Profitability in the cattle feeding industry is extremely simple; buy cheap, sell high.  But implementing that strategy is anything but simple.  Now, the Iowa Beef Center is providing an on-line tool to help make it easier to manage the margin between purchase and selling price.  It is called the “crush margin” Margin Maker.

What is the “crush margin?”  In its simplest form, it is the value of the fed steer less the cost of the feeder steer and corn.  Since the cost of the feeder calf and the cost of corn are the two biggest input costs involved in feeding cattle, if you can manage the price risk related to those two you also manage the risk in the fed cattle.

The term crush originated in the soybean sector where futures on oil, meal, and soybeans are used to manage the margin derived from crushing the beans into components. Similarly, prices for fed cattle, feeder cattle, and corn can be managed to protect a margin for a feedlot operator.

The margin is the remaining revenue used to pay all other costs and, hopefully, return a profit.  It is tied to the futures market, which can be used to manage the price risk for several months before the cattle are sold. The crush margin calculation can serve as a quick indicator of risk management opportunities or pitfalls and help feedlot operators monitor the cattle and corn market for current and future marketings.

Specifically, the crush margin factors in the fed cattle futures that expire in a certain month adjusted for the basis for that month, the feeder steer price five months prior to slaughter, and the corn futures price at placement adjusted by the North Central Iowa Basis.  This all assume you are purchasing a 750 pound feeder steer that will sell at 1250 pounds and will consume 50 bushels of corn in the process.

If you would like to calculate your own crush margin, you can find the full formula on the ISU web page at www.econ.iastate.edu/margins/YFcrushDefinition.pdf

However, it is much easier to let the on-line calculator do the calculations for you.  It can be found at http://www.econ.iastate.edu/margins/cattlecrush.htm

The crush margin isn’t a guarantee for profit, but it is a simple indicator of potential returns.   Then you need to know where your individual costs of production differ from the assumptions in the calculator.  Regardless, the crush margin can act as an indicator of hedging opportunities by alerting the producer when futures prices are in the desired range.

For more information about managing the risk involved in feeding cattle, see the Iowa Beef Center at www.iowabeefcenter.org.