With recent cattle markets causing turmoil and creating significant losses in the feedlot, many producers are looking for answers. The feedlot industry carries significant open market risk as a large share of the cattle on feed remain unhedged. Current finished open market cattle losses in the feedlot according to www.cattlekrush.com as of December 6th are at a $517/ loss per head. Sterling Profit tracker for the week of November 28th is showing a $562 / loss per head.
As I talk to feedlot producers, I am always impressed on how well producers have done on improving the feedlot performance on daily gain and efficiency. These improvements have been the industry's outcome on focusing on cattle genetics and management for optimal performance, but are we overlooking profit performance?
Cattle Performance vs Profit Performance?
In an article written by Lee Schulz, “How Often Can Cattle Feeders Hedge a Profit with Futures?” He notes “Cattle feedlots face significant market risk during each feeding period. 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. (Lawrence, Wang, and Loy 1999)” These statistics prove that the time spent in the office managing financial risk are just as important as feeding cattle in the morning.
Take your feedlot from cattle management to business management
Volatile commodity markets are costly for many as it can be easy to end up on the losing side of the equation if risk management is not taken seriously. For many Cattlemen, risk management can be challenging. It can be exhausting to ingest all of the “emotional” market reports on what supposedly is causing the drastic change in the market and the speculative decisions that start to fill your head.
Regardless of the market reports, it is important to keep your business management consistent. A few key recommendations on business tactics are outlined below:
Data & performance recording: By managing your data on a real time processing system it allows you to analyze your data to find areas to where you can be more efficient. This also gives you realtime information to the cattle performance numbers and your breakeven to be able to strike when the market allows a profit.
Finding Profits in the Data
Use technology tools, and stick to the fundamentals: It can be easy to get engulfed in commodity updates on what is moving the market which can create an emotional bias on your decision. As a cattle producer, you should always be tracking “profit opportunities” and adhere to marketing fundamentals. Set profit goals and “pull the trigger” when the market allows it. Many producers are already taking advantage of, www.CattleKrush.com to better manage their profit decisions. Cattle Krush is an automated real time web service that gives you automated calculations on profit opportunities based on the live CBOT movement. The tool automatically calculates profit opportunities of each feeder market and exposes these profits at 600, 700, and 800lb feeder calves. Cattle Krush tracks profit opportunities on your current lots of cattle but also future Krush profit opportunities as soon as the contract month opens on the board. This allows you to optimize profits up to eight months prior to even putting the cattle in the lots.
Cattle Krush exposes actionable data that producers and financial advisors can utilize in their everyday decisions. This chart is one example of the insights. Making profitable decisions can not be made by simply watching how the markets change from day to day. By taking tracking each market individually, producers will not understand the profit opportunity. Cattle Krush combines the Feeder, Live, and Corn future prices and delivers a profit opportunity for any placement date. The yellow line represents Corn prices, blue represents Live prices, green represents Feeder prices, and the red shades represent the Krush profit opportunity for placing cattle on that date.