Futures, Options, and LRP Feeder Cattle

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Futures, Options, and LRPFeeder Cattle

• Tim Petry
• Livestock Marketing Economist
• www.ag.ndsu.edu/aginfo/lsmkt/livestock.htm

02-25-05
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What Is Brewing For 2005?
Canadian Border
9-11
Japanese Border
Dock Strike
BSE False Positives
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Price Risk Management Tools

• Cash forward contract
• Video and internet auctions
• CME futures
• CME options
• LRP
• Which one or combination fits your marketing plan?

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Livestock Marketing Information Center
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Livestock Marketing Information Center
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Livestock Marketing Information Center
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Feeder Cattle Contract

• 50,000 lbs, 500 cwt
• 700-849 lbs (72-60 hd) M,A,M
• 600-849 Aug and later
• USDA Medium and Large Frame, 1
• Jan, Mar, Apr, May, Aug, Sep, Oct, Nov
• Cash settlement
• Daily limits - 3

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N.D. Feeder Cattle BasisRule of Thumb

• E to W along I-94
• Highway 2 deduct 1 to 2
• 700 850 par -4 to 4
• 600 700 5
• 500 600 10
• 400 500 15
• 850 950 -5

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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

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Why use options?

• Price? cash
• Price? futures
• Price ? options
• Options will always be 2nd best

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FUTURES FEEDER CATTLE EXAMPLEOCT-JAN550 lb
800 lb2.77 lb / day gain62 head / contract
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January(futures contracts mature on last
Thursday)
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Put Option(same assumptions as previous)
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January(options expire on last Thursday)
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Summary
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When should I pull the trigger?
Most difficult part of using Futures and Options
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Feeder Cattle Hedge ProfitsOct 30 to Jan, Mar,
Apr 15
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LRP

• Similar to put options
• 13 of premium is subsidized
• Crop insurance agents do not have to offer
• List of approved agents at www3.rma.usda.gov/ap
  ps/agentsslpi/result.cfm

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LRP Feeder Cattle

• Based on Chicago Mercantile Exchange (CME) feeder
  cattle price index which is available at
  www.cme.com or DTN
• 600-849 lb, M L 1, feeder steers at markets
  reported by USDA-AMS
• Same basis considerations as futures and options

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Insurance Period

• Policies available for the following weekly
  lengths
• 13, 17, 21, 26, 30, 34, 39, 43, 47, 52
• Policy Size
• Any up to 1,000 head per Specific Coverage
  Endorsement (SCE)
• 2,000 maximum per year (July 1June 30)

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Actuarials

• Coverage prices rates change daily and are
  posted on the USDA Risk Management Agency (RMA)
  web site
• www.rma.usda.gov
• Coverage levels will range from 70-95 of posted
  price

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Indemnity

• Payment based on difference between COVERAGE
  PRICE (CP) CME CASH SETTLEMENT PRICE (CS)
• CP 105/cwt
• CS 100
• 5/cwt payment
• Producers must submit 04-LRP-Claim Form within 60
  days of end of contract

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Steps to LRP

• Submit eligibility application form with
  insurance agent
• Select a SCE (coverage prices and premiums are
  available after 5 PM (CST) except holidays)
• Number of head
• Policy length closest to marketing date
• Estimated average market weight
• Choose coverage price
• Pay premium to agent
• Agent submits SCE form electronically (hours are
  between 5 PM and 9 AM (CST), Tues-Sat only)

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LRP

• Advantages
• Small numbers can be hedged
• Premium subsidized 13
• No brokerage or margin
• Receive higher prices in bull market
• Available in months where no futures/options
• All coverage prices available daily
• Disadvantages
• Not flexible like futures and options
• basis risk
• Only out of money coverage prices (70-95)
• Can be suspended at any time

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LRP Prices and Premiums600 900 Steers
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Recommendations

• Fall sales of calves
• Prices should be profitable for several years
• Futures market is difficult to use because of
  different seasonal price patterns,
  specifications, basis, etc.
• Buy LRP or out-of-the money puts to protect
  against disasters (9-11-01, BSE, etc.)
• Backgrounded calves
• Put options or futures particularly for later Feb
  thru Apr sales
• LRP for floor
• Fed cattle
• Use futures contracts
• Options premiums are relatively expensive
• Contract size, specifications, basis, etc., are
  conducive even to small lots
• If profitable (or breakeven) price can not be
  locked in, do you really want to take the
  additional risk??

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Commodity Challenge
www.commoditychallenge.com
A Realistic Online Education Tool to Build
Producers Marketing and Decision Making Skills

• Montana MarketManager

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Commodity Challenge - Features
www.commoditychallenge.com

• Getting Started
• Producers will log on to the website
  www.commoditychallenge.com
• They will complete the following process to sign
  up for Commodity Challenge

Montana MarketManager
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• Registration Steps
• UserName and Password
• Pick the Game
• Marketing Savy Quiz
• Develop Marketing Plan

Registration Step 2 Pick the Game to Play
Click the game Title to see a full description of
the game. Use the JOIN button to pick the game
you want to play.
Title Start/End Date Commodities
ND Crops 9/15/2003-6/15/2004 Corn-Hunter,
ND Soybeans-Hunter, ND Wheat(HRS)-Minot,
ND ND Cattle Feeder 9/15/2004-5/30/2005 Feeder
Cattle Corn Fed Cattle
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Game Description
Game Title ND Crops Game Description A crop
game for North Dakota marketing club members and
facilitators Start of Game 9/2004 End of
Game 6/2005
Corn Soybeans Wheat (HRS)
Cash Market Location Hunter, ND Hunter, ND Minot,
ND Production 30,000 bushels 15,000
bushels 30,000 bushels Harvest Date 10,30/2004 10/
15/2004 8/30/2004 Storage Cost Per Month 3 cents
per bu. 4 cents per bu. 3 cents per bu. Futures
Market CBOT Corn CBOT Soybeans MGE Wheat Contract
Size, Futures Options 5,000 bushels 5,000
bushels 5,000 bushels Commission, Futures
Options 75/contract 75/contract 75/contract
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Game Description
Game Title ND Cattle Feeders Description This
is a cattle feeding game, where you decide when
to place cattle on feed and when to take them off
of feed. You can hedge feeder cattle, corn (for
feed) and live cattle. Start of
Game 9/2004 End of Game 6/2005
Cash Market Location Feedlot, NE Head Placed on
Feed 300 Weight When Placed on Feed 650 Pounds of
Gain Per Day 3 Pounds of Feed per Pounds of
Gain 6.15 Maximum Market Weight 1300 Head Taken
off Feed 298 Commission, Futures Options
(/contract) 60
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Wheat (HRS)
Detailed Report Detailed Report Detailed
Report Production 45,000 45,000 55,000 Quantity
Sold 0 0 20,000 Value of Sales 0.00 0.00 81,350
.00 Unsold Inventory 45,000 45,000 35,000 Storage
Cost 0.00 0.00 3,122.95 Total Cash
Value 92,250.00 274,050.00 204,927.00 Futures
Profit 682.50 -510.00 3,497.50 Options
Profit 0.00 0.00 588.75 FuturesOptions
Profit 682.50 -510.00 4,086.25 Net
Value 92,932.50 273,540.00 209,013.30 Net
Price 206.5 607.9 380.0
Minnesota Game
User
Tim Petry
Reports
Cash Sales Futures Positions Option Positions
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Detailed Report for HRS Wheat Cash Sales Sold
Date/Time (CST) Quantity Price Value 8/20/2003
52900 PM 5,000 405.00 20,250.00 8/19/2003
100600 AM 10,000 413.00 41,300.00 8/13/2003
121500 PM 5,000 396.00 19,000.00 Total
Sales 20,000 406.8 81,350.00 Unsold
Inventory 35,000 362.0 126,700.00 Storage
Cost 3,122.95 Net-Cash Value 204,927.00 Futur
es Profit
Date/Time (CST) Position/Contract Quant. Price Las
t Price Comm. Status Profit 8/21/2003 94500
AM Sell Dec-03 MGE Wheat 1 396 347.5 30 OPEN 2,39
5.00 8/19/2003 100541 AM Buy Sep-03 MGE
Wheat 1 372 395.25 60 CLOSED 1,102.50 Net-Profit
on Futures Positions Option Profit Date/Time
(CST) Position Contract Quant. Price Last
Price Comm. Status Profit 8/13/2003 14500 Buy
Dec-03 MGE Wheat 360 Put 1 7.5 19.875 30 OPEN 588
.75 Net-Profit on Option Positions 588.75 T
OTAL COMMODITY VALUE 209,013.30 NET-PRICE
380.0
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Commodity Challenge - Features
www.commoditychallenge.com

• Other Features
• Quotes futures, options, and cash
• Charting software allows charting of all futures
  contracts
• Interactive charting of local prices
• Basis Charting!!!

Montana MarketManager