Use Puts for Live Cattle

What’s happened…

Cattle futures have been in an uptrend for multiple months. The fundamental picture continues to look supportive, as the beef herd is at a record low number of cows. Drought conditions, aging demographics of the cow-calf producer, and strong demand have propelled prices into a long-term uptrend. Yet, producers should be leery of high prices sustaining themselves for extended periods of time. Only time will tell if prices can hold up. With futures trading at record highs, there is concern that consumer demand could back away, leaving prices with plenty of room to drop.

Why this is important…

Domestic demand remains strong. It appears the U.S. consumer is willing to pay higher retail prices, accepting the idea that higher beef prices are part of the inflation mix, where all goods and services are more expensive. If beef prices were higher without other food prices rising, perhaps then the consumer would be more selective. Export demand could be the weak link, as data continues to show that China’s economy is struggling. Imports of all commodities to China are expected to remain weak in the year ahead. The bottom line is that prices are lofty and have been in an extended uptrend. The old saying “a stairway up and elevator down” could be a good visual to think about how prices could move in the future.

What can you do?

Deferred futures offer an opportunity to shift risk. If you can pencil in profits and are happy with those gains, then forward contracting or selling futures are alternatives in shifting risk. If, however, you want to leave the topside open for future price advances, then now may be the time to consider using put options to establish a price floor. The buyer of a put has the right (not the obligation) to sell futures. If futures prices are below the strike price (level of price protection) at option expiration, this position will convert to a hedge (sold futures) at the strike price level. Should futures be above the strike price level at the expiration date, the put will have lost its value.

The key is to recognize that prices are always dynamic and marketing decisions are never easy. However, after an unprecedented rally, now is the time to consider how to defend prices. Consult with your advisor and ask questions related to protecting the value of your cattle. Understand the risks and rewards of any strategy. Questions and discussion regarding outlook are fine; however, prices have rallied for a reason and it is easy to argue they should not go down based on what you believe you know today. At the top of a price rally there is every reason to believe they can continue higher. Sometimes they do and sometimes they don’t. The reality is that markets often make big moves when least expected. It is better to be on the offensive and prepared than get caught with no protection, should prices decline.

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