TOP FARMER WEEKLY PERSPECTIVE 01/07/2022 BY BRYAN DOHERTY
Livestock and Dairy Producers: Stay on Alert
The cattle, hogs, and dairy futures markets have recently reached into new contract highs. Higher input prices, expectations for strong demand (domestic and export), and limited supply could keep prices supported. Yet, at new highs, it is time to stay alert. Markets tend to factor in perceived expectations. Expectations are fluid and change continuously.
The Chicago Mercantile Exchange (owned by CME Group) is what we will call the centralized auction place, where participants vote on expected prices at contract expiration. Price expectations are determined through various means and measures, from sophisticated technical analysis to new monthly information from the USDA. In theory, both fundamental and technical analysis factor in up-to-date developments. Yet, others may make decisions to buy or sell that has nothing to do with charts or supply and demand analysis. In the livestock and dairy markets, producers may not want to clutter their decision process with analysis when prices offer excellent value to their operation. New contract highs are offered (as of this writing) in many futures contracts. The why behind recent price movement may be of little relevance. The opportunity to lock in high value is what is important. We will call these value sales. Value sales are sales, no matter where the market goes after the sale made, that will not create any sense of second guessing. Value sales can be done on percentages of production to reduce worries that you may be selling too much at once. The key, however, is to take action to shift risk.
Taking action could be in the form of forward sales with buyers. You lock a price, delivery time, and place. Whether prices move higher or lower is insignificant. You could also sell futures. When futures are sold, you will need to margin the position until it is exited or delivered. Delivery on futures contracts almost never occurs. Instead, you sell your product and deliver locally. Once price is set, you buy back the futures contract. Another way that you can shift risk is to purchase a put option. This gives you the right (not obligation) to sell futures. The advantage is that your product remains unpriced until you decide to sell. The risk is the premium paid for the option. Puts establish a price floor.
The above-mentioned strategies are probably the most popular tools utilized. Others can be more complicated and are usually used in conjunction with cash contracts, or to provide leverage or added value. Conversations with your advisor is recommended before entering any position.
When markets rally, there is generally a reason. We may spend a lot of time trying to understand why and if the trend will continue. At some point, however, prices peak. By the time most of us feel we have enough information to determine the end of a price rally, it is usually after prices have dropped. Now is the time to be alert.
If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: 800-334-9779.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.