Hedge signal from Feeder and Live Cattle futures?

[farming101]

Only 110 or so days ago the DOW had just broke through 23000. No one could believe the strength in equities. Interesting that the Mar feeder cattle contract was at about 147.

And now the sky might fall. Oh well, never get in the way of a stampede. It will be interesting to watch the markets next week.

Thanks for your input Tech

[Oliver88]

Good information. 👍🏻

[TechAnalyst]

The weak closes today and the volatile downdrafts in the stock markets confirm the previously mentioned sell signals.

My preference is still using the March Feeder Cattle $145 puts (now just over $3/cwt) or the $140 puts (now just over $1.60/cwt) for risk management purposes.

That leaves the upside open should the negative outside forces (ie weak stocks) turn around.

[grassfarmer]

Regarding a put option, cow calf producers and backgrounders would likely want to look at a March feeder cattle put, expiring March 29th, covering 50,000lbs. A $145 strike put closed Friday just over $2/cwt, A cheaper $140 strike closed just over $1/cwt.

How many cow/calf producers do you think manage risk in this way? When the average cow herd in Canada is only 62 cows you may as well be talking in a language from another planet.

[TechAnalyst]

60 yearlings averaging 800 lbs is 48,000 lb total, basically a perfect fit for one 50,000 lb contract.

I don't expect many producers do manage risk this way. If it's due to a lack of comfort or understanding, what a better way to see examples in real time than on a commodity marketing forum.

Given the volatility these days, there likely are some that are interested in knowing they could spend $800 US to limit their price risk to roughly $60/hd through to March 29. All the while hoping the price insurance expires worthless.

[farmaholic]

While at a meeting recently there was a marketing presentation. It seemed mostly chart based....selling when the market moves above the top Bollinger band and buying in when it dips below the bottom Bollinger band. RSI Stochastic indicator-over bought and over sold. And a bunch of others not touched on. Puts and calls.

S/U was talked about. Longs and shorts. Basis, rolling, spreads, inverse and carry. You have to wonder if all the speculators have more market influence than the actual supply and demand. Once supplies are kind of known, seems to me chart based trading moves prices more than supply and demand.

I've heard it said volitility creates opportunity. But if you're only ever a seller of physical, and that's all you ever want to do is sell at the best price you can achieve, without all the other risk and games.....? Best yet is when "Buyers" encourage you to deliver and "stay" in the market.....effectively passing the rest of the market risk on to you....basis contracts, options. Options cost, rolling can cost.

I'm not saying it doesn't work and have admitted I don't have a real good handle on it.

As far as I'm concerned, your market power is being able to hold(not applicable to live cattle at a certain stage)and hopefully negotiate.


I'm kinda learning but it's getting late, and I don't know if I want to "play" anyway. It would be interesting to know what percentage of Producers trade futures and play with options. Even if I never actively trade, knowing what chart conditions move the market would be useful info.

Not knowing what I'm doing, I really have no desire to be trampled by bulls or mauled by bears.

[15444]

How many cow/calf producers do you think manage risk in this way? When the average cow herd in Canada is only 62 cows you may as well be talking in a language from another planet.

It's very much an American way of thinking.

All I can ever think when guys talk about risk management and hedging is that if they need it that badly, they are likely riding the edge anyways and any major long-term correction would bankrupt them.

[grassfarmer]

60 yearlings averaging 800 lbs is 48,000 lb total, basically a perfect fit for one 50,000 lb contract.

I don't expect many producers do manage risk this way. If it's due to a lack of comfort or understanding, what a better way to see examples in real time than on a commodity marketing forum.

Given the volatility these days, there likely are some that are interested in knowing they could spend $800 US to limit their price risk to roughly $60/hd through to March 29. All the while hoping the price insurance expires worthless.

There is the Western Livestock Price Insurance program available in the western provinces which is maybe more user-friendly and applicable to producers with smaller numbers of cattle.

[TechAnalyst]

I just wanted to provide a quick update in case anyone had followed this.

With the March feeder cattle futures now under $138/cwt, the $145 puts would be more than $7/cwt in the money. Given the fact they expire March 29th, I would protect profits by selling the $145 puts for a $5/cwt profit and buy a $138 put for $1 in case the market does fall to the $132 level by next Thursday.

It may not be worth taking profits on the $140 puts yet but they could be rolled down in the same manner. That said, if the market falls to $135 this week, I would sell these as well for $5 or more to capture the profit.

[farming101]

Thanks for the update.
What would be a ballpark for commission on the trade?

With the crash in the CAD feeder cattle in AB are steady to higher since Jan 31

[TechAnalyst]

The commissions would range from $10/option if done with a self directed online account to around $100/option if done through a full service broker.

The 145 puts would have generated a $2500 USD profit to protect about 60 x 800lb yearlings with $10 to $100 coming off for commissions.

If the 138 puts were purchased to keep the price insurance in place, that would cost $1/cwt or $500 USD with another $10 to 100 commission.

It has worked very well to have the breaking Canadian dollar cushion the setback on the cattle futures.

[farming101]

Thanks