In this file:


·         No whining, just profit

Good analysis and good trades still making money in this soft market.


·         How futures markets work: Straight hedge

For many, the futures market can be confusing. But learning how it works can help your marketing strategy.



No whining, just profit

Good analysis and good trades still making money in this soft market.


Doug Ferguson, BeefProducer

May 31, 2019


Over the weekend I got a text from a friend who was at a social function with President Trump’s ag advisor, who was telling everyone within earshot that nobody is having any fun in agriculture right now. That reminded me of when former cattle marketing teacher Ann Barnhardt used to highlight profitable trades on her web page years ago, and she called those posts “Fun With Math.”


This is a good week to highlight some fun with math because one would think the deck is stacked against us. We had a holiday at the start of the week, so that cancelled sales, and the runs on Tuesday sales were light as well. This week also started the summer schedule, with many barns not having a sale. Some of the barns that did have sales held special female sales. Then there is was the lower undertone this week.


If you’ve read this blog for a while you may recall I’ve repeatedly called four-weights undervalued. If you bought them back then they should weigh 600 by now. In this first trade I am going to use $1.33 Break Profit Cost of Gain (BPCOG). I include a profit as an expense in my cost of gain because a business must make a profit to thrive.


In Kentucky a six-weight steer was $1.55 and a four-weight bull was $1.55. Time for fun with math.


·         Sell 596-pound steer at $1.55 = $923.

·         Buy 432-pound bull at $1.55 = $670.

·         Difference is 164 pounds and $253 profit.


This trade gives us a return on the gain of $1.55. That is higher than our BPCOG of $1.33, which gives us $35 extra profit. I call it extra profit because its above and beyond the profit I already had figured in, which was $50. Therefore we made $85 total profit. How fun is that?


Maybe you sold fats last week.


With the price structure, we can assume you sold a fat steer weighing 1,400 pounds at $1.16, and replaced it with a 980-pound steer for $119.50. If we use a BPCOG with $127 profit already figured in, we still make a little extra.


The market was also paying some people to take weight home. Sell a 729-pound heifer in Missouri for $970, buy back in Oklahoma a 778-pound heifer at $116.50 for $906. You get 49 pounds and $64. That’s a cheap cost of gain.


In every crowd there has to be a party pooper. Hay prices continue to stay high and now there’s that corn rally. So I’m going to kick the BPCOG up to $1.68 using corn at $4.40, hay at $150 a bale for a 1,600-pound bale, and a $65-per-head profit.


Therefore we sell a 567-pound heifer for $149.70 and replace her with a 420-pound heifer at $143.40. That gives us a return on the gain of $1.68. No extra profit here, but still a good trade.


Here’s another neat deal:





How futures markets work: Straight hedge

For many, the futures market can be confusing. But learning how it works can help your marketing strategy.


Nevil Speer, BEEF Magazine

Jun 05, 2019


I came across some market commentary in early May proclaiming cattle feeders had achieved their best sales of the year. This despite the cash market trading in the low $120s. The logic was something like this: Feedyards sold cattle early in the week at $122 per cwt. Meanwhile, the spot futures market on that given day was $112; that equated to a $10 basis.


To this marketer commenter, that meant “You can add that on to the sale price of $122 because when they’re short the board that means they can pick up that extra money – tack on 10 bucks on $122 and you’re suddenly at $132.” 


Unfortunately, that’s NOT how it works. As a result of that misunderstanding of how futures work, Industry At A Glance will highlight some basics around risk management over the next several weeks. With that, perhaps one of the most misunderstood principles of hedging revolves around the concept of basis.


Basis equals the difference between the cash market and the futures market (cash minus futures). This week’s illustration highlights two generalized examples outlining its importance.


Let’s assume that cattle marketed in early- to mid-May went on feed at some point between mid-November and mid-December. 


At that time, CME’s June live cattle contract averaged roughly $114.50 per cwt. A feedyard would sell (or short) June futures contracts to implement a hedged position at $114.50. 


During the past five years, May’s basis average has been a positive $9.75. Therefore, at the time of placing the hedge, the feedyard’s expected selling price would be $124.25 ($114.50 + $9.75).


The feedyard is now indifferent to what occurs in the futures market – they are protected against downside market risk. The only remaining price risk revolves around basis.  


Now fast-forward to the first week of May; the cattle are ready to be marketed. The cash market averaged $123.75 while the futures had drifted back to $114. The basis was right in line with the five-year average. 


The feedyard markets the cattle at $123.75 while simultaneously negating the short position in the futures market by purchasing June contracts at $114 – thereby facilitating a 50¢ profit. The net selling price is $124.25 ($123.75 + $.50).




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