In Charles Dickens’ classic novel Great Expectations the main character, Pip, continues to have his great expectations dashed by real world experiences. Perhaps he should have been a cattle feeder rather than striving to be a gentleman and he could have learned the same lesson in a matter of months rather than over several years.
In August and September of this past year, when yearlings were being placed on feed to be harvested in January and February, the Feb Live Cattle board was trading around $99/cwt. Yearling prices reflected, if not exceeded, these great expectations for the fed market. A 900 pound steer sold for an average price of $1.00/lb in Utah during that time frame. Based on the price of corn at that time, estimated feedlot cost of gain was around $65/cwt. The projected break even on these steers if they were shipped and fed in Nebraska would have been about $98/cwt. With basis generally being around $2/cwt under the Feb Live Cattle board, Nebraska feedlots could have expected prices around $97/cwt for fat cattle. An anticipated small loss, but cattle feeders always have great expectations for the market. The actual fed cattle prices in January averaged closer to $90/cwt. This would imply a loss of about $108 per head. If the feedlot had not purchased corn in advance or had not forward contracted corn needs, then the actual cost of gain was likely closer to $70/cwt of gain. Therefore the result could have been a loss of about $130 per head on these 9-weight steers.
Throughout the fall of 2007 the Apr Live Cattle board traded around $100/cwt. Again, heavy fall calf and yearling prices reflected much of those great expectations. 7-weight steers in Utah sold for $1.05/lb in October. With feedlot cost of gain expectations of $65/cwt and cost of transportation to Nebraska added in, the estimated break-even for these steers in March would have been about $95/cwt. With a March basis typically about $1 over the Apr Live Cattle contract, feeders would have expected a cash price of about $101/cwt. The expected return on these 7-weight steers would have been about $6/cwt or $78 per head. However, the Apr Live cattle contract has now lost $10/cwt. and is currently around $90/cwt. Cash fed cattle price in Nebraska for March average about $91/cwt. Rather than realizing a profit of $78 per head on these steers, losses have likely ranged from $50 to $110 depending upon how much corn was locked up in the fall versus bought throughout the feeding period. Feedlot producers who saw those great expectations of $100/cwt fed steer prices in March and April and who placed a hedge using Apr Live Cattle contracts and who also forward priced their corn needs, may have come close to realizing the $78 per head returns.
How realistic are the great expectations for summer and fall live cattle contracts which are trading in the upper $90 range and even over $100/cwt on Oct and Dec Live Cattle? I can’t answer that question. However, I can suggest that if you are buying feeder cattle to place against those fed cattle contracts, I would hedge in those contracts if you want to insure that those great expectations are met.
What about the great expectations for corn prices? Every time I update my slides to give a cattle outlook talk, I must raise the price of corn. For example, the Dec Corn contract on the Chicago Board of Trade averaged about $5/bushel in January, $5.40/bushel in February, and in mid March is now over $5.80/bushel. With any problems in planting or the growing season, I fear those great expectations will be exceeded.
What is the message here? If I were a cattle feeder, I would be taking price protection on both late summer and fall anticipated fed cattle sales. I also would take some price protection on corn and would watch spring and summer cornbelt weather closely. From a cow-calf producer’s perspective, I think there is still some downside risk to calf and yearling prices. The last two years, producers who have sold or contracted early have benefited over those who have waited until fall to price calves. That scenario may well play out again in 2008.
My final message here is a more general one. Anytime that great expectations in future prices cause you to make a production decision, the way to insure that those expectations are realized is to take a position in the futures market. This will limit your ability to exceed those expectations, but it will also guard against those expectations not being met. This is another way of saying that if prices seem too good to be realized, they probably are, and to realize them you have to take them when they are offered.
"Take nothing on its looks; take everything on evidence. There's no better rule." Charles Dickens, Great Expectations.
Dillon M Feuz
Utah State University