![]() Buying livestock futures allows those who need protection against rising prices to acquire the peace of mind of knowing that they took steps to manage the risk involved in purchasing these livestock and livestock products for their business. No one can predict the future, but hedgers can take steps to manage it. Benefit from arbitrage and spread opportunities with other commodities such as grains. Facilitate price discovery and manage price risk related to the purchase or sale of cattle. If the basis strengthens from two over to four over, the result would be a net purchase price of $144 per hundredweight: the March futures price of $148, plus the basis of four over, minus the futures gain of $8. Manage the risk inherent in cattle production and processing with Live Cattle futures and options. ![]() However, if the basis strengthens, in other words, becomes less negative or more positive, it could increase the final purchase price. If the basis weakens from two over to one under for example, his net purchase price would be $139, which is the March futures price of $148, minus the basis of one under, minus the futures gain of $8. For example, in the earlier scenario Feeder Cattle futures increased to $148 per hundredweight. Keep in mind that a long hedger will benefit from a weakening basis, or a basis that becomes less positive or more negative.Ī basis that is weaker than expected could lower a long hedger’s net purchase price, even in the face of a price increase. Of course, the feedlot operator’s actual purchase price will be affected by what happens to the basis between the time he initiates the hedge and when he makes his cattle purchase. Relinquishing the chance to pay a lower price in exchange for securing price protection, knowing that the price could just as easily have increased, is a trade-off a futures hedger is willing to make. By hedging with futures, he accomplished what he intended when making the decision to hedge. However, remember his original goal at the beginning of this process: to lock in a price of $142 per hundredweight for his cattle purchases. In this scenario, where hedging with futures provided protection against rising prices, but did not allow him to take advantage of a lower price, it may appear on the surface that hedging was a losing proposition for the feedlot operator. This still equates to a net purchase price for feeder cattle of $142, which equals the cash price of $138 plus the $4 loss on the futures position. ![]() With the basis of two over, the feedlot operator would purchase feeder cattle locally at $138 and simultaneously offset his futures position by selling March Feeder Cattle futures at $136.Įven though he could purchase his animals at a lower price, the feedlot operator lost $4 on his futures position. Suppose the March Feeder Cattle futures price falls from $140 to $136 by February. If feeder cattle prices decline instead, the feedlot operator will still pay $142 per hundredweight for the animals he needs.
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