2. Livestock Risk Protection and Price Basis Tim Eggers, Iowa State University Extension Field Agricultural Economist

3. September Feeder Cattle

4. October Feeder Cattle

5. November Feeder Cattle

6. A Marketing Plan A marketing plan should address: – short term survival – long term success – key elements – map to destination

7. Key Elements of a Marketing Plan Marketing objectives Cost of production Current market environment Contingency plans Flexibility

8. Pricing Targets Establish minimum price objective – Risk tolerance – Your cost of production Could use Beef Cow/Calf Enterprise Budget Your records provide better information

9. Strategies for Marketing Spring Calves Wean, Sell Nov. 1 Background, Sell Jan. 1 Background, Finish, Sell July 15 Wean Sep. 1, Finish, Sell June 1 Wean Nov. 1, Finish, Sell July 1

10. Wean & Sell Nov. 1 Calves weaned & sold on Nov 1 (550#) Benchmark strategy Cost of Production—Cow costs Market Value Factors – Pre-conditioning – Source verification

11. Wean & Sell Nov. 1 Risk Management Factors – Forward Contract What, When, Where, Price  Sale Barn  Video Auction

12. Background & Sell Jan. 1 Wean November 1 background 60 days Sell at ~670# on January 1 Increased risks – Price risk and opportunity – Rate of gain risk and fleshiness – Mortality and morbidity risk

13. Background & Sell Jan. 1 Risk Management Factors – Forward Contract – LRP Insurance Minimum coverage period is 13 weeks, so insurance must be purchased as appropriate

14. Background & Finish Previous backgrounded calves put in feedlot January 1 and fed until August 20 Increased Risks – Price risk – Opportunity cost – Mortality, morbidity – Weather – Feed price

15. Wean Sep. 1, Finish Lower cow costs More feed yardage costs Improved quality grade

16. Risk Management Tools Futures market – Hedging – Buy a Put Option Forward Contract Livestock Revenue Insurance – Livestock Risk Protection (LRP) – Livestock Gross Margin (LGM)

17. Feeder Cattle Futures Contract Feeder Cattle Futures Contract (FC) – 50,000 pounds (67 hd- 750# feeder cattle) – Contract months—Jan, Mar, Apr, May, Aug, Sep, Oct, Nov – Contract expires last Thursday of contract month – Cash settle, no delivery – Margins--$1000

18. Live Cattle Futures Contract Live Cattle Futures Contract (LC) – 40,000 pounds (33 - 1200# cattle) – Contract Months—Feb, Apr, Jun, Aug, Oct, Dec – Expires last business day of the contract month – Contract settled by physical delivery of cattle – Margins--$700

19. Hedging: Money Required Commissions vary with broker – Example: $60 per contract = about 15 cents per cwt. (LC) about 12 cents per cwt. (FC) about 1-2 cents per bu. (Corn) Margin Money Interest on margin money

20. Basis Basis = Cash Price - Futures Price If Cash = $120 and Futures = $110 Basis = Estimated basis is a forecast based on history.

21. Hedge Managing price or market risk by taking a position in the futures market opposite to that held in the cash market Cash position—33 head of cattle to be marketed in June Hedge position—Sell a live cattle contract on the CME

22. Hedge Example Cattle ready for market in June Sells June LC futures at $98.50/cwt in October Expected local basis in June is $0.74 Expected hedge price is $99.24/cwt ($98.50 + $0.74) If futures are $95 when hedge is lifted there will be a $3.50 gain on the futures contract ($98.50 – $95) Cash price will be $3.50 less than expected ($99.24 – $95.74 = $3.50 loss), offsetting the futures gain Result will be expected price of $99.24 Gain offsets loss as long as basis is as expected ($0.74)

24. LRP Exercise Cow/calf producer End of March wean and sell 36 steer calves at 550 lbs Buys LRP on September 22 – (26 wks out)

25. Size of Coverage Futures and options have fixed contract sizes: – Fed cattle: 400 cwt. or about 32 head – Feeder cattle: 500 cwt., 60-100 head LRP can be purchased for any number of head or weight

26. Expiration Date of Coverage LRP ending date is fixed. – Insurance contract settles on end date. – Price may change after date of sale. – Market date should equal end date Futures or options can be lifted at any time before the contract expires.