For years, cattle feeders have relied on the “cattle crush spread” as a hedging strategy. This involves buying feeder cattle and corn while selling fat cattle. The idea has been to manage costs and stabilize returns. However, today’s markets are more volatile and unpredictable than ever, making this traditional “one-size-fits-all” approach less effective for achieving consistent results.
Instead, by breaking the cattle crush spread into its individual components and managing each one separately, feeders can respond to market conditions more precisely. While this method offers flexibility, it doesn’t eliminate risks, and outcomes can vary, as all strategies depend on market conditions.
What is the traditional cattle crush spread?
The cattle crush spread simplifies the cattle feeding business into three parts: feeder cattle (input), corn (input) and fat cattle (output). The strategy involves simultaneously buying feeder cattle and corn (to feed them) while selling fat cattle (the final product). This hedging approach aims to offset risks by evening out costs and income.
But, each part of the crush spread reacts to different market forces. For example:
- Corn prices might rise due to bad weather or global supply chain disruptions.
- Feeder cattle prices might fall if there is an oversupply in the market.
- Fat cattle prices might remain stable or decline, depending on consumer demand and slaughter capacity.
When you hold the entire crush spread as a single position, you risk being stuck in a one-size-fits-all strategy that doesn’t allow for adjustments to individual components.
Why consider a component-based approach?
Breaking the spread into parts allows feeders to manage each component separately and make decisions based on current market conditions. For example:
- If corn prices suddenly spike, you might choose to wait before locking in prices until they stabilize.
- If feeder cattle prices drop significantly while fat cattle prices remain high, you might decide to buy feeders now and hold off on forward-selling fats until the market aligns more favorably.
This flexibility can help you make informed choices instead of relying on averages across the entire spread. However, it’s important to note that separating the spread doesn’t eliminate risks – it simply changes how they’re managed. Delaying a purchase or sale can still expose you to price reversals or missed opportunities.
Moving past the ‘law of averages’
Many cattle feeders rely on the “law of averages,” hoping that good years will offset bad years. A component-based approach allows for a more active way to manage outcomes. Instead of waiting for markets to recover or normalize, you can adapt to changing conditions.
However, this strategy does not ensure smooth or favorable results. Cattle markets are highly volatile, and even with careful planning, unexpected events can significantly impact decisions. Managing each component separately might help mitigate some extreme swings, but uncertainty remains.
A strategy without constant trading
This approach isn’t about making frequent trades or reacting to every price move. It’s about developing a disciplined process to evaluate each component of the crush spread individually. Adjustments are made only when necessary and based on sound analysis.
For example, you might decide to lock in corn prices after a harvest glut or forward-sell fat cattle when demand spikes. The goal isn’t to outguess the market but to respond to specific risks and opportunities as they arise. Still, this approach doesn’t eliminate the inherent risks of market volatility or guarantee consistent outcomes.
Final thoughts: A balanced approach to feedyard management
Feedyard operations have always been challenging, and today’s unpredictable markets make it even harder to achieve reliable results. By managing the components of the cattle crush separately, you can take a more active role in navigating market risks.
That said, this strategy does not eliminate uncertainty. It requires careful monitoring, disciplined decision-making and an understanding of the risks involved. By focusing on flexibility and thoughtful management, you may be able to better control your operation’s outcomes while avoiding some of the extreme highs and lows common in agriculture.
In the end, the goal is to approach feedyard management with clarity and control – not to gamble on markets or rely on luck.
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