producer has limited financial capability to finance further production, but still wants to have ownership or be long cattle, a futures and options strategy that has a defined cost with limited risk can be implemented.
Gerald Klassen analyzes cattle and hog markets in Winnipeg and also maintains an interest in the family feedlot in Southern Alberta. For comments or speaking engagements, he can be reached at [email protected]or 204 287 8268.