Three Cardinal Rules To Profitable Cattle Feeding
Cattle-Fax's Duane Lenz says three factors have proven to be useful in planning market strategies, market aggressiveness, and forecasting price trends and patterns:
Are, the fed cattle currently moving out of feedlots selling at a profit or loss?
Will cattle being purchased and placed on feed breakeven at or below the price that fed cattle are current-selling for on the open market?
Is the relationship between cash and futures normal? Or, is the futures market premium to the cash market or higher relative to cash than normal?
It's not uncommon that one, and sometimes even two, of these factors are negative (compared to normal).
"This suggests we must monitor the situation very closely, as it could lead to a major currentness and carry-over problem," Lenz explains.
During the past 25 years, in each instance when all three of these factors were negative (sending the wrong message to producers), the end result in the market was the same.
Large, front-end number.
Major feeding losses in dollar terms.
Increasing fed-cattle weights.
Increased days on feed.
Large carryover problems.
Lenz says this occurred in 1974, 1985, 1991, 1994, 1998 and 2001. In other years when at least two of these factors occurred, the result was similar but the time period affected was shortened significantly.
Watching The Markets
Much can be gleaned from watching the major market factors, They can give an excellent read on the overall market psychology. They can also help determine how aggressive one wants to be in a cash market when buying feeders or selling feds.
"Just as important, if all these factors are negative, it suggests extreme caution in planning cash market purchases and an aggressive posture to risk-management programs," Lenz says.
If you're selling feeder cattle or calves, these same principles apply.
For example, September 1993 through April 1994 was a great time period to aggressively sell cash inventory. That's because all these factors told us what was inevitable for the summer of 1994.
"If you're a professional cattle feeder building a disciplined approach to managing risk, these principles could be applied," Lenz concludes. "There will be times when you miss purchasing cattle for a profitable turn in the feedlot, because two out of three of the factors were negative."
However, if you use an approach like this when all three factors are negative, you won't be burned in years when major feeding losses are suffered, like 1994 and 1998.
source: BEEF Magazine, pg 10BF Beef Feeder, April 2004.
posted by Dr. Harlan Hughes 1:16 PM