Source: Iowa Pork Industry Center
Livestock producers who purchase weaned pigs or feeder cattle plus the feed, and then sell finished animals at a specific point in time, take on a significant amount of both input and output price risk. Weaned pig, feeder cattle 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 hogs and cattle and can be used as a risk management tool. For market hogs, the margin is lean hog value minus weaned pig value and estimated corn and soybean meal fed value. For fed cattle, the margin is live cattle value minus feeder cattle value and estimated corn fed value.
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 close on that date. The web page will continue and have historical margins in addition to comparing placement month margins.
This new ISU Livestock Crush Margin App is in addition to the ISU Livestock Crush Margin website and allows users to select hogs or cattle and pick their placement date for weaned pigs or feeder cattle. It will use the appropriate futures contract close price from the previous day to calculate the margin without any additional inputs. 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.
ISU Extension livestock specialist Russ Euken says 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 says. “The app will run in a browser on your computer or the app can be saved on a smart phone 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 says evaluating margins and taking advantages 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 says.
The assumptions used in calculating the margins and basis information are available as links on the crush margin app web page. You can find the new app on the websites of the Iowa Pork Industry Center, Iowa Beef Center and Iowa State University Extension Economic crush margin as listed.