Presentation by Tim Petry, NDSU Extension Service livestock economist. This slideshow was part of the 2011 NDSU Feedlot School.

1. Futures and Options Live Cattle Feeder Cattle Tim Petry Livestock Marketing Economist NDSU Extension Service 1-28-11 FutOpt-Carrington-Jan2011.ppt

4. Live Cattle – April 2011

5. Livestock Marketing Information Center

6. Livestock Marketing Information Center Data Source: USDA-AMS & USDA-NASS, Compiled & Analysis by LMIC

7. Breakeven Prices for 1300 lb Fed Steers 750 to 1300 lb ADG = 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

8. Kansas Steer Feeding Cost of Gain

9. BASIS: Difference between cash price and futures price Cash price - Futures price = basis Futures Price Cash Price Actual Livestock Sale Date Futures Nebraska N. Dakota

10. 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

12. Futures Live Cattle Example Fed Cattle for April Market 1300 lbs/31 hd / contract Jan APR LC FUT $112 / cwt EXPECTED BASIS -3 109 BREAKEVEN -104 BROKERAGE - (included in BE) EXPECTED PROFIT 5

13. April 15 Price Decrease Price Increase Short $112 $112 Long 103 117 9 -5 Cash 100 114 BE -104 104 -4 10 Profit 5 5

14. April 15 Price 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

18. 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

19. 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

20. Summary Price Decrease Price Increase CASH -4 10 OPTION 2 7 FUTURES 5 5

23. Livestock Marketing Information Center

24. Feeder Cattle – March 2011

25. Feeder Cattle – April 2009

27. When should I pull the trigger? Most difficult part of using Futures and Options