AG Investor

Farmers and ranchers traditionally have faced many risk factors in their businesses. Among the largest are uncertainties in the weather and the unpredictability of markets. While KIS can’t control the sun, rain, wind or cold, we can help producers weather changes in the increasingly global market for their ag products by designing practical hedging plans for cattle, corn and other ag products.

In the past years, U.S.agriculture has experienced the effects of worldwide economic and political upsets on markets for products ranging from beef and chicken to pork and grains. With many markets hitting historic low prices, the producers of these products are realizing they cannot continue to stake their livelihoods on these volatile markets. Lacking the ability to control all the factors that drive markets down, they must find ways to protect their businesses from price risk.

Fortunately these farmers and ranchers do have a tool available to them – the futures and options markets. KIS’ experienced brokers can help individual producers create customized hedging plans for cattle or crops, locking in profits based on realistic breakeven prices and protecting against losses should prices plummet. Our current clients – including ranchers, cattle feeders and grain farmers – use a wide variety of strategies to manage market risk for their businesses.

S tart now and do your homework long before you bid. First, carefully and honestly calculate the feeding expenses, being sure to include everything from the trucking bill to cost of medicating sick animals. If you plan to feed at a commercial yard, call and check prices and performance information, suggests Mr. Klute, who also co-owns Phelps County Feeders in Holdrege, Nebraska. Find out the average per-head costs for expenses such as processing and medicine over a significant time period, maybe the past three years. Be sure to request figures for the type of cattle you plan to purchase. (Calves cost more in total yardage than yearlings; cattle from some geographic areas may have higher health costs.)

The feedyard also should be able to provide cattle performance information such as average costs of gain and conversion rates – again over a significant time period and for the type and weight of cattle you plan to purchase. Also ask about their yardage and projected ration costs through the feeding period.

If you’ll be feeding cattle at home, you need the same types of information. And remember that just because you raise part of the feed doesn’t make it free, notes Ms. Yocam, whose ag background includes farming, ranching and cattle feeding. To be accurate you must include the fair market value in your cost projection. A full-service commodity broker can tell you the futures prices for grains, and your local elevator can tell you what area contract prices are.

Also be sure to include the cost of your labor and the use of your facility and equipment – your own version of the feedyard’s yardage cost. If you’ve fed cattle in the past and kept good records of the annual cost of running your equipment and maintaining your facility, you just need to estimate the percentage of that work that was related to feeding cattle and charge it out accordingly.

Realistically project the cost of borrowing the money to finance your venture. Will your bank back you or will the feedyard participate in financing cattle, feed or both? If you buy calves, will your lender give you the flexibility to choose whether to warm up the cattle and sell them as feeders or finish them to slaughter weight, depending on the market? Pay attention to the prices being paid for cattle in your local market and run the numbers along with your calculated expenses to provide some sample breakevens. This will tell you the price you must receive for the different weights and qualities of cattle to cover the projected expenses.

Armed with your expense calculations and cost estimates, contact a commodity broker knowledgeable about the cattle market and find out futures prices for the time period when you anticipate selling your cattle. Is the cash market projected to be at a level that will allow you to break even or make a profit? Is there an opportunity to hedge at a level that meets or exceeds your projected breakeven?

If you haven’t already done so, learn how the futures and options markets work to provide price protection. Most commodity offices have a variety of free informational publications to help you learn the basics, and most full-service brokers are willing to answer questions if you call them in the afternoons after trading hours. Plus abundant information is available on the Internet.

Use this market and hedging information, along with your cost estimates, to determine the maximum price you can pay for your feeder cattle and reasonably expect a positive outcome. The final, and most important, piece of advice – when the bidding starts stick to your price range. Don’t get caught up in the heat of the moment and buy cattle that your calculations showhave little or no chance of turning a profit.

“If the prices are too high to give you a chance of making money,” suggests Ms. Yocam, “maybe you better just sit on your hands.”