Feuz Cattle & Beef Market Analysis
Hedging with Futures & Options Marketing Strategies


The Short Hedge

Producers of fed cattle or feeder cattle can lock-in a fixed selling price by executing a short hedge (the net realized price will vary somewhat due to basis).  The expected hedge price is the futures price plus or minus the expected local basis.

       Basis = Local Cash Price - Futures Price

This strategy is executed by selling the futures contract for the month that the cash sale is expected to occur.  The hedge is lifted at the time the cattle are sold in the cash market by buying back the futures contract at that time.

Advantages

  • Guarantees a price, subject to basis fluctuation
  • Yields the best price if market declines significantly after placing the hedge
  • Can price as much as 12 months in advance
Disadvantages

  • Margin call responsibility
  • Can not take advantage of a market rally

Example

A producer is running yearling steers on grass.  He expects to sell the steers in September.  It is currently May and the producer is wanting to hedge the feeder steers.  In May the producer sells September Feeder Cattle futures for $100.00/cwt.  The expected local basis for September is -$0.50/cwt.  The expected hedged price is $99.50/cwt.  The net realized price for two different market situations is presented below:



Market Strengthens
Date
Cash
Futures
Basis
May
Expected Selling
Price = $99.50
Sell Sep FC
for $100
Expected
   -$.50
September
Sell Steers
for $109.50
Buy Sep FC
for $110
Actual
   -$.50


Lose $10/cwt

Net Realized Price=Cash Price +/- Gain/Loss in Futures = $109.50 - $10.00 = $99.50
Market Weakens
Date
Cash
Futures
Basis
May
Expected Selling
Price = $99.50
Sell Sep FC
for $100
Expected
   -$.50
September
Sell Steers
for $89.50
Buy Sep FC
for $90
Actual
   -$.50


Gain $10/cwt

Net Realized Price=Cash Price +/- Gain/Loss in Futures = $89.50 + $10.00 = $99.50
Return to Hedging Alternatives
 
Description of Puts
Description of a Fence