2011 futures and options - live cattle, feeder cattle

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