Plains People Trading & Consulting

Submitted by:Predictive Market Director:

Ari H.

“The Jew that Knew”

Cattle feeding in 2026 will remain capital-intensive, margin-tight, and volatile. Capital-at-risk per head is ~$2,800–$2,850 at recent levels (vs. $1,500–$1,800 in 2016–2020), driven by high feeder costs, feed, and interest—so a single mispriced turn can materially impact cash flow. While rates may drift lower, farm borrowing costs will remain above long-run norms—providing only modest relief on operating and real-estate notes. At the same time, feeder supplies are tight, herd rebuilding is slow, and price volatility persists—meaning feeders must deliberately lock inputs, protect margins, and preserve liquidity.

This playbook gives you quarter-by-quarter actions, hedging examples, and cash-flow templates to navigate 2026.

Q1–Q4 Action Timeline & Checklists (2026)

Guiding idea: “Fix the costs you can; flex the ones you can’t.”

Q1 (Jan–Mar): Secure Inputs & Floor Revenues

1. Finance & Liquidity
   • Convert a portion of operating lines to shorter-term fixed tranches to cap interest risk; keep a revolving facility for working capital swings .
   • Maintain 3–6 months of OPEX liquidity buffer (cash + undrawn line).
2. Feeder Procurement
   • Pre-arrange contracts with multiple sources; schedule staggered placements to avoid single-cohort risk amidst tight supply .
3. Feed Cost Lock-Ins
   • Forward-contract corn or use futures/options to cover 50–70% of projected needs where basis is favorable. Each $0.10/bu corn increase adds ≈$0.86/cwt to COG—protect that sensitivity now .
4. Revenue Floors
   • Add Livestock Risk Protection (LRP) or put options on live cattle to secure price floors without margin calls; match coverage to projected out-dates of Q2–Q3 marketings .
5. Operating Efficiency
   • Deploy bunk-management audits; phase-feeding protocols to tighten feed-to-gain (reduce waste; increase ADG) to offset feed and financing headwinds .

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Q2 (Apr–Jun): Manage Basis & Placement Mix

1. Basis Management
   • Adjust hedges: roll futures if carry/backwardation changes; capture favorable local basis via cash-forward deals when elevators are short space (storage/logistics volatility expected) .
2. Feeder vs. Live Spread
   • Use feeder-live cattle spreads (e.g., long feeder/short live) to stabilize gross feeder margins where feeder prices outpace expected fed prices .
3. Placement Flex
   • Delay or lighten placements if feeder prices spike; reweight pen mixes (weights/sex) to match ration and market window economics given tight supplies and volatile demand .
4. Demand Watch
   • Track boxed beef and cutout seasonal patterns (spring grilling lift vs. rib weakness in late Q2); adjust hedge delta accordingly .

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Q3 (Jul–Sep): Lock Margin Windows & Prepare for Volatility

1. Margin Locks
   • When expected breakevens turn positive, lock forward: sell live cattle futures or buy puts; simultaneously fix remaining feed for matched lots to create synthetic “crush” coverage (feeder + corn vs. live) .
2. Event Volatility
   • Around high-impact events (policy/trade/processing outages), use long straddles or put spreads to protect against sharp downside while maintaining upside participation—volatility tends to spike on shocks .
3. Working Capital
   • Reassess credit covenants mid-year; pre-negotiate seasonal line increases for Q4 feed purchases; keep liquidity cushion intact as rates remain above long-run averages .

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Q4 (Oct–Dec): Year-End Risk Compression & Tax Planning

1. Post-Harvest Corn Strategy
   • Historically softer post-harvest cash/basis can be used to extend coverage into early 2027; but watch South American crop and storage constraints—seasonality isn’t guaranteed .
2. Revenue Finalization
   • For late-year marketings, favor collars (long put/short call) if premiums are rich; protects floor while sharing upside—useful if demand remains strong but packer margins shift .
3. Capex & Taxes
   • Time equipment maintenance/retrofits to optimize depreciation without tightening cash; avoid major expansion funded by high-rate debt unless IRR > blended cost of capital .

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Practical Hedging Examples (Plug-and-Play)

Assumptions: WTI crude doesn’t directly hedge cattle, but affects macro/consumer costs; below we focus on feeder/live/corn—your primary levers.

A) Feeder–Corn–Live “Cattle Crush” Framework

• Goal: Protect gross feeder margin (GFM).
• Structure:
  • Buy corn futures (or calls) for 60% of expected ration.
  • Buy feeder cattle futures (or calls) for intended placement month.
  • Sell live cattle futures (or buy puts) for expected out-date month.
• When to use: Feeder & corn costs rising faster than expected live prices.
• Source context: Elevated capital-at-risk; fed-cattle selling price uncertainty; cost-of-gain sensitivity to corn .

B) Floor + Flex on Revenues (LRP + Put Spread)

• Goal: Secure minimum fed price; keep upside.
• Structure:
  • Purchase LRP coverage per-head for marketings in next 4–6 months.
  • Add a bear put spread (buy ATM put, sell lower-strike put) on the same contract month to cheapen premium.
• When to use: Strong demand but margin compression risk into early 2026; concern over packer margins and rib weakness .

C) Collar on Finished Cattle (Cost-Conscious Hedge)

• Goal: Floor protection with reduced premium outlay.
• Structure: Long put at/near expected breakeven; short call OTM (cap upside you’re willing to forgo).
• When to use: Into Q4/Q1 seasonal adjustments and if you expect range-bound outcomes amid tight supplies .

Tip: Keep hedge ratios aligned with expected headcount marketed per month and ADG/DOF assumptions; rebalance if performance deviates.