We like to consider the forward margin opportunity from this perspective because it is often here that we can get a head start on securing profitability for the feedlot prior to even going to auction.
As an example, let’s consider the forward profit margin opportunity currently being projected for the April fat cattle marketing period.
If we assume seven-weight feeder cattle on a six-month feeding cycle that will be finished to a market weight of roughly 1,250 pounds, the futures market can be used to project forward costs and revenue for this spring marketing period.
Feeder cattle priced off of September and October futures that will be consuming corn priced against the December and March futures contracts will ultimately finish cattle at a market weight that will be valued against the April live cattle futures price.
Fixed costs for our yard will have to be estimated along with basis values for the feeders, corn and live cattle to translate futures prices to local values in our cash market.
In addition, other factors will need to be considered, such as yardage, feed conversions, death loss and any other variables that will impact forward profitability; however, once that model is built, we effectively have a fairly accurate projection of our profit margin for this spring marketing period.
Looking at such a model in very simplistic terms, where 55 bushels of corn will be needed to convert a 700-pound feeder to a 1,250-pound fat market weight, and a total of $250 per head is assumed for other feed and non-feed expenses.
The forward profit margin projection for the April marketing period is a positive $3.19 per hundredweight (cwt), which represents the 92nd percentile of the previous 10 years (see figure).
Click here or on the image at right to view it at full size in a new window.
This profit margin projection implies that 92 percent of the time, the actual margin in the April marketing period has been lower than $3.19 per cwt if we assume these same fixed costs and feed conversion over the past 10 years of price history, while 8 percent of the time, the profit margin has been higher than $3.19 per cwt.
From a risk management perspective, this is an attractive margin to protect, as it is relatively strong in a historical context.
A feedyard could execute a hedge in the futures market where feeder cattle and corn futures are purchased and live cattle simultaneously sold to “lock in” this profit margin projection.
Alternatively, option contracts could be used whereby flexibility is incorporated into some or all of the three legs of the profit margin matrix.
This would allow for potential profit margin improvement should either input costs decrease or revenue value based upon live cattle futures increase.
Regardless of the strategy employed, projecting forward profit margins even before feeders are purchased at auction can be a powerful tool to get a head start on securing strong profitability for your yard. 
Chip Whalen is a senior risk manager and director of education for Commodity & Ingredient Hedging based in Chicago, Illinois.
How to read the futures calculation
The beef margin calculation uses feeder cattle futures to price inbound animals and assumes each will consume 55 bushels of corn and cost approximately $250 per head (for other feed and non-feed expenses) to gain 550 pounds and reach a market weight of 1,250 pounds.
The figure depicts the projected forward profit margin in dollars per cwt, reflecting the last-observed value as well as the high and low for that particular marketing period since it first began to be tracked.
The 10-year percentile represents where the last-observed value ranks within a historical context for that particular marketing period, assuming the aforementioned variables were applied to past futures price history for that marketing period in the previous 10 years.
