2011 futures and options - live cattle, feeder cattle
DESCRIPTION
Presentation by Tim Petry, NDSU Extension Service livestock economist. This slideshow was part of the 2011 NDSU Feedlot School.TRANSCRIPT
Futures and OptionsLive CattleFeeder Cattle
Tim Petry
Livestock Marketing Economist
NDSU Extension Service
1-28-11FutOpt-Carrington-Jan2011.ppt
Live Cattle Contract
40,000 lbs, 400 cwt 1100 – 1425 lbs (36-28 hd) USDA Y.G.3, 55% Choice & 45% Select Feb, Apr, Jun, Aug, Oct, and Dec Delivery to stockyards or packing plant Daily limits: $3/cwt
Live Cattle – April 2011
Livestock Marketing Information Center
SEASONAL PRICE INDEX -- FED STEERS2000-2009
0.85
0.90
0.95
1.00
1.05
1.10
1.15
1.20
Jan Mar May Jul Sep Nov
Index
Max.Index
Avg.Index
Min.Index
07/08/10
CHOICE STEER PRICE vs BREAKEVENCattle Feeding, S. Plains, Monthly
60
70
80
90
100
110
120
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
$ Per Cwt
SteerPrice
Breakeven
ProjectedBreakeven
C-P-2101/05/11Livestock Marketing Information Center
Data Source: USDA-AMS & USDA-NASS, Compiled & Analysis by LMIC
Breakeven Prices for 1300 lb Fed Steers750 to 1300 lbADG = 3.5 lbs
157 Days on Feed
Feeder Price ($/cwt)
Total Cost of Gain (¢/lb)
75 80 85 90 95 100
110 96.19 98.31 100.42 102.54 104.65 106.77
115 99.08 101.20 103.31 105.43 107.54 109.66
120 101.96 104.08 106.19 108.31 110.42 112.54
125 104.85 106.97 109.08 111.20 113.31 115.43
130 107.73 109.85 111.96 114.08 116.19 118.31
135 110.62 112.74 114.85 116.97 119.08 121.20
Kansas Steer Feeding Cost of GainKansas Steer Feeding Cost of Gain
BASIS: Difference between cash priceand futures price
Cash price - Futures price = basis
Sep Oct Nov Dec Jan Mar Apr May Jun Jul Aug
Futures Price
Cash Price
ActualLivestockSale Date
FuturesNebraskaN. Dakota
BASIS is difference between a cash price and the CME futures price.
HEDGING eliminates risk of adverse price movement, except for the risk of the basis being different than expected.
increasing
decreasing
CASH(+)
FUT
(-)CASH
Futures Live Cattle ExampleFed Cattle for April Market1300 lbs/31 hd / contract
Jan
APR LC FUT $112 / cwt
EXPECTED BASIS -3
109
BREAKEVEN -104
BROKERAGE - (included in BE)
EXPECTED PROFIT 5
April 15Price Decrease Price Increase
Short $112 $112
Long 103 117
9 -5
Cash 100 114
BE -104 104
-4 10
Profit 5 5
April 15Price Decrease Price Increase
Short $112 $112
Long 103 117
9 BASIS -5
INC DEC INC DEC
Cash 100 101 99 114 115 113
BE -104 104 104 104 104 104
-4 -3 -5 10 11 9
Profit 5 6 4 5 6 4
Options
Similar to an insurance policy PUT: right to a short futures contract CALL: right to a long futures contract Buyer pays market determined premium Seller receives premium
Live Cattle Options
Feb, Apr, Jun, Aug, Oct, Dec Strike prices available in $2/cwt intervals
nearby contracts may have $1/cwt intervals
Terminate on first Friday of contract month
Why use options? Minimum price established for bear market,
but can receive higher prices if bull market
Price▲ cash
Price▼ futures
Price ? options
Options will always be 2nd best
Put Option(same assumption as previous)
Jan
APR LC PUT $112
PREMIUM -3
EXPECTED BASIS -3
BROKERAGE
MINIMUM EXPECTED PRICE 106
BREAKEVEN 104
MINIMUM EXPECTED PROFIT 2
April 1 (First Friday)
Price Decrease Price Increase
APR PUT 112 112
APR FUT 103 117
PUT VALUE 9 0
PREM -3 -3
6 -3
CASH 100 114
BE 104 104
-4 10
PROFIT 2 7
Summary
Price Decrease Price Increase
CASH -4 10
OPTION 2 7
FUTURES 5 5
Some packers offer futures-based contracts
Tyson exampleApril delivery: $1 off Apr futuresMay delivery: $2 off Jun futures
other specifications
Feeder Cattle Contract
50,000 lbs, 500 cwt 650-849 lbs (72-60 hd) USDA Medium and Large Frame, #1 Jan, Mar, Apr, May, Aug, Sep, Oct, Nov Cash settlement Daily limits: $3/cwt
Livestock Marketing Information Center
SEASONAL PRICE INDEX -- FEEDER STEERS700-800 Pound, 2000-2009
0.85
0.90
0.95
1.00
1.05
1.10
1.15
Jan Mar May Jul Sep Nov
Index
Max.Index
Avg.Index
Min.Index
C-P-51B07/09/09
Feeder Cattle – March 2011
Feeder Cattle – April 2009
Feeder Cattle Options
Jan, Mar, Apr, May, Aug, Sep, Oct, Nov(same as futures)
Strike price available in $2/cwt intervalsnearby two contracts at $1/cwt intervalsexpiring contract may have $0.50/cwt intervals
Terminate on last Thursday of contract month same day as futures expire and cash settlement
When should I pull the trigger?
Most difficult part of using Futures and Options
Margin, not price level is important Both feed and cattle price should be locked in Futures projected feeding potential
EXPECTED
FUT BASIS PRICE
Mar FC 126 0 126
Mar Corn 6.50 -.40 6.10
Oct LC 116 -3 113
FC 750 @ 126 = $ 945.00
CORN 65 @ 6.10 = 396.00
OTHER = 76.00
Total Costs 1417 Total cwt. 13
= BE = = 109