Kim Ulmer owner of Huron Continental Marketing said the futures system was created to benefit producers but has been changed to benefit speculators and puts cattlemen at a disadvantage. Hay supplies are on the short side, so we’ll see higher prices there.” Corn prices are depressed and the anticipated 2018 crop looks like we’ll have plenty of feed on hand. “However, we are hopeful feed costs will stay down compared to what they have been. “The calf market is strong, but fat cattle prices are tough largely due to the uptick in supply com-pared to last year,” Nilsson said. Marlin Nilsson, owner of Nilsson Farms in Warner, S.D., says it’s tough going right now. I tell my customers to plan your trade and then trade your plan.”Ĭattle feeders are currently feeling the market pinch with fats priced roughly $100 less than this time last year. “When you take a position as a hedge, and you like the price, you should never look back. “None of us know exactly what the market is going to do,” he said. Basically, these options offer protection for a downside, but they also leave room for the upside. When you have a trade in the account and it goes in your favor, cash goes in, but when the market goes against you, you have to put more cash in your account. These are used to stop a loss if the market goes south, or they can be used to lower your break even by using those options. They can either lock in a straight price by hedging or use options that act as additional insurance. “Puts and calls are just another tool that producers have access to. “For these more complex strategies, that’s where a broker can really help,” Varilek said. Choosing options instead of outright purchasing the Feeder Cattle futures offers additional leverage while limiting potential losses, but the risk for the trader is the asset could expire and be worth nothing. If you sell your commodity and feel like it might still go higher, you can try to capture that upside by utilizing a call option.”Ī more complex strategy implements “spreads,” which combine both buying and selling options. In this case, the safest place to start is to buy a put, which puts a floor under your price and won’t necessarily make money but will stop a loss. “In some strategies, we are selling options to lower the breakeven costs. “There are upside options and downside options, and you can be a buyer or seller either way,” explained Varilek. This right for an option contract is eliminated after the market closes on an expiration date. In layman’s terms, the holder of a Feeder Cattle option possesses the right to assume a long position (a call option) or a short position (a put option) in the underlying feeder cattle futures at a strike price. Producers can also choose Feeder Cattle options, which are option contracts where the underlying asset is a Feeder Cattle futures contract. It allows producers to mitigate risk to ensure they are still operating next year.” “Producers can calculate their breakevens and lock in a price on their commodities to manage the price now instead of waiting and getting whatever the price happens to be. “When you have a product like cattle, and you have to buy a pen of them, that’s a lot of dollars tied up,” Varilek said. Live Cattle contracts come with physical delivery, there is no option for live delivery with Feeder Cattle contracts they must be settled with cash. for Feeder Cattle, and they are priced in cents per pound. Feeder Cattle consist of calves weighing 600-800 pounds while Live Cattle are cattle fed to the point of harvest weight. There are two types of cattle futures contracts - Live Cattle and Feeder Cattle.
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