KEY
Ag Decision Maker Activity
Hedging of Livestock
File B2-50
Using File B2-50 answer the questions below.
1) Farmer Jones placed a hedge on 50,000 pounds of live cattle for
$60 per hundredweight. Since placing the hedge, prices have
risen so Jones has had to make additional margin deposits.
Compute the interest on margin money assuming the following
provisions.
a)
b)
c)
d)
e)
f)
contract held for 6 months
10 percent interest rate
initial deposit of $1,000
additional deposit of $300 after two months
additional deposit of $400 after three months
additional deposit of $600 after five months
Initial margin
$1,000 x 10% x (6/12) year =
$50.00
Additional margin
$300 x 10% x (4/12) =
10.00
Additional margin
$400 x 10% x (3/12) =
10.00
Additional margin
$600 x 10% x (1/12) =
5.00
Total interest
Interest per cwt.
$75/500 cwt. =
$75.00
$.15
2) It if February and Farmer Jones has 270 hogs that will be
marketed in June. Jones has decided to hedge one contract on
the CME (40,000 pounds or about 220 hogs).
Assume
June futures
Expected June basis
Brokerage fee
Interest on margin
Cost of production
$80.00
3.50
.20
.15
68.00
a) What is the expected net hedge price?
June futures
Expected June basis
Brokerage fee
Interest on margin
Expected net hedge price
$80.00
3.50
.20
.15
$76.15
b) What is the expected net profit per cwt?
Expected net hedge price
Cost of production
Net profit
$76.15
68.00
$8.15
c) What is the net profit per cwt. from the hedge if the actual
futures price in June is $90.00, basis is $4.00, and interest
on margin is $.30?
Futures price in February
Futures price in June
Futures loss
$80.00
90.00
$10.00
Futures price in June
Basis
Cash price in June
$90.00
- 4.00
$86.00
Cash price in June
$86.00
Futures loss
Brokerage fee
Interest on margin
Cost of production
Net profit
- 10.00
- .20
- .30
-68.00
$7.50
d) Why is the actual net profit different than the expected net
profit?
The interest on margin is 15 cents larger than
expected and the basis is 50 cents larger than
expected.
e) What is the net profit per cwt. in "c" above from the
unhedged hogs?
Cash price in June
Cost of production
Net profit
$86.00
-68.00
$18.00
f) How much of the production is hedged and how much is
unhedged?
Hedged production
Unhedged production
270 hogs - 220 hogs =
50 hogs x 180 lbs. =
40,000 pounds
50 hogs
9,000 pounds
g) What is the net profit in "c" above from all of the hogs?
40,000 / 100 x $7.50 =
9,000 / 100 $18.00 =
Total
$3,000
1,620
$4,620
h) What is the net profit in "c" above if the hedge is not placed
and all of the hogs are sold on the cash market in June?
49,000 / 100 x $18.00 =
$8,820
i) What is the net profit per cwt. from the hedge if the actual
futures price in June is $70.00, basis is $3.00, interest on
margin is $.10?
Futures price in February
Futures price in June
Futures gain
$80.00
70.00
$10.00
Futures price in June
Basis
Cash price in June
$70.00
- 3.00
$67.00
Cash price in June
Futures gain
Brokerage fee
Interest on margin
Cost of production
Net profit
$67.00
10.00
- .20
- .10
-68.00
$8.70
j) What is the net profit per cwt. in "i" above from the unhedged
hogs?
Cash price in June
Cost of production
Net profit
$67.00
-68.00
$- 1.00
k) What is the net profit in "i" above from all of the hogs?
40,000 / 100 x $8.70 =
9,000 / 100 $- 1.00 =
Total
$3,480
900
$5,380
l) What is the net profit in "i" above if the hedge is not placed
and all of the hogs are sold on the cash market in June?
49,000 / 100 x $ -1.00 =
$ -490
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