ENID, Okla. — Prices for feeder cattle have continued a bullish trend this fall and pushed above $140/cwt. on the March contract. Contract highs established resistance near $157/cwt. in April, making moves above that level difficult.
Low feed grain prices and strong demand have helped maintain cattle prices, but producers should be concerned about possible weakness in feeder cattle markets.
Value of gain for feeder cattle also has been strong this fall, ranging from $1.16 to $1.39 per pound in recent auctions. Currently, the value of gain for a 500-pound calf is approximately $1.27/cwt. Assuming a six-bushel reduction from grazing, topdress nitrogen at 30 pounds and increased seed expenses, it will cost between 24 cents to 34 cents per pound to grow calves on wheat pasture. This is the marginal cost of grazing and does not include labor, equipment or marketing costs. However, it is clear that feeder cattle budgets can be profitable if prices do not fall before March and death loss is kept at reasonable levels.
A loss in trade partners, decreased domestic demand or an increase in feed prices could derail rising prices. The total cattle inventory is decreasing as the industry moves through the current cattle cycle, yet feeder calf numbers will remain large for a few more years. This is a critical time in markets as the magnitude of the reduction in herd numbers is yet to be known.
Producers must decide how much risk they can absorb. Support in feeder cattle markets exists at $126/cwt., so a $14/cwt. reduction in prices is not out of the question. Competition from pork and poultry through the winter months will put some pressure on prices if consumer demand cannot maintain at current price levels. Larger supplies of heavy feeder cattle coming off wheat pasture in February and March also could drop prices on the 600-plus-pound weight classes.
If the risk of lower prices is a concern to producers, they should contact a broker to determine the best price protection strategy for their operation. For example, a March put option contract at $140/cwt. will cost about $6/cwt. This would establish a floor price of $135/cwt. since a put option is the right but not the obligation to sell a futures contract. In the event that prices fall below $135/cwt. a producer may exercise the right to sell a futures contract for $140/cwt.
If feeder cattle futures fall to $125/cwt. and a producer has a put option at $140/cwt. they could exercise that put option. By exercising they sell a $140/cwt. futures contract. Since the producer paid $6/cwt. for the put option, the protected price they receive is $134/cwt. This is $9/cwt. above the $125/cwt. the market fell to. The producer then sells cattle for the cash market price, and because of their futures market transaction, the producer captures an additional $9/cwt. above the cash market.
There are many unknowns in agriculture, and currently prices for feeder cattle are near the 52-week marketing channel average.
Take advantage of the opportunity to explore price protection strategies for stocker cattle in case markets move lower in the coming months.