You learn more from losing money than making money. We sold 205 heavy feeder steers last week in Bowling Green, MO. On the way home, Dad and I grasped at straws talking about why the cattle lost money.
We spent a good hour trying to talk that pen of cattle into a profit:
-Maybe our cost of gain was cheaper than we calculated.
-At least we got all of that great manure! That adds more bushels than we realize.
-It was a way we could spread our equipment cost. You know we use that feeding tractor to plant corn and bale hay.
-Feeding those cattle was a way to market our grain.
-Well, we could have lost a lot more money if we didn’t hedge futures back in October.
He said, “Maria, you are justifying the loss. I’ve been doing that for 50 years.” He was right; farmers have justified losses on the farm for generations.
Here’s what happened
We bought 470 pound steers in October. I simultaneously hedged an equivalent weight in April 2016 feeder cattle futures. Our goal was to put on about 2.5 pounds of gain per day and sell the cattle as heavy feeders this April.
I sold futures at an average of $1.75, which locked in just under $100 profit per head. Sounds like a good deal, right? In late March, April feeder futures were $1.65 but inching higher enough that we had a margin call. Instead of sending margin money, we decided to lift the hedge and collect our profits. What could go wrong? We would collect what we made in the hedging account, and watch the markets go higher and ultimately sell the cash cattle for more.
Here’s what went wrong: April feeder futures were $1.56 the day of the cattle auction. If we would have held our hedge like we preach, we would have collected nine cents more in the hedging account.
As dad drove home, I looked at the numbers in detail. Taking into consideration purchase price, trucking, cost of gain, selling price, auction fees, and hedging income, we lost $20 per head on that pen of cattle.
Lifting that hedge three weeks before the cash sale sent us from the black into the red. The market worked the wrong way, leaving us feeling deflated and grasping at straws.
Dad initially said maybe we are feeding the wrong type or color of cattle. Maybe we are feeding too much corn and the cattle are getting too fat, thus resulting in a cheaper price per pound for a heavy feeder. Perhaps we are feeding too much corn, but the fact is that we would have been in the black if we would have held the hedge until the cash sale.
Six months of work to lose $20 per head? We can justify it any way we want, but the fact is that we made a hedging mistake. It sounds similar to a farmer planting corn this year who has paid too much for land. How much longer can we justify losses before we change our business model?
The opinions of the author are not necessarily those of Farm Futures or Penton Agriculture.