The Angus Journal® is a monthly magazine known for in-depth coverage of American Angus Association® programs and services; the Angus business; herd management; and advertising reflecting genetics and herd philosophies.
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July 2015 ■ ANGUSJournal ■ 47 Paul Peterson, University of Illinois Clearing Corp. Foundation clinical professor of derivatives trading in the Ag and Consumer Economics Department, encourages producers to begin the market education process by identifying a hedge broker who can explain how to use markets for their risk-management needs and not as speculation or investment. "Understand cash market risk- management tools and how to use them to protect your price," he says. "Futures and options also are important risk- management tools. Producers should never stop studying and learning how they can use these tools to manage risk in their operations." Here are some risk-management tips Peterson and Griffi th say cattle producers should know. @ When you choose to use a cash forward contract, you have only production risk. Your price is established with the contract. Typically, producers could rely on the seasonality of cattle prices to guide decisions, but unseasonal price action has occurred the last two years. Calf prices peaked in the fall instead of the spring in 2013. Griffi th says 2015 may see more seasonal action, although price peaks and troughs may not be as defi ned. @ Futures price discovery is a projection on what the price may be at delivery, when the contract expires. Using futures contracts means you trade price risk for basis risk. You lock in a sales price. If the price goes up, you do not benefi t from the gain and you may have to meet margin calls. If the price goes down, you are locked in at a higher price. Basis, or the difference between the futures and cash at time of delivery, can change. @ Options are similar to insurance premiums — you pay for market coverage at a certain price, but are not obligated to use or exercise the option. The further out you go on the board in selecting puts or calls, the higher the premium you will pay. The advantage is in market fl exibility. If you think the market will go down, you can establish a price fl oor with options. Then if the market goes up, you can get the higher price by selling or abandoning the options position. There are no margin calls when you use options. @ When you purchase LRP insurance, you pay a premium. The benefi t of LRP to producers is that you can insure on a per- head basis. "I would not be surprised to see more tools added to manage risk," says Peterson. "Remember there is a difference between hedging and speculation. If you use the markets for risk management, don't fool yourself into thinking you are managing risk with speculative positions." Robb encourages cattle producers to revisit their marketing alternatives frequently. "Establishing a marketing plan only once a year is behind us. You have to have a plan with alternatives based on what may happen," he says. "It is an ongoing process of recognizing when opportunities avail themselves and being more adaptable in managing risk." 35 Keys to Success Marketing Commercial Cattle Learn more about marketing Several good resources are available online to assist with market understanding and decisions: @ Livestock Marketing Information Center (LMIC) www.lmic.info/ @ Iowa State University Extension and Outreach Ag Decision Maker www.extension.iastate.edu/agdm/homepage.html @ Iowa State University Extension and Outreach Estimated Livestock Returns www.econ.iastate.edu/estimated-returns/ @ Iowa State University Extension and Outreach Livestock Crush Margins www.econ.iastate.edu/margins/ @ Iowa Beef Center www.iowabeefcenter.org/ @ Kansas State University Ag Manager www.agmanager.info/ Method Advantages Disadvantages Cash sales Easy to transact Immediate payment No set quantity Minimize risk No price protection Less fexible Forward contract Easy to understand Flexible quantity Locked-in price Minimize risk Must deliver in full Opportunity loss if prices rise Futures contract Easy to enter/exit Minimize risk Often better prices than forward contracts Opportunity loss if prices rise Commission cost Performance bond calls Set quantities Options contract Price protection Minimize risk Beneft if prices rise Easy to enter/exit Premium cost Set quantities Commission cost Table 1: Advantages and disadvantages of risk-management tactics