For example, 51 percent of the trading days during feeding period for calves sold in February 2015 provided the opportunity to hedge a profit. Tables 1.1 and 1.2 show the percentage of trading days that produced a hedge that was equal to or better than the projected breakeven price for calves and yearlings fed to slaughter. These results are reported in Tables 2.1 and 2.2. This process was repeated for different target levels of return from a $4/cwt loss through a $4/cwt profit. The percent of trading days that the expected hedge price was greater than the breakeven price out of the total number of trading days is reported in Tables 1.1 and 1.2. The expected hedge price was compared to the estimated break- even price each trading day of the 180-day feeding period for yearlings and the 210-day feeding period for calves. This expected basis for each month is the previous five-year average basis. The underlying assumption is that the final breakeven price is accurately predicted at the start of the feeding period.ĭaily closing futures prices were adjusted to a hedge price using a historic basis estimate as the expected basis. If the 15th was not a trading day, they were bought or sold on the previous trading day. Cattle are assumed to be placed on the 15th of each month and sold on the 15th of the marketing month. This series reports an estimated cost of production per hundredweight (cwt) and profit per head for each month based on relevant cattle and feed prices and interest rates. Method and Dataīreakeven price data comes from Iowa State University Estimated Returns to Finishing Yearling Steers and Finishing Steer Calves. The analysis was extended to look at the percent of trading days that a return between a $4/cwt loss and a $4/cwt profit could be hedged. Twenty years of data from 1996-2015 was analyzed to determine the percent of trading days during calf and yearling feeding periods that live cattle futures (LCF) - adjusted for an expected basis - were above the cost of producing fed cattle. This analysis is meant to discover how often it is possible to hedge a profit. Live cattle futures offer a method to reduce price risk by hedging a selling price at or above the cattle’s cost of production. Research on Midwest feedlots has indicated that approximately 74 percent of the variation in cattle feeding returns is due to changes in the prices of fed cattle, feeder cattle, and corn while approximately 10 percent of the profit variation is due to production risk from average daily gain and feed efficiency. Pdf How Often Can Cattle Feeders Hedge a Profit with Futures?Ĭattle feedlots face significant market risk during each feeding period.
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