Livestock Risk Protection and Price Basis Tim Eggers, Iowa State University Extension Field...
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Transcript of Livestock Risk Protection and Price Basis Tim Eggers, Iowa State University Extension Field...
Livestock Risk Protection and Price Basis
Tim Eggers, Iowa State University Extension Field Agricultural Economist
September Feeder Cattle
October Feeder Cattle
November Feeder Cattle
A Marketing Plan
A marketing plan should address:– short term survival – long term success– key elements – map to destination
Key Elements of a Marketing Plan
• Marketing objectives• Cost of production • Current market environment• Contingency plans• Flexibility
Pricing Targets
• Establish minimum price objective– Risk tolerance– Your cost of production • Could use Beef Cow/Calf Enterprise Budget
• Your records provide better information
Strategies for Marketing Spring Calves
• Wean, Sell Nov. 1• Background, Sell Jan. 1• Background, Finish, Sell July 15• Wean Sep. 1, Finish, Sell June 1• Wean Nov. 1, Finish, Sell July 1
Wean & Sell Nov. 1
• Calves weaned & sold on Nov 1 (550#) • Benchmark strategy • Cost of Production—Cow costs• Market Value Factors– Pre-conditioning– Source verification
Wean & Sell Nov. 1• Risk Management Factors– Forward Contract• What, When, Where, Price
Sale Barn Video Auction
Background & Sell Jan. 1
• Wean November 1• background 60 days• Sell at ~670# on January 1• Increased risks– Price risk and opportunity – Rate of gain risk and fleshiness– Mortality and morbidity risk
Background & Sell Jan. 1
• Risk Management Factors– Forward Contract– LRP Insurance• Minimum coverage period is 13 weeks, so insurance
must be purchased as appropriate
Background & Finish
• Previous backgrounded calves put in feedlot January 1 and fed until August 20
• Increased Risks– Price risk– Opportunity cost– Mortality, morbidity– Weather– Feed price
Wean Sep. 1, Finish
• Lower cow costs • More feed yardage costs• Improved quality grade
Risk Management Tools
• Futures market– Hedging– Buy a Put Option
• Forward Contract• Livestock Revenue Insurance – Livestock Risk Protection (LRP)– Livestock Gross Margin (LGM)
Feeder Cattle Futures Contract
• Feeder Cattle Futures Contract (FC)– 50,000 pounds (67 hd- 750# feeder cattle)– Contract months—Jan, Mar, Apr, May, Aug, Sep,
Oct, Nov– Contract expires last Thursday of contract month– Cash settle, no delivery– Margins--$1000
Live Cattle Futures Contract
• Live Cattle Futures Contract (LC)– 40,000 pounds (33 - 1200# cattle)– Contract Months—Feb, Apr, Jun, Aug, Oct, Dec– Expires last business day of the contract month– Contract settled by physical delivery of cattle– Margins--$700
Hedging: Money Required
• Commissions vary with broker– Example: $60 per contract =
about 15 cents per cwt. (LC)about 12 cents per cwt. (FC)about 1-2 cents per bu. (Corn)
• Margin Money• Interest on margin money
Basis
Basis = Cash Price - Futures Price
If Cash = $120 and Futures = $110
Basis =
• Estimated basis is a forecast based on history.
Hedge
• Managing price or market risk by taking a position in the futures market opposite to that held in the cash market
• Cash position—33 head of cattle to be marketed in June
• Hedge position—Sell a live cattle contract on the CME
Hedge ExampleCattle ready for market in JuneSells June LC futures at $98.50/cwt in OctoberExpected local basis in June is $0.74Expected hedge price is $99.24/cwt ($98.50 + $0.74)If futures are $95 when hedge is lifted
there will be a $3.50 gain on the futures contract ($98.50 – $95)Cash price will be $3.50 less than expected ($99.24 – $95.74 = $3.50 loss), offsetting the futures gainResult will be expected price of $99.24
Gain offsets loss as long as basis is as expected ($0.74)
LRP Exercise
• Cow/calf producer
• End of March wean and sell
• 36 steer calves at 550 lbs
• Buys LRP on September 22 – (26 wks out)
Size of CoverageFutures and options have fixed contract sizes:– Fed cattle: 400 cwt. or about 32 head– Feeder cattle: 500 cwt., 60-100 head
• LRP can be purchased for any number of head or weight
Expiration Date of Coverage
• LRP ending date is fixed. – Insurance contract settles on end date.– Price may change after date of sale.– Market date should equal end date
• Futures or options can be lifted at any time before the contract expires.