How Often Can Cattle Feeders Hedge a Profit with Futures?
Cattle feedlots face significant market risk during each feeding period. Research on Midwest feedlots has indicated that 74 percent of the variation in cattle feeding returns is due to changes in the prices of fed cattle, feeder cattle, and corn, while 10 percent of the profit variation is due to production risk from average daily gain and feed efficiency (Lawrence, Wang, Loy, 1999).
Live cattle futures offer a method to reduce price risk by hedging a selling price at or above the cattle’s cost of production. This analysis was meant to discover how often it is possible to hedge a profit. Twenty years of data from 1990-2009 were 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 raising fed cattle. The analysis by Dr. John Lawrence can be found at the Ag Decision Maker site.