October 5, 2007

 

US cattle feeders encouraged to lock in feed needs due to volatility

 

 

Cattle feeders should consider locking in a larger percentage of their expected feed needs during the autumn harvest due to the unprecedented volatility in the US corn market, extension economists and market analysts say

 

Ron Plain, agricultural economist at the University of Missouri, said he is encouraging cattle feeders to buy corn at harvest because the growing ethanol industry has changed the face of livestock feeding.

 

"We have far, far more volatility (in current markets), and there are huge amounts of risk out there," Plain said.

 

Cash prices often hit their lowest point of the year during harvest, when supplies are greatest, but cattle feedlots traditionally lock in only a small percentage of their expected needs, market analysts and traders said.

 

Chris Reinhardt, extension feedlot specialist at Kansas State University, said the theory behind locking in only a small portion of feed needs was to remain in the market at all times, riding out any market volatility.

 

Other traders and analysts said custom feedyards typically passed on grain costs to their customers. Feedyard managers want to provide the best possible service to their customers, and part of this means avoiding being caught with high-priced, contracted feed when a competing lot, without locked-in feed costs, could take advantage of lower spot prices.

 

The way to avoid being caught with the highest priced feed costs among competing feed yards is to eschew contracts, they said. Feed costs rise and fall, but so did everyone else's. It does not matter that over the long haul feed costs could be reduced for a feeding customer, one misstep could spell economic disaster for the feedlot.

 

Currently, however, many (feedlots) do lock in a portion of their feed costs with three- to six-month contracts, Reinhardt said. The amount varies, but many will price 25 percent to 75 percent of their expected feed needs with such contracts, he said.

 

Plain recommended that cattle feeders be very careful about dealing with the futures or options markets because cash-market volatility is amplified in the futures and options market.

 

Steve Amosson, Panhandle area Agricultural Economist for Texas A&M University, said the fall harvest low typically comes in mid-October, although this year it may have come in mid-September. But even if the actual low is past, current corn prices are close enough to that low that feeders could be looking at locking in a portion of their expected feed needs. December corn futures at the Chicago Board of Trade Thursday closed at US$3.42 1/4.

 

Amosson said he expects price fluctuations between corn, soy and wheat to buy back some of the acreage that was planted to corn this year when planters roll in the spring. He suggested corn acreage next year could be around 90 million acres versus 93 million this year.

 

At the same time, ethanol demand is expected to continue growing, and exports are up because of poor crops in other countries.

 

That makes for a volatile market, Amosson said.

 

In a departure from tradition, some feeders already have increased their fall corn purchases, Amosson said. He and others expected the practice to continue.