Manage Backgrounding Risk

Higher calf prices and feed price risk create narrow margins for backgrounders.

Published on: Mar 24, 2010

The cost of a calf, the price of the feed and the potential for cattle prices to trend down after May pressure on backgrounders to closely manage their cost of gain, says University of Kentucky Extension Livestock Specialist Kenneth Burdine.

Backgrounders should constantly look for opportunities in the market to place calves on an expected gross margin that will lead to profits, given feed prices and expected cattle performance.

Just as producers look for opportunities to place calves at attractive times, they should also look for opportunities to manage risk. If feed prices appear favorable, they should consider booking at least a portion of their feed needs. Burdine says producers can manage price risk on feeders by using forward contracts, commodity futures and options or through relatively new Livestock Risk Protection Insurance.

Backgrounding is a margin business, Burdine says, and it's important to constantly manage those margins to ensure profits.

Since the first of the year, prices for stocker cattle have increased, almost on a weekly basis. Summer feeder cattle futures have been increasing as well. For backgrounders, it is this potential buy-sell margin that should drive decisions, Burdine said.

"Even with prices changing recently, gross margin for adding 300 pounds has been hovering around $250 per head," he said.

Gross margin is the difference between the expected value of a feeder when sold in the future and the current value of a stocker or light feeder now. From this gross margin, cattle producers must cover feed, medical expenses, minerals, labor, interest, death loss and any other expenses they incurred during backgrounding.

"For example, recently 5wt feeder steers averaged about $1.11 per pound on a state average basis. That would put placement value around $610 for a 550-pound feeder steer. At the same time, the August feeder cattle futures contract was trading around $109 per cwt," he said. "While many factors can affect this, I would expect August basis to be around $8 or $9 less for groups of 8wt feeder steers. Using this as a price expectation, we would expect to sell 850-pound feeders in August for about $100 per cwt. We estimate our gross margin by subtracting the cost of the stocker ($610), from the expected value of the 8wt this summer ($850). This would put our expected gross margin around $240 for cattle placed now to be sold in August."