Marketing cattle is challenging this year given the high price of feed at the present time and sharply lower feed prices expected this fall. Cattle producers may be looking for tactics to use to protect the price of newborn calves, to protect yearlings headed to summer grazing, or price cattle to be placed on feed in the coming months. As producers weigh their marketing alternatives, a few tools may help from a seller’s perspective.
The first tool is a decision aid that combines price and basis expectations to show what marketing and insurance tools make sense to use from a risk management perspective. If higher prices are expected, then little needs to be done. However, if lower prices are expected, then a seller may prefer to either price the cattle sooner rather than later or use a protection strategy.
More details are available in the iGrow publication titled Livestock marketing and insurance tactics.
If a producer is expecting lower prices, then basis expectations dictate if a forward contract or other tactic would be warranted. Fed cattle are forward contracted throughout the year. In recent months, the volume of fed cattle forward contracted has been below levels from last year. This is also the time of year when forward direct and forward auction sales start to occur for feeder cattle and calves.
Ideally, a producer would track and know the basis on their cattle. That approach would be the best way to account for quality differences, localized market conditions and timing differences of sales. Comparing to a common benchmark is useful to see if there are quality problems or other times when marketing may be more profitable.
The second tool is a recent history of basis levels specific to South Dakota. Basis tables are in a publication titled Monthly cattle prices and basis levels.
A third tool is historic knowledge of volatility in the market. Despite high feed prices and lower cattle inventories, the volatility in the cattle market has been low. This aspect is in the seller’s favor because option premiums and livestock insurance premiums are cheaper compared to other years.
Specifically, the implied volatility of futures and options is low by historic standards. Typical volatility for live cattle is 20% and for feeder cattle is 15% when backed out from option prices and annualized. The volatility is not as widely available as prices and fundamental factors. One source is barchart.com, where a contract’s chart can be studied and an indicator added for the implied volatility. Currently, the implied volatility levels for live and feeder cattle are in the 10-12% range. Thus, options and Livestock Risk Protection insurance premiums are inexpensive.
Source: Matthew Diersen