Stay the Course

What’s Happened…

Live cattle futures have had an unprecedented upward trend for the last 12 months, reaching new highs practically monthly. The same can be said for feeder cattle prices. As prices moved higher, producers did what they should do, that is, forward sell or hedge to lock in positive margins. We say “should” because when the market offers opportunity to shift risks, those are tools that can and should be considered. Yet, margin calls and opportunity cost ate away at many producers, making them feel they were making a mistake executing risk management strategies. Unfortunately, this can lead to a mindset of “we don’t need to do this anymore.” However, input costs increase, and it is more important now more than ever before to continue with strategies to shift risk. 

Why this is Important…

In theory, meeting a margin call should be mechanical in nature and not emotional. If futures prices are rallying and you are short (sold) the market, margin will be due in your account. Your unpriced inventory gains value as well. The tradeoff should be near equal. Yet, emotion likely kicks in. If you forward sell on a cash contract and prices then move higher, you may not be making margin calls, yet you likely feel you are missing out. This can mentally eat way at you as well. In either case, you may have regret.  

It is paramount to remember the reason why you either hedged or forward sold in the first place. The reason is that prices moved to a point where you told yourself you needed to act and manage price risk. The uncomfortable part is when prices move higher you can’t help but feel you have done something wrong. You’re only human. You did nothing wrong. You are not expected to magically outguess the market. 

When a market trend is higher for an extended time period, a sense of comfort can develop. Comfort unfortunately leads to a lack of planning and execution. That’s the dilemma. After all, those who did no risk management benefitted fully as prices rallied. However, at some point, the do-nothing mentality can become dangerous. What generally goes up comes down. In the world of commodities, the drop lower can come quick and be unforgiving. This can include cattle prices. Consumer demand, supply, or any multitude of variables can change. Eventually, high prices cure high prices. Stepping away from managing the risk that comes with record-high prices could prove financially dangerous.  

What can you do about it?

Stay the course. Use good risk management tools whether you have cattle on hand or need to buy cattle/calves. If you are concerned that hedging or forward contracting could create an opportunity cost you do not want to face, then consider purchasing call options to cover those positions. The key is to provide yourself with a balanced approach that can shift risk and still take advantage of opportunities. This approach prepares you for whichever way the market may go. Speak with the right people that can guide you. 

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.   

About the Author: With the wisdom of over 35 years at Total Farm Marketing and a following across the Grain Belt, 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