An evaluation of changing profit risks in Kansas cattle feeding operations

Abstract

Cattle feeders face significant profit risk when placing cattle on feed. Risks arise from both financial and biological sources. To date, few standardized measures exist to measure current risks against historic levels, or to obtain forward looking risk estimates. Those that do exist could benefit from updates and inclusion of additional risk elements. This study measures the risk of expected profits when cattle are placed on feed. This study creates a forward-looking estimate of expected feedlot profits using futures and options market data as price forecasts. Joint probability distributions are created for prices and cattle performance variables affecting feedlot profit margins. Monte Carlo simulation techniques are then employed to generate probability distributions of expected feedlot profits. Results show cattle feeding is a risky business and cattle feeders have been placing cattle on feed facing significantly negative expected returns since June, 2010. This assessment of negative expected profits is consistent with other findings. Over the study’s 2002 to 2013 time frame, the relative risk to cattle feeding profits accounted for by feed costs has been increasing, while the relative risk levels from feeder cattle and fed cattle prices remain steady. Additionally, the probability of realized per-head profits greater than $100 has been decreasing since 2009 and the probability of realized per-head profits less than $-100 has been increasingly rapidly.