Cattle Producers: Don’t Take Your Eye Off the Ball
What’s happened….
Tight inventories of market-ready cattle, coupled with drought conditions limiting herd rebuilding and good demand, have provided underlying support for cattle prices. Both live and feeder cattle values have continued to move into new highs, both from a near-term and long-term perspective. The cattle cycle, a period between high and low prices, has been extended to the side of higher prices. Typically, there are signs of herd rebuilding, yet none have really surfaced due to a lack of cheap available feed and drought-challenged pasture conditions. Cow calf operators have been reluctant to expand the herd, now at multi-year low levels. The market has responded with uptrending prices, which are setting record-high levels.
Why this is important….
The old saying, however, is that what goes up must come down. With prices continuing to trend upward and the expectation for supplies to remain relatively tight, it may be easy to become complacent from a marketing perspective. After all, doing nothing has paid good dividends. Yet we all know price trends don’t last forever. When they end, they can end violently. As an example, it may take several months for a market to climb higher and only several weeks to lose half or more or the rally. Prices can tip over so quickly, it’s difficult to make marketing decisions due mainly to emotions. When prices trend lower, there is a tendency for many to wait and see if they can bounce back. If prices don’t bounce back, protection is not in place, and nothing is sold or protected. The stress (emotion) is compounded.
What can you do?
Is there a best way to protect prices? “Best” is a relative word. There are tools available to producers, yet, the right tool for the right producer at the right time needs to be defined. Some prefer the strength of selling futures, which establishes a hedge. The theory is if prices go up, you lose on futures and gain in the cash market. If prices drop, you lose in the cash market and gain on futures. The term “hedging” comes from the idea that when something happens on one side of the hedge row, the opposite happens on the other side. One consideration is cash flow for margin requirements. Hedging offers flexibility, as you are not required to make delivery, and can exit your contract at the time you feel is best. Forward contracting, if available, is a strategy as well. This locks a price and requires delivery. Costs to forward contract will vary by the buyer.
Another strategy to establish a price floor is to utilize put options. The buyer of a put has the right (not the obligation) to sell futures at the level of protection (strike price) purchased. The advantage of a put is that if futures prices go higher, unpriced cattle can gain in value. Your risk is limited to the premium paid, commission, and fees.
Doing nothing is also a strategy, however, this may be considered extreme. If prices continue to move higher, you are in great shape. If they move lower, you may experience a lot of pain.
Find out what works for you….
Work with a professional to find the strategy or strategies that are best suited for your operation. Communication is important. Ask critical questions and garner a full comprehension of consequences and potential rewards before executing. The idea is to make good decisions for the operation and less emotionally-charged responses to market moves, which are always dynamic. Now is not the time to take your eye off the ball.
Editor’s Note: If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: 800-334-9779.
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.
Author
Bryan Doherty