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What's a livestock feeder to do?

Agriculture.com Staff 12/28/2006 @ 2:29pm

It's been repeated over and over -- if the expansion in ethanol continues as planned, the livestock feeder will be the one that suffers the most.

Profit margins will shrink (or evaporate totally) as more and more high priced corn is fed. Plus the supply/demand situation may get tight enough in coming years to cause rationing. Who will blink first -- the feeder, the ethanol plant or the foreign buyer?

Feed rationing is possible from all sectors of the livestock industry. The sector in the most difficult shape -- chicken -- has already cut back. Egg sets, chicks placed and finished weights have all declined, due to both low chicken prices and high corn prices. The life cycle in this industry is so short that high feed prices were felt immediately.

Cattle feeders have an easier time of deciding what to do. Amazingly, the answer may be the opposite of a poultry producer -- keep feeding cattle! If cattle feeders can manage the risk, the market is telling everyone to keep feeding cattle. The gross margin on cattle feeding (live cattle minus feeders minus corn) is as much as $40 per head above the historical averages.

The new insurance product, LGM for Cattle, has these three components bundled as one product. Other forms of risk protection are available as well -- futures, call options on corn, put options on fed cattle, etc.

The economics in the livestock markets will have to change to cause a change in behavior. When will livestock feeders get pinched?

The risk of loss in trading commodities can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial situation.

It's been repeated over and over -- if the expansion in ethanol continues as planned, the livestock feeder will be the one that suffers the most.

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