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Department of Agricultural Economics 400 Charles E. Barnhart Building Lexington, KY 40546-0276

+1 (859) 257-5762

ageconomics@uky.edu

Using Futures Markets to Manage Price Risk for Feeder Cattle

Using Futures Markets to Manage Price Risk for Feeder Cattle

Using Futures Markets to Manage Price Risk for Feeder Cattle

Price volatility in feeder cattle markets has greatly increased since 2007.  While there are many reasons for the increase in price volatility, some of the more common factors include volatility in grain and fed cattle prices, variability in weather, and an increased dependence on exports.  Price risk is becoming another factor that cattle producers must learn to manage, just like they would anything else in their operation.  Along with this volatility is an increase in producer interest in learning more about strategies to manage price risk for feeder cattle.  

2012 was the type of year that price risk management would have saved feeder cattle producers a great deal of money.  The August 2012 CME© Feeder Cattle Futures contract opened in the upper $130’s, but pushed above $160 in the early spring.  Then it actually came back to near $160 twice in the early summer, providing producers multiple opportunities to capitalize.  Around the second week of June, as worsening corn yield prospects drove corn prices higher, feeder cattle futures plummeted back into the $130’s.    

Many producers purchased calves in the spring of 2012, based on strong summer and fall feeder cattle price expectations.  These expectations made those calf purchases very expensive.  As feeder cattle futures fell by more than $20 per cwt ($160 on an 800# feeder steer2), so did profitability expectations of those backgrounders and stocker operators planning to sell feeder cattle in the fall.  Some took futures positions to protect themselves from this downside price risk, but many did not.  The purpose of this publication is to introduce cattle producers to the futures market as a risk management tool and provide an illustration of how hedging with this tool could provide them with downside price risk protection. 


Author(s) Contact Information: 

Kenny Burdine | kburdine@uky.edu


Livestock

Related Information

Contact Information

Department of Agricultural Economics 400 Charles E. Barnhart Building Lexington, KY 40546-0276

+1 (859) 257-5762

ageconomics@uky.edu