Livestock producers who purchase feeder cattle or weaned pigs as well as feed and then sell finished animals at a specific point in time take on a significant amount of both input and output price risk. Feeder cattle, weaned pig and feed prices account for a significant share of the total input cost and, along with market livestock prices, are volatile, adding to a producer’s risk.
The crush margin, a term borrowed from the soybean processing industry, describes the margin that can be hedged using futures contract prices for soybeans, soybean meal and soybean oil. A crush margin can also be calculated for cattle and hogs and can be used as a risk management tool. For fed cattle, the margin is the live cattle value minus the feeder cattle value and the estimated value of corn fed. For market hogs, the margin is the lean hog value minus the weaned pig value and the estimated value of corn and soybean meal fed.
For several years, Iowa State University Livestock Extension economist Lee Schulz has been tracking the crush margins for cattle and hogs and posting them online. The margin is calculated every Wednesday using the futures closing prices on that date. The webpage will continue to have historical margins in addition to comparing placement month margins, but Iowa State University Extension now has also launched a new app, called the ISU Livestock Crush Margin App, to aid producers in calculating margins.
The app will allow users to select cattle or hogs and pick their placement date for feeder cattle or weaned pigs. It will use the appropriate futures contract closing price from the previous day to calculate the margin without any additional inputs. The historical basis information Schulz has compiled is programmed to be used in the app. Users also can enter their own prices or basis for the inputs if they wish to override the defaults.
Extension livestock specialist Russ Euken said the app was designed to minimize inputs yet still provide some flexibility for users.
“The app is a web-based app, and internet access is needed to use the app to access CME futures price," he said. "The app will run in a browser on your computer, or the app can be saved on a smartphone for access by selecting the icon from the screen.”
The app was developed as part of a North Central Region Risk Management Education grant for livestock price risk management education. Schulz said evaluating margins and taking advantage of profitable opportunities can be a valuable asset to producers in managing risk.
“Using futures prices to evaluate and manage the crush margin between revenue and the major input costs, which change with market conditions, is a good price risk management strategy," he said.
The assumptions used in calculating the margins and basis information are available as links on the crush margin app webpage. The new app can be found on the websites of the Iowa Beef Center, Iowa Pork Industry Center and Iowa State University Extension Economic crush margin as listed.