All involved in the livestock industry have seen tremendous volatility in production costs over the past few years. This volatility can be tied in part to the feed grain and oilseed markets. With feed being the major component of production costs for livestock producers, the recent wide price swings in soybeans and soybean meal have greatly increased business risks for many operations.
FEED BUYING STRATEGIES
Most operations can choose among three strategies for feed buying and inventory management:
1. Buy as needed
2. Buy and store
3. Buy futures contracts
1. Buying as Needed does spread an operation’s price risk through the season. However, it does not allow a business to take full advantage of periods of low feed prices. The key advantage of this approach is that it is easy to manage and requires a minimum of storage and handling facilities.
The main disadvantage of this strategy is the risk that a business will face periods of high feed costs. In periods of rising grain prices, average feed costs will be higher under this strategy as opposed to operations with available bulk feed storage.
2. Buying and Storing feed when prices are low can reduce average costs over time. Owning feed inventory in storage gives an operation more control over costs. It will be easier to keep costs and returns within annual budgets.
The main disadvantage is the investment cost in storage facilities and the need to manage these facilities. An additional storage cost could include the interest that accrues on large feed purchases.
3. Buying Futures Contracts. Typically, soybean meal prices are at their lowest levels in September and October. As an example, a producer could buy a soybean meal futures contract at these seasonally low prices and sell the futures contract when and if prices move higher. There are a number of soybean meal futures contracts traded and a producer could select an expiring futures contract that closely matches the timeframe in which actual cash feed purchases are made. Any profits made from this futures hedge position could be used to offset higher feed costs. This strategy could be a good fit for operations without storage facilities or limited storage.
One disadvantage of hedging purchases could be the difficulty of matching the number of futures contracts needed with the equivalent cash (actual) feed purchases. A soybean meal futures contract consists of 100 tons. For some operations these standard futures contract sizes may not match well with actual feed purchases. Also, for futures hedging purposes it may be necessary to establish a credit line to cover initial and possibly additional margin requirements.
Lastly, to hedge feed purchases some producers may need additional marketing skills and knowledge of futures markets.
Soybean/Meal Market Outlook
On February 9, the USDA made no changes to the U.S. soybean supply and demand projections. Soybean projected 2010/11 ending stocks remain at 140 million bushels. The current 2010/11 ending stocks estimate is 11 million bushels lower than the 2009/10 estimate of 151 million.
As for soybean meal, prices climbed in January to a 16 month high of $369 per short ton. The strong price level is indicative of a tight supply situation. Livestock feeders are being encouraged to substitute more whole cottonseed, cottonseed meal and other protein feeds this year due to their larger than usual price discounts relative to soybean meal. The USDA currently projects that 2010/11 meal ending stocks will decline slightly from 2009-10 to 300,000 tons. Meal prices are projected to increase over last year with cash prices expected to range from $340 to $380 per ton. The mid-point of this range ($360 per ton) is $49 higher than the 2009/10 average price of $311 per ton.
Soybean supplies remain tight and continue to support historically high soybean prices. For example, in January the average price paid for soybeans by central Illinois processors was at a 30 month high of $13.78 per bushel. The rise in soybean prices is needed not only to ration current demand but also (given the rally in corn prices) to maintain planting incentives this spring for the 2011 crop. At the present time the projected soybean/corn price ratio favors increased corn production. Additional gains in soybean prices may be needed to encourage producers to expand acreage this year.
Scott Stiles has worked for the University of Arkansas Cooperative Extension Service for over 11 years. Joining the Extension Service in 1999 as a Risk Management Specialist.
