Sort & Cull

Sometimes risk managers have to think out of the box. Sometimes conventional strategies of speculation amount to the safest game in town.

The fall of 2014 may be such a time for cattle feeders as they face a disturbingly wide and widening spread between nearby live futures and the rising tide of feedlot breakevens over the next several months.

Specifically, spot October closed this week $3 to $4 under cash sales. At the same time, breakevens on fed cattle started to aggressively climb higher. According to the DTN feeding model, breakevens are now set to explode more than $20 by the end of the year.

As it turns out, that's about the same amount December live futures need to rally for late-year fed marketings just to keep investment nest eggs in one piece.

By the way, projected breakevens continue to rise even as we turn pale. If you need to affix blame for such runaway bullishness, points to excellent feedlot profits to-date, sinking feed costs, and extremely tight feeder cattle supplies.

Yet if you're determined to play the cattle feeding game, options are limited. But perhaps "Texas hedging" is one you might want to kick around.

For those of you who want to pretend ignorance, Texas hedging is a wild west strategy employed by commercials, "requiring" them to be long both physical commodity AND futures. As far as I can tell, there are two kinds of Texas hedgers: 1) Those who admit it; and 2) Those that don't.

Yet even riverboat gamblers have an appreciation of odds. Owning the board at current price levels may be a sensible way for commercials to effectively lower late-year breakevens.

Here's another way of thinking about it. The most economical feeder you can buy now comes in the form of a live cattle contract. It's the difference between embracing a breakeven of $158.70 (i.e., Friday's settlement basis December live) versus one of $175 plus (i.e., the implications of feeder cattle plucked out of the red hot sale barn).

Granted, it may take an aggressive Power-Point presentation to get your banker on board with this strategy. But something tells me if you've already successfully sailed $230 8-weight steers by him, you're a pretty good talker to begin with.

For more from John see www.feelofthemarket.com

(CZ)

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