Feeder Cattle Price Risk Management

1. Feeder Cattle Price Risk Management Dr. Curt Lacy Extension Economist-Livestock University of Georgia

2. Let’s talk about risk • It is NOT uncertainty! • It is the negative outcome associated with an unforeseen event. • Good risk managers • Know the odds • Don’t risk a lot to make a little. • Don’t risk more than they can afford lose.

3. Developing a “Good” Risk Management Plan • Identify your major risks • Price • Production • Legal • Financial • Labor • Determine what constitutes a “wreck” for you • Learn about the alternatives to minimize or manage this risk • Develop and implement a risk management plan

4. Feeder Cattle Price Risk Management

5. GA Feeder Cattle Prices, 2001-2011

6. Cattle Pricing Alternatives

7. Basic Decisions • Do nothing • Forward price • Pre-sell through an auction • Hedge • Minimum price • LRP • Option

8. Cattle Pricing Alternatives

9. Delivery Pricing • Two most common forms • Auctions • Negotiated/private treaty • Easy • No delivery obligation • Highest possible price • Lowest possible price • Risk = high • Reward = high

10. Delivery Pricing Example

11. Cattle Pricing Alternatives

12. Forward Pricing • Most common forms • Auction with future delivery • Futures hedge • Negotiated forward contract • Ability to set or at least know what price you will receive. • Advantageous if market is declining • Less than highest price if market goes up. • Risk = moderate • Reward = moderate

13. Minimum Pricing • Most common • Put options • Livestock Risk Protection (LRP) • Trade small but certain loss (premium) in exchange for protection from uncertain and larger loss (declining market). • Ability to set floor price good in declining market • Ability to get higher price if market goes up.

14. Forward Pricing/Hedging Example

15. “Perfect” Hedge – down market Currently @ $125

16. “Perfect” Hedge – up market

17. Cattle Pricing Alternatives

18. Minimum Pricing Example

19. Put Options: • Put Option - gives the holder the right but not the obligation to SELL a futures contract at a set price before the option expires. (Insurance against falling prices). If you will be selling the commodity use a Put • Think of a put option as a price FLOOR

20. Put Option Example – Market Drops

21. Put Option Example – Market Drops

22. Put Option Example – Market Rises

23. Put Option Example – Market Rises

24. Using Livestock Risk Protection (LRP) insurance to set a floor price Special Thanks to Dr. Darrell Mark, University of Nebraska for these slides

25. LRP Is Price Risk Protection • Establishes A Floor Selling Price For Livestock • Pays Producers If A Regional/National Cash Price Index Falls Below A Set Price • Does Not Guarantee A Cash Price Received • Basis Risk Must Still Be Considered • Covers Feeder Cattle, Fed Cattle, & Swine

26. Insurance Agents • Available Through Crop Insurance Agent System • Agent Locator Tool On USDA Website • http://www3.rma.usda.gov/apps/agents/

27. Coverage Availability • Coverage Available About 5pm To 9am CST • Available Sat Mornings Until 9am, But Not Sun, Mon, & Holidays • Coverage Initiated With Specific Coverage Endorsement (SCE) • No Limit On Number Of SCEs • Producers Have Flexibility On The: • Timing Of Purchase • Time Length Of The SCE • Number Of Head Covered

28. Limitations On Number Of Head Insured

29. LRP Compared to Hedging or Options • Advantages • No need to establish brokerage accounts • Can insure animals on individual basis • “Guaranteed” availability for price protection for far-off futures contracts • May be less expensive for deferred months • Disadvantages • Paperwork can take a while • Available only for animals in certain states • Can’t “lock-in” a price • Can’t exercise or “sell back” contract if market goes up • May be more expensive for nearer months

30. LRP Prices for 05/23/2011

31. Minimum Pricing Example

32. Feeder Cattle Price Risk Management Dr. Curt Lacy Extension Economist-Livestock University of Georgia www.secattleadvisor.com