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California's Budget Crisis And Cattle

Thursday, 7 Aug 2008 | 8:45 AM ET

California can’t come up with a budget, as the Golden State continues to drown in red ink. This year's budget shortfall is $15 billion, and Governor Schwarzenegger has vowed to reduce the wages of 200,000 state employees to the federal minimum of $6.55 an hour until a budget agreement is reached (by the way, the federal minimum wage is lower than California’s minimum wage of $8 an hour).

If this happens—and the state controller suggests the Governor can’t do this--everyone from state university professors to highway repair crews to secretaries to DMV testers will be making less than the kid at McDonald’s, because McDonald’s has to pay California’s minimum wage. “Crucial” services like law enforcement are exempt.

California goes through this tortuous exercise every year, but this year’s showdown is particularly nasty.

On the other hand, maybe not everyone in the state merits more than $6.55 an hour. I say this as I read that today, state-employed researchers at UC Davis plan to demonstrate the importance of cows taking a shower.

Yep.

It’s all about how to keep cows cool in the heat, which is apparently a mystery. The California Farm Bureau reports that, “No one has been certain how much cooling cows need to be comfortable in the heat, so specialists created the showers that cows could turn on themselves.”

Yep.

Now, I’m sure this is going to save cows’ lives and save farmers money (except on their water bills), but, well, I guess as a taxpayer I was sorta hoping state researchers would be more focused on curing cancer.

But the real beef in my reporting today involves a different part of cattle ranching.

Today I’m doing a story on how cattle ranchers are trying to expand their hedging strategies to offset high feed and fuel costs. We catch up with Brett Crosby of Custom Ag Solutions, a Wyoming cattle rancher we first interviewed in December. Back then, Crosby was using the futures markets to hedge against high feed costs. Now, it’s oil he’s trying to hedge. He says, though, that it’s difficult for a small or mid-size farm operation to participate in the futures markets for many commodities. “A corn contract, for example, calls for 5,000 bushels per contract,” Crosby says. “Feeder cattle (call for) 50,000 pounds per contract, live cattle 40,000 pounds.” Those are big amounts for a small operation.

As for hedging fuel costs—which have doubled--diesel fuel contracts are 30,000 gallons each, says Crosby, more fuel than some ranchers will use in two or three years.

So now Crosby is starting to invest in things like the PowerShares DB Oil Fund, an ETF that allows him to play the market in smaller bites.

DANGER, DANGER

But Carl Anderson at Texas A&M warns some farmers are getting in way over their heads. They’re buying straight futures contracts, only to see the futures prices take off much faster than the actual cash prices turn out to be. Farmers then have to cover the difference, and that could break some smaller players. Anderson says it happened to cotton farmers in Texas in March. “I mean, there were large operators that sent in a billion dollars worth of margin money overnight to some of the exchanges when the price just flat ran away from the cash price.” Large operators can afford to do that. Small operators don’t have that kind of money.

Anderson suggests farmers invest in put and call options instead of straight futures. Meantime, Brett Crosby is busy advising ranchers on how to play the game. “I think the most common mistake that farmers and ranchers make is underestimating the price volatility that exists for the commodity that they produce,” he says. “In other words, I think that farmers and ranchers are consistently more optimistic about prices than the rest of the market is.”

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  • Based in Los Angeles, Jane Wells is a CNBC business news reporter and also writes the Funny Business blog for CNBC.com.

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