From my experience, marketing cattle in the futures market and consistently making money is one of the hardest things to do. I have always had more success trading corn and soybeans rather than livestock.
Why is that? Most of the time there is ample information about the grain commodity market to make an informed decision. This, however, is not always the case with the beef market.
With grain commodities, we plant at the same time every year and are informed by the USDA how many acres were planted. We are also told the usage of previous year’s crops and what the carry-over is to the next marketing year. As the year progresses we gauge how crops look nationwide in terms of growing conditions and yield trends which gets us close to knowing the supplies we will have to ration throughout the coming year. The goal is to use as much of the crop as possible to keep the prices at the highest levels. To do this we need demand. When supplies and demand are running together, we have the most stable markets with the highest prices. When supplies or usage vary from another, we get volatility in the market and price movements become more significant to balance out the difference.
These ebbs and flows have worked very well for years and is a great science to become acquainted with. The upside advantage is that this cycle never ends. Grains are a storable commodity that can carry over year to year until the surplus is equaled out by mother nature or other marketing factors.
There are thousands of uses for grain, buyers from all nations and walks of life need a certain amount of a commodity at a given price. In dry years, when grain production is down, livestock feeders have to look for other feed sources to reduce the cost of feed rations. Thus, using less of the high-priced grain to help keep the livestock operation profitable. On the flip side, a flour mill may be willing to pay more money for a commodity than a livestock producer. This creates a healthy marketing environment.
Now, let’s look at the beef market and compare it to what we just talked about with the grain market.
Unlike grains, beef animals do not have planting and harvest season. Animals are born anytime of the year. There are fewer reports and little information on the growing season and how different factor effects the weight gain of livestock. The genetics of livestock are also less controlled than most row crops, thus, the pounds produced, and the quality of the end product is highly variable. The disadvantages also include the fact that producers are unable to store livestock for long periods of time until there is a rise in demand.
When a hog is ready to go or fed cattle are ready to sell there isn’t any magic we can do to postpone the need to move these animals. If we don’t sell, we must keep feeding them, which is not financially beneficial. We also must remember that there are not thousands of different uses for meat as there are for grain. Once an animal is harvested the end has come, and it will need to be consumed before the next animal is ready to be harvested.
This is the very reason we see the cattle cycle working the way it does. Producers build breeding inventory to the point where supply outweighs demand. Just like the pendulum of a clock, producers then cut breeding stock to the point of profitability, driving demand to the market. Then, the process starts all over.
Unfortunately, there are not thousands of buyers lined up to buy cattle. The truth is there is just a small number of buyers, and the major players can be counted on one hand. This is a big disadvantage.
More cattle are bought and sold by index funds and the financial markets than most of us would like to admit. This is all done as a market play to generate income rather than to use the product. When prices move, index funds will ride markets up, and then liquidate their holdings at profits, dropping the value of livestock without changing the amount of usage of the product.
With the advent of computers and algorithms to trade, this market has become harder and harder to use by most farmers. Even though this is done through contracts on paper it still dramatically affects the cash prices, right down to the local sale barn.
While this all sounds bad it is not the end of the world. By the board trading the price of cattle, a market is established, and farmers can use that to keep their operations profitable.
I would argue the invention of the Livestock Risk Protection (LRP) program is one of the best, if not the best, tool ever developed for cattlemen.
This program allows the cattle producer to look back in his records and figure what price it takes to make his operation profitable. In my personal example, I have chosen not to place livestock in a feed lot unless I can net a minimum of $100 per head profit on either a 13 or 17 week contract. We set this price floor using LRP when we bring cattle into the operation. If the price continues to increase while these cattle are being fed, we sell them for more money and do not have to pay any margin calls as if we would if we had traded options on the futures market. We just collect the additional profits after we pay the LRP premium. If the markets break, the worst we can do is profit $100 per head because the LRP program has guaranteed us that as a floor price.
This program was new several years ago and is now becoming the go to way of marketing by most producers. It fits small producers and large producers, giving equal advantages and is not skewed based on the size of operation.
Are there times when this program should not be used? The answer is yes! I would never suggest a producer flooring themself at a loss. If there is not a possibility to make a profit, there is no need to invest the time and labor in raising livestock.
I realize that many producers have never used this program and may have never used any kind of risk management and still gotten by. I am confident that the days of running without protection are coming to an end.
Today, there are profits to be made in the beef industry. These profits can be had with little effort on the producer’s part. It is our job as Gibson Insurance Group – Acrisure to help you through this process and keep your operation profitable for generations to come. I would encourage you to call our office and speak with the staff about how this program would work for you. If you are open to it, we would like to visit your farm and answer any questions that you might have. Call Gibson Insurance Group – Acrisure at 660-433-6300.