Perception, Demand, or Both?
What Happened….
In mid-March, June live cattle futures were trading over $186, their highest level since late fall. This was also the same time when HPAI (Highly Pathogenic Avian Influenza), otherwise known as bird flu, was detected in several dairy herds. Without a clear understanding of the potential impact to cattle, traders were quick to shed long positions, sending June live cattle $12.00 lower in a matter of a couple of weeks. There were many questions. Could beef supplies be tainted by HPAI? Could the virus spread to humans? Perceptions of the potential impact loomed large. Was the price drop reflective of other factors, such as continued inflation, increasing consumer debt, and a rising U.S. dollar? The likeliest conclusion is all the above.
Why is this important….
Whether or not avian flu will have a long-term impact on the cattle herd remains unknown. At present, it does not look like it. Yet, the market reminded us just how fast prices can drop. In this case, a combination of various demand concerns beyond bird flu sent prices falling. The market reminded us that, as fundamentals and perceptions change, price drops can be quick and unforgiving. Rising prices can last for a long period of time (as they had for cattle futures). Even then, it takes only a little of the wrong news for traders to exit long positions, go short (sell) or both. It is nearly impossible for anyone to outguess something like HPAI. Expecting that bull markets can quickly change and preparing for this potential is part of a good risk management strategy.
What can you do about it?
Consider using various strategies to defend the price of what you produce. Know the tools in your marketing toolbox. A good strategy in up-trending markets is to use trigger points below where the market is currently trading. If these trigger points are hit, you are a seller. In the futures market, these are called stop orders. As prices rise, you can raise your stop closer to where the market is trading. Some refer to this strategy as using trailing stops.
Another strategy is to purchase put options, which establish a price floor. If prices continue to move higher, you can then decide whether to raise your price floor by rolling to a higher strike price or keep the original option in place as your safety net.
Rewarding price rallies with forward contracting is also a strategy to shift risk. If prices reach a point where you are satisfied with the return on investment, then forward selling can be a powerful tool.
The key to good risk management is staying informed, which entails continually exploring and reviewing strategies that best fit you, and then executing. Have conversations with your advisor. Ask lots of questions and build your knowledge. The old saying is that knowledge is power. Knowledge also provides confidence.
About the Author: With the wisdom of 30 years at Total Farm Marketing and a following across the Grain Belt, Bryan Doherty is deeply passionate about his clients, their success, and long-term, fruitful relationships. As a senior market advisor and vice president of brokerage solutions, Doherty lives and breathes farm marketing. He has an in-depth understanding of the tools and markets, listens, and communicates with intent and clarity to ensure clients are comfortable with the decisions.
The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Examples of seasonal price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences or likely to occur. Futures prices have already factored in the seasonal aspects of supply and demand. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation.
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Bryan Doherty