April 27, 2007

High corn prices mean cattle producers are spending more to feed their cattle. To combat these high corn prices, cattle producers need to explore their options in marketing and feeding their cattle, a University of Nebraska-Lincoln ag economist said.

Corn prices have increased almost $2 a bushel since Sept. 1, 2006 and are now close to $4 a bushel, said Darrell Mark, UNL livestock marketing specialist. In addition, soybean meal prices also have increased from $160 to $220 a ton, and alfalfa is averaging $90 to $100 compared to $60 per ton at this time last year.

"Drought and strong demand has brought all hay prices up, even baled corn stalks are running high," he said.

The break-even price — the price a producer would have to receive for his cattle at market to break even on the costs of feeding and raising the cattle — are in the low to mid-$90 range, the Institute of Agriculture and Natural Resources specialist said.

"Those are fairly high break-evens," he said. So now the question is, "can cattle producers make any money?"

On the feeding side producers may be able to guarantee a break-even or perhaps turn a small profit by locking in prices on the futures market for cattle placements earlier this spring, Mark said.

"There was a nice rally in futures to the mid- to $90s in March," he said. "At that time, it put August's price around $94. What that means is producers could have hedged in the futures market against those sales they plan on making." Feeders must continuously evaluate this scenario for current placements.

Mark said despite higher corn prices, producers had potential to make some money, because feeder cattle prices are down. During the last six months, feeder cattle have dropped about $15 per hundredweight. This means producers buying feeder cattle offset the higher feed costs by paying less for feeder cattle.

In addition to hedging opportunities, producers also can lock in feed costs.

"Corn prices will be up and down this year," Mark said. "Everything from the weather and ethanol production will make them volatile. So, in order to remove that volatility, producers should lock in feed costs."

There are several ways to do that. First, producers can do long hedges in the corn markets. Coupling that with long feeder cattle hedges and short fed cattle hedges can protect the feeding margin.

Livestock risk protection insurance also can be used if producers hedge the sales prices on feeder cattle and fed cattle, for example.

Another new insurance product is livestock growth margin insurance."Essentially this is an insurance product that hedges the spread or difference on the futures market, the difference between fed cattle sales prices and corn and feeder cattle input prices — which is a gross feeding market or profit spread," Mark said.

This approach may be appropriate in the current market situation. However, there are several rules to be aware of, which makes it important to visit with an insurance agent, Mark said.

For more information about this insurance product, consult UNL Extension NebGuide G1641, Livestock Growth Margin Insurance.

When it comes to cow-calf producers, they may end up with lower cattle prices. However, they might want to hedge as well. Livestock risk protection insurance, or LRP, can give cow-calf producers opportunities to be somewhat profitable."We are not going to see big profits like we have over the last two to four years, but there still should be opportunities there to lock-in prices at money that will work and be profitable," Mark said. "It's not as rosy as some cow-calf producers would like it to be, but it's not a disaster either."

For more information about LRP, visit the Web at http://lrp.unl.edu/.When it comes to the demand side of the cattle industry, the outlook is hard to predict, Mark said.

"In 2005 and 2006 we saw a decrease in demand around 5%," he said. "However, in 2007 we may see some moderation. With petroleum prices down slightly compared to this time last year, that also might provide some support on the demand side as far as shipping costs go. Growth in exports looks promising too. But it is very apparent the high protein diet boom has worn off and demand levels have tapered off to where they were before that happened."

IANR News Release