Cattle Marketing Game
The Cattle Marketing Game
Stacy Hadrick, South Dakota Extension Educator
Stacy Hadrick
April 2006
Meade County Extension Educator
National Extension Women In Agriculture
April 2006
Education Conference
National WIA Conference
The Game Guide
• Follow the year of a cow/calf producer
• Start in March-calving season through
October-weaning, may choose to
background.
• Make Money, not TOP the Market Money
• Determine Cost of Production
• Develop a Marketing Plan
• Gain knowledge about basis & seasonality
• End of the game sell out & offset contracts
Ranch Information
• Cow/Calf Operation
• 400 head of mother cows-Calving now
• Typically sell 550 lb calves when you wean
in October
• Can decide to background in the
neighbors lot to 800 pounds and sell in
January
• Can Forward Contract
• Can utilize Hedges in your marketing plan
Hedging
Taking a position in the futures market that is equal and opposite
to the position one expects to take in the cash market, thus
providing protection against adverse price movements
Long: Bought futures contract to protect against price increase.
You plan to buy a commodity later
Short: Sell a futures contract to protect against price decrease. You
plan to sell a commodity later
CME-Chicago Mercantile Exchange
F – January
CBOT-Chicago Board of Trade
G – February
H – March
J – April
K – May
M – June
N – July
Q – August
U – September
V – October
X – November
Z - December
LCZ01 73.650
CK01 2606
2=¼
4=½
6=¾
Contract Specs
•
•
•
•
Ticker Symbol
Trading Unit
Price Quote
Minimum Price
Fluctuation (Tick)
• Daily Price Limit
• Contract Months
FC
50,000lbs. 650-799lb.
$ per 100 pounds
.025=12.50/contract
1.50=$750.00/contract
Jan, Mar, Apr, May, Aug,
Sept, Oct, Nov.
• Last Day of Trading Last Thursday of the
contract month, unless of
holiday
• Cash Settlement
Cost of Production
Cow Cost
Land/Interest
Death Loss
Vet
Marketing
$380
$48/head
$45/head
$12/head
$15/head
Do You Know Your COP?
MARCH
Calf Weight
90 Expected Basis +$10.00
January Feeder Cattle Futures $86.80
Calf values are expected to follow the twenty-year average this
spring, which is to say that prices are likely to see their spring
high sometime in the next few weeks. 550 weights are
expected to decline towards a summer low near $105/cwt.
range during the balance of the summer. There is a possibility
of higher corns prices.
Marketing Plan
Enterprise
Date
1. Production Level and RiskWrite down what you reasonably expect to market. Be reasonable about death loss and pounds of
animal marketed.
2. Financial SituationNote any major financial implications for the plan.
3. Price Targets-Translate financial goals into prices.
Use the breakeven price as a benchmark. Have targets of “needs” “wants” and “hopes”
4. Fundamental OutlookIdentify some known's of the market. What are seasonal patterns and trends.
5. Tools and StrategiesState when you will sell, how much you will sell and by what method.
6. Evaluation –Maintain a history of performance.
Marketing Plan
Enterprise
Calves
Date March
1. Production Level and Risk*400 head of cows 90% calf crop=360 calves at 550lbs weaning weight
*Consider Backgrounding
2. Financial Situation*Reviewed financial statements-cash flow is good
3. Price Targets-Translate financial goals into prices.
*Breakeven $91/cwt is a need; Want-$101; Hope-$135
4. Fundamental Outlook*Volatility with BSE
*Cattle Cycle-Supply & Demand
5. Tools and Strategies1. Track January Feeder Cattle Contracts
2. April-Buy 2 feeder cattle contracts if January @ $93
3. June-consider forward pricing opportunities if market is above $115
4. August-Forward contract 30% if cash is @ $110
5. August-pencil out backgrounding option
6. Evaluation –look how plan worked-what strategies do I need to change?
April
Calf Weight
156 Expected Basis +$10.00
January Feeder Cattle Futures $89.50
As grass season begins, the green grass fever and high
calf prices associated with it are expected to subside.
Current expectations are that 550 lb steer calves will
see a floor near $105-$110/cwt. for a nationwide
average during June, July and August.
Basis
Cash
-Futures
Basis
Made up of: weight, sex, type, location
Historical
South Dakota Cash Stocker Minus Nearby Feeder Cattle
Futures
2005
Avg.'01-'05
35
$/cwt.
28
21
14
7
0
Jan
Feb
Mar
Sources: AMS, CME, & SDSU
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
South Dakota Cash Feeders Minus Nearby Feeder Cattle
Futures
2005
Avg.'01-'05
15
$/cwt.
12
9
6
3
0
Jan
Feb
Mar
Sources: AMS, CME, SDSU
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
May
Calf Weight 222
Expected Basis +$10.00
January Feeder Cattle Futures $98.00
Forward Contract $124.50
USDA released data this week that supports the idea of limited
supply of feeder cattle. The marketplace responded to tight supplies
and strong demand by raising feeder cattle prices to record monthly
levels. Sellers need to understand there are numerous issues which
could provide price risk such as corn prices, another BSE case,
closed export markets, etc. All could influence feeder cattle prices.
Sellers are encouraged to consider forward contracts as a way to
manage risk.
June
Calf Weight 288
Expected Basis +$10.00
January Feeder Cattle Futures $100.85
Forward Contract $123.00
The market has had a very strong rally making some producers
nervous about the sustainability of these price levels. From a historical
perspective feeder cattle prices still have room to advance. Using this
logic August feeder cattle could reach the $114 to $117 range fairly
easily from now until early fall.
July
Calf Weight 360
Expected Basis +$10.00
January Feeder Cattle Futures $103.40
Forward Contract $134.50
As more calves are offered and the extreme part of the summer weather
passes, calves will become more attractive to cattle feeders and prices
will rise slightly. From now through mid-September, prices could increase
by as much as $5/cwt. before moving lower during the fall runs.
Backgrounding Indicators
What is the market telling you?
What will it cost you to put pounds on
calves?
What is the cash market doing in October vs
futures market in January/March?
August
Calf Weight 435 Expected Basis +$10.00
January Feeder Cattle Futures $105.00
Cash Market $139.00
Forward Contract $134.50
Time for fairs and motorcycles. Fall calf prices will be supported by
historically tight supplies and the large degree of foreword contracting
that will have already taken place.
September
Calf Weight 500 Expected Basis +$10.00
January Feeder Cattle Futures $106.00
Cash Market $134.00
Feeder cattle have experienced considerable volatility over the last
several weeks. Calf prices may largely trade within a range between
now through mid to late October. Risk management plans should keep
this in mind and account for the appreciation in the feeder cattle futures
and cash markets.
October
Calf Weight 572
Expected Basis +$10.00
January Feeder Cattle Futures $108.00
Cash Market $132.00
Calf runs have started in the Central Plains and offerings will grow in
size each week for a month. Calf values are a little more attractive,
lower corn values and costs of gain have helped to offset part of the
impact of both from a feeding standpoint.
Need To Decide-Sell Calves or Background!
Backgrounding Decision
October Cash Market $132.00
January Futures $108.00 + $2.00=$110.00
550lbs x 1.32=$726/hd
800lbs x 1.10=$880/hd
$154 Difference
How much does it
cost to add pounds
to those calves?
November
Calf Weight 661
Expected Basis +$2.00
January Feeder Cattle Futures $101.90
Cash Market $120.00
Forward Contract $102.50
Feeder Cattle outlook has become less clear as a result of the
inconclusive BSE announcement last Thursday. Prior to this latest
event the market was preparing to follow a largely seasonal price
pattern with highs projected in last December or early January.
December
Calf Weight 730
Expected Basis +$2.00
January Feeder Cattle Futures $103.25
Cash Market $110.00
Merry Christmas! Volatile markets make buying and selling decision
very difficult. This volatility underscores the fact that producers should
have a plan in place and profit objectives should be the headliner of the
plan.
January
Sell in Cash market
Offset any Hedges
Calf Weight 800
January Feeder Cattle Futures $103.50
Cash Market $107.00
Game Wrap up
• How Did You Do?
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•
•
•
Cost of Production-Do you know yours?
Basis-What did you learn?
Marketing plans-Did you use it?
Marketing Options-Do you use those?