FEEDER CATTLE PRICE RISK MANAGEMENT DR. CURT LACY EXTENSION ECONOMIST-LIVESTOCK UNIVERSITY OF...
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FEEDER CATTLE PRICE RISK MANAGEMENT DR. CURT LACY EXTENSION ECONOMIST-LIVESTOCK UNIVERSITY OF GEORGIA
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Transcript of FEEDER CATTLE PRICE RISK MANAGEMENT DR. CURT LACY EXTENSION ECONOMIST-LIVESTOCK UNIVERSITY OF...
FEEDER CATTLE PRICE RISK MANAGEMENT
DR. CURT LACY
EXTENSION ECONOMIST-LIVESTOCK
UNIVERSITY OF GEORGIA
LET’S TALK ABOUT RISKIt is NOT uncertainty!
It is the negative outcome associated with an unforeseen event.
Good risk managers• Know the odds• Don’t risk a lot to make a
little.• Don’t risk more than
they can afford lose.
DEVELOPING A “GOOD” RISK MANAGEMENT PLAN
1. Identify your major risks
1. Price
2. Production
3. Legal
4. Financial
5. Labor
2. Determine what constitutes a “wreck” for you
3. Learn about the alternatives to minimize or manage this risk
4. Develop and implement a risk management plan
FEEDER CATTLE PRICE RISK MANAGEMENT
GA FEEDER CATTLE PRICES, 2001-2011
01/1
3/01
10/2
7/01
08/1
0/02
05/2
4/03
03/0
6/04
12/1
8/04
10/0
1/05
07/1
5/06
04/2
8/07
02/0
9/08
11/2
2/08
09/0
5/09
06/1
9/10
04/0
2/11
$50.00
$60.00
$70.00
$80.00
$90.00
$100.00
$110.00
$120.00
$130.00
700-800# Steers
700-800# Steers
CATTLE PRICING ALTERNATIVES
Delivery Pricing
Auction
Negotiated
Floor Pricing
Options
LRP/LGM
Forward Pricing
Futures Hedge
Auction or Negotiate for
Future Delivery
BASIC DECISIONS
Do nothing
Forward price
• Pre-sell through an auction• Hedge
Minimum price
• LRP• Option
CATTLE PRICING ALTERNATIVES
Delivery Pricing
Auction
Negotiated
DELIVERY PRICING
Two most common forms
• Auctions• Negotiated/private treaty
Easy
No delivery obligation
Highest possible price
Lowest possible price
Risk = high
Reward = high
DELIVERY PRICING EXAMPLE
$110.00
$114.00
$118.00
$122.00
$126.00
$130.00
$134.00
$138.00
$142.00
$146.00
$150.00 $80.00
$90.00
$100.00
$110.00
$120.00
$130.00
$140.00
$150.00
Net Cash Prices at Various Futures Prices Using Delivery Pricing
Cash Price
Futures Price
Net
Cas
h Pr
ice
($/C
wt.)
CATTLE PRICING ALTERNATIVES
Delivery Pricing
Auction
Negotiated
Forward Pricing
Futures Hedge
Auction or Negotiate for
Future Delivery
FORWARD PRICING
Most common forms
• Auction with future delivery• Futures hedge• Negotiated forward contract
Ability to set or at least know what price you will receive.
Advantageous if market is declining
Less than highest price if market goes up.
Risk = moderate
Reward = moderate
MINIMUM PRICING
Most common
• Put options• Livestock Risk Protection (LRP)
Trade small but certain loss (premium) in exchange for protection from uncertain and larger loss (declining market).
Ability to set floor price good in declining market
Ability to get higher price if market goes up.
FORWARD PRICING/HEDGING EXAMPLE
$110.00
$114.00
$118.00
$122.00
$126.00
$130.00
$134.00
$138.00
$142.00
$146.00
$150.00 $100.00 $105.00 $110.00 $115.00 $120.00 $125.00 $130.00 $135.00 $140.00 $145.00 $150.00
Net Price at Various Futures Prices Using a Selling Hedge
Net Price With HedgeNet Price - delivery pricing
Futures Price
Net
Cas
h Pr
ice
($/C
wt.)
“PERFECT” HEDGE – DOWN MARKET
Date Cash Futures Basis27-Apr $ 128.95 Sell futures@ $ 133.95 $ (5.00)
3-Aug $ 115.00 Buy futures @ $ 120.00 $ (5.00)
$ 13.95 Futures Gain (Loss) $ 13.95
Net Price $ 128.95
Currently @ $125
“PERFECT” HEDGE – UP MARKET
Date Cash Futures Basis27-Apr 128.95$ Sell futures@ 133.95$ (5.00)$
3-Aug 140.00$ Buy futures @ 145.00$ (5.00)$
(11.05)$ Futures Gain (Loss) (11.05)$ Net Price 128.95$
CATTLE PRICING ALTERNATIVES
Delivery Pricing
Auction
Negotiated
Floor Pricing
Options
LRP/LGM
Forward Pricing
Futures Hedge
Auction or Negotiate for
Future Delivery
MINIMUM PRICING EXAMPLE
$110.00
$114.00
$118.00
$122.00
$126.00
$130.00
$134.00
$138.00
$142.00
$146.00
$150.00 $80.00
$90.00
$100.00
$110.00
$120.00
$130.00
$140.00
$150.00
Net Price at Various Futures Prices Using Minimum-floor Pricing
Net Price With putNet Price - delivery pricing
Futures Price
Net
Cas
h Pr
ice
($/C
wt.)
PUT OPTIONS:Put Option - gives the holder the right but not the obligation to SELL a futures contract at a set price before the option expires. (Insurance against falling prices). If you will be selling the commodity use a Put
Think of a put option as a price FLOOR
PUT OPTION EXAMPLE – MARKET DROPS
Date Cash Basis27-Apr Buy Put @ $ 130.00 $ (5.00) Option premium $ (3.88)
PUT OPTION EXAMPLE – MARKET DROPS
Date Cash Basis27-Apr Buy Put @ 130.00$ (5.00)$
Option premium (3.88)$ 3-Aug 115.00$ Futures @ 120.00$ (5.00)$
Option Value 10.00$ Option premium (3.88)$
Option Net 6.13$ Net Option 6.13$ Net Price 121.13$
PUT OPTION EXAMPLE – MARKET RISES
Date Cash Basis27-Apr Buy Put @ 130.00$ (5.00)$
Option premium (3.88)$
PUT OPTION EXAMPLE – MARKET RISES
Date Cash Basis27-Apr Buy Put @ 130.00$ (5.00)$
Option premium (3.88)$ 3-Aug 140.00$ Futures @ 145.00$ (5.00)$
Option Value -$ Option premium (3.88)$
Option Net (3.88)$ Net Option (3.88)$ Net Price 136.13$
USING LIVESTOCK RISK PROTECTION (LRP) INSURANCE TO SET A FLOOR PRICE
SPECIAL THANKS TO DR. DARRELL MARK, UNIVERSITY OF NEBRASKA FOR THESE SLIDES
LRP IS PRICE RISK PROTECTION
Establishes A Floor Selling Price For Livestock
Pays Producers If A Regional/National Cash Price Index Falls Below A Set Price
• Does Not Guarantee A Cash Price Received• Basis Risk Must Still Be Considered
Covers Feeder Cattle, Fed Cattle, & Swine
INSURANCE AGENTS
Available Through Crop Insurance Agent System
Agent Locator Tool On USDA Website
http://www3.rma.usda.gov/apps/agents/
COVERAGE AVAILABILITY
Coverage Available About 5pm To 9am CST
• Available Sat Mornings Until 9am, But Not Sun, Mon, & HolidaysCoverage Initiated With Specific Coverage Endorsement (SCE)
• No Limit On Number Of SCEsProducers Have Flexibility On The:
• Timing Of Purchase• Time Length Of The SCE• Number Of Head Covered
LIMITATIONS ON NUMBER OF HEAD INSURED
Fed Cattle
Feeder Cattle
Per Specific Coverage Endorsement 2,000 1,000
Per Crop YearJuly 1-June 30
4,000 2,000
LRP COMPARED TO HEDGING OR OPTIONS
Advantages• No need to establish
brokerage accounts• Can insure animals on
individual basis• “Guaranteed” availability
for price protection for far-off futures contracts
• May be less expensive for deferred months
Disadvantages• Paperwork can take a
while• Available only for animals
in certain states• Can’t “lock-in” a price• Can’t exercise or “sell
back” contract if market goes up
• May be more expensive for nearer months
LRP PRICES FOR 05/23/2011
MINIMUM PRICING EXAMPLE
$110.00
$114.00
$118.00
$122.00
$126.00
$130.00
$134.00
$138.00
$142.00
$146.00
$150.00 $100.00 $105.00 $110.00 $115.00 $120.00 $125.00 $130.00 $135.00 $140.00 $145.00 $150.00
Net Price at Various Futures Prices Using Minimum-floor Pricing
Net Price With putNet Price - delivery pricingForward Pricing
Futures Price
Net
Cas
h Pr
ice
($/C
wt.)
FEEDER CATTLE PRICE RISK MANAGEMENT
DR. CURT LACY
EXTENSION ECONOMIST-LIVESTOCK
UNIVERSITY OF GEORGIA
WWW.SECATTLEADVISOR.COM
