The document provides an overview of futures and options in the cattle market, detailing live and feeder cattle contracts, pricing, and breakeven analysis for feeding operations. It includes information on cost of gain, hedging strategies, and the use of options to manage price risk. Additionally, it emphasizes the importance of understanding margins and pricing dynamics in making trading decisions.

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

3. 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

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

15. 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

16. 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

17. 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 2 nd best

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

21. Some packers offer futures-based contracts Tyson example April delivery: $1 off Apr futures May delivery: $2 off Jun futures other specifications

22. 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

23. Livestock Marketing Information Center

24. Feeder Cattle – March 2011

25. Feeder Cattle – April 2009

26. Feeder Cattle Options Jan, Mar, Apr, May, Aug, Sep, Oct, Nov (same as futures) Strike price available in $2/cwt intervals nearby two contracts at $1/cwt intervals expiring contract may have $0.50/cwt intervals Terminate on last Thursday of contract month same day as futures expire and cash settlement

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

28. 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