Cattle futures set an all-time high this week, as tight supplies and strong export demand continues to push the fed market higher. Fed cattle traded solidly at $1.14/lb. (some cattle traded as high as $1.18 in Kansas), taking out the previous record set in 2003. On Wednesday, the April contract hit nearly $1.18/lb., the highest a nearby contract has ever traded. December fed moved over $1.22.

Besides the smallest cowherd in over 50 years, we continue to see demand buoyed up by an export market that’s increased 19% in 2010 and is expected to continue to be price supportive this year. As a result, boxed beef has also hit record prices, trading at $1.76/lb.

All this is really good news for the cow-calf producer; the feeding industry not so much. Cattle feeders had gone through an extended period of losses as overcapacity and tight supplies combined to force feeders into buying losses the last several years. The last several months have helped heal some of those wounds with some pretty significant profits.

While the short-term outlook is pretty good, cattle being placed today are difficult to pencil out. Both the cow-calf and feedlot sectors can verify that feed costs have been rising at a rate that even surpasses cattle prices. Corn prices have nearly doubled, and $7 corn equates to a cost of gain well north of $1/lb. With feeder cattle costs rising, a profit on many of these cattle is questionable, even at the record $1.20/lb. price or higher that people are anticipating.

The concern about today’s market, however, isn’t as much about the price of feeders or corn, which were largely anticipated. The concerns are about the risk and the need for demand to remain strong in the face of soaring energy costs that could hurt the overall economy.

Psychologically it’s hard to adjust to these price levels. The scope and speed of the price increases for corn and cattle are largely unprecedented. Plus, there are significantly more dollars tied up and at risk because of these new price levels. The fact that most people are realistically looking at the potential to make as much as they ever have, or lose as much as they ever have, on a per-head basis, makes it easy to understand why the market today could be described as equal doses of nervous optimism and healthy skepticism. Any experienced sailor will get nervous when sailing in uncharted waters.

Feeders are making upwards of $200/head on closeouts currently. Over the next several years, however, the leverage will be with the cow-calf producer, while the feeder and packer largely will face very tight and negative margins most of that time.

Many people are asking how high corn could go if we were to get into a serious short-crop scenario. The answer to that is that the situation would be significant enough that government would be forced to try to prevent the ramifications from being too severe.

If you need any assurance that the price risk on the corn side is real, all you have to do is listen to policy discussions. But nobody wants to talk about it; they are all just praying for another bumper crop.