– Dr. Kenny Burdine, Livestock Marketing Specialist, University of Kentucky
This summer has once again shown us how brutal markets can be. In April, fall CME© feeder cattle futures were in the upper $150’s and I was surprised that calf prices weren’t higher given the profit potential of summer stocker operations. Two months later, those same contracts are down over $20 per cwt and many producers are wishing they had done something to protect those fall sale prices. I think the two largest reasons for the decrease are uncertainty created by trade issues and continued delay in corn planting.
Kentucky calf prices really did seem to hold on as long as they could, but finally broke hard through May and early June. After putting in their highs in April just under $160 per cwt, 550 lbs M/L 1-2 steers had moved into the mid-$140’s by the second week of June (see figure 1). Honestly, this is less drop than would be expected given the $20+ drop in the futures market. It’s as though our calf market didn’t completely buy into the inflated spring market and isn’t currently buying into the deflated summer market.
KY Auction Prices ($ per cwt)
Source: USDA-AMS, Livestock Marketing Information Center, Author Calculations
A market like this one also is a good reminder to me of what should be expected of an extension economist. The decrease in futures from April to June translates into an expected decrease in value for heavy feeders this fall of more than $150 per head. For 2019, this is about what I was estimating profit to be for a stocker operation this spring. In a normal year, this would be more than enough to turn modest returns into modest losses.
While producers often want an extension economist to predict prices and make estimates for returns looking ahead, there is simply no reason to think that an extension economist can do this any better than the futures market. Our role should be more about risk management strategies that price prediction. Previous research has suggested that futures are as accurate a predictor of markets as we have available, but there is certainly plenty of evidence to show that they aren’t perfect. Still, one can’t deny that fall futures in the upper $150’s this spring provided us a pricing opportunity. It’s easy to say that now, but pulling the trigger back in April was difficult for many as the market seemed to be invincible.
It’s important to remember that there is nothing countercyclical about the futures market. They only allow us to capitalize on expectations of prices in the future. As those expectations change, the futures market will change, and the best we can do is price based on those newer expectations. I always get lots of questions about risk management after a year like this one, but by that time it is simply too late. Futures’ markets don’t allow us to resurrect good prices.
Everyone has their own philosophy on risk management and that is perfectly fine. But, some producers are in better financial position to absorb markets swings, like we saw this summer, than others. Some grain producers use a strategy of pricing their grain as they incur their expenses for inputs. In other words, by the time they have priced half of their inputs for the year (rent, seed, fertilizer, etc), they like to have half of their grain priced for sale. It’s interesting to think about how this might apply to a stocker operation.
Given that stocker operations tend to be relatively low-input, 75% to 85% of total expenses can be incurred on the day the stocker calves are placed. And, if one really thinks about it, more expenses are committed on that same day such as health costs, transportation, and commission. If one wanted to apply this proportional pricing approach to a stocker operation, they would be very aggressive pricing cattle at placement – perhaps pricing them all from the start.
I think the most important suggestion that I could make to someone about a marketing strategy is simply to have one. Think about risk management from the very start and include your lender in this discussion. The second suggestion that I would offer is that one should not make risk management decisions in real time. I have witnessed this countless times over the years as producers see the market move upward or downward. We tend to have analysis paralysis, get caught up in the emotion, and can’t make a decision quick enough. I typically recommend having a predetermined strategy, with pricing targets and dates, that one can move on as soon as they are reached. In a sense, you are taking the emotion out of the decision and automating the implementation of your plan.
If you would like to learn more about risk management strategies for feeder cattle, I would recommend that you take a look at my publication, “Using Futures Markets to Manage Price Risk for Feeder Cattle” at https://www.uky.edu/Ag/AgEcon/pubs/ext2013-0128.pdf. And, as always, don’t hesitate to reach out to me with questions.