It's a marketing tool that can help protect cattle feeders from $1 higher corn prices in what's become one of the most volatile periods ever for cattle and corn markets.

“We must be prepared for a lot of volatility in cattle and corn prices,” says Derrell Peel, Oklahoma State University Extension livestock marketing economist in Stillwater, and a proponent of the “Crush” strategy. “We're going to be all over the board for the next three to five years.”

The Crush involves using live-cattle futures or options, feeder-cattle futures or options, corn futures or options and various combinations of all three. But such a realm of Chicago Mercantile Exchange (CME) and Chicago Board of Trade (CBOT) contract combinations to lock in a certain price for all three commodities can baffle even the savviest traders.

It's especially confusing for cattle feeders who don't use any kind of futures or options to protect prices, but depend on a steady cycle of feeding several pens a year to balance out. But with cash corn prices ranging from $3+/bu. in parts of the Corn Belt to $4+ in the Southern Plains, better market management may be needed to prevent a massive mistake.

A soybean-market tactic

The Crush term comes from soybeans, which are crushed to become meal and oil. Buying beans while selling meal and/or oil is the “Crush spread.” The cattle-feeding Crush involves selling, or being short, live cattle futures, and buying, or being long, feeder cattle and corn futures. You're buying the two components needed to produce and finish the slaughter-ready cattle that are sold.

When examining cattle and corn prices recently, the spread was a feasible tool for protecting cattle coming out of the feedyard this spring, Peel says. Using numbers on the CME and CBOT in early December, a small profit, or at least a breakeven, could be squeaked out with a Crush in place.

Peel figured in the purchase of about 100, 750-lb. heifers at a March 2007 futures price of $98/hundredweight (cwt.) The Crush also involved buying March corn at $3.90/bu. Figuring in a Southern Plains basis of +50¢, that put the feed price at $4.40. April live cattle futures were sold at $90/cwt.

If the cattle were fed a typical 160 days, the projected cost of gain was about 62¢/lb. The breakeven was $88 for the finished cattle. The $90 futures provided the cushion.

All that's on paper, of course, considering how winter weather can impact gain and overall performance. But the Crush numbers don't lie, considering the odds cattle in the yard could face questionable winter performance no matter what type of marketing plan is in place.

Variations of a Crush can replace the futures contracts with options, or protect the futures positions with options.

Buying a live-cattle put option to set a floor would accomplish the same goal as selling a live-cattle futures contract, minus the cost of the put premium. If live prices were down at slaughter time, protection would be in place. If prices increased, the upside would be open.

At the same time, the strategy could shift to buying call options on feeders and corn to accompany the futures. If either feeder or corn prices increased, the calls' increased value would offset losses from the futures contract.

As an example of using options in a Crush spread, a cattle feeder could buy an April $90 put for about $2/cwt., providing an $88 floor. A $98 March feeder-cattle call would cost about $2. A $3.90 corn call would cost about $6.

If either feeders or corn increase from those prices, the potential margin calls on the futures contracts would be offset by the increase in value of the call options.

Of course, with volatility in the market, corn prices could just as easily drop if: plans for the many projected ethanol plants don't come through, corn acres increase substantially or feeding numbers drop. The corn futures contract would cover that decrease.

In that case, having the ability to recover some of the expenditures on high-priced corn can be a plus.