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


The Long Hedge

Producers of fed cattle or feeder cattle can lock-in a fixed purchase price for feed grains by executing a long 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 buying the futures contract for the month that the cash purchase is expected to occur.  The hedge is lifted at the time the grain is purchased in the cash market by selling the futures contract at that time.

Advantages

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

  • Margin call responsibility
  • Can not take advantage of a decline in the market 

Return to Hedging Alternatives
 
Description of Calls
Description of a Long Fence