Futures and Options Live Cattle Feeder Cattle

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Futures and OptionsLive CattleFeeder Cattle

• Tim Petry
• Livestock Marketing Economist
• NDSU Extension Service

03/15/04
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Live Cattle Contract

• 40,000 lbs, 400 cwt
• 1100 1350 lbs (36-30 hd)
• USDA Y.G.3, 55 Choice 45 Select
• Feb, Apr, Jun, Aug, Oct, and Dec
• (NEW) Jan, Mar, May, Jul, Sep, Nov
• Delivery to stockyards or packing plant
• Daily limits?

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CME Agricultural Futures -- Outright Rates
(Exchange Minimums) Revised 03/09/2004. An
before the rate type indicates the rate is new
since the last revision 03/08/2004 Initial
Maintenance Live Cattle (LC) Spec 1,620
1,200 Hedge/Member 1,200 1,200
Delivery Month - Spec 1,620 1,200
Delivery Month - Hedge/Member 1,200 1,200
Feeder Cattle (FC) Spec 2,025 1,500
Hedge/Member 1,500 1,500 Delivery Month -
Spec 2,025 1,500 Delivery Month -
Hedge/Member 1,500 1,500
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Live Cattle Futures Pit-Traded prices as of
03/16/04 MTH/ --- SESSION ---
PT STRIKE OPEN HIGH LOW
LAST SETT CHGE MAR04 85.150 86.700B
85.150 86.700B 86.700 1600 APR04 81.300
82.700 81.200 82.600 82.625 1775 MAY04
77.000 78.500B 77.000 78.500B 78.500
1500 JUN04 76.150 77.450 76.150 77.450
77.350 1375 AUG04 74.425 75.150 74.425
75.150 75.100 675 OCT04 76.550 77.200
76.550 77.200 77.200 750 DEC04 77.675
78.300 77.675 78.250 78.275 625 FEB05
79.350 79.800 79.200A 79.800 79.750
525 APR05 79.050 79.100 79.050 79.050
79.050 UNCH
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Futures Live Cattle ExampleFed Cattle for April
Market1300 lbs/32 hd / contract
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April 15
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April 15
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BASIS is difference between a cash price and the
CME futures price. HEDGING eliminates risk of
adverse price movement, except for the risk of
the basis being different than expected.
CASH ()
increasing
FUT
decreasing
(-) CASH
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BASIS Difference between cash price and
futures priceCash price - Futures price basis
Actual Livestock Sale Date
Futures Price
Futures
Nebraska N. Dakota
Cash Price
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Why do futures and cash prices come together
during delivery at par delivery points?
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Options

• Similar to an insurance policy
• PUT right to a short futures contract
• CALL right to a long futures contract
• Buyer pays market determined premium
• Seller receives premium

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Live Cattle Options

• Feb, Apr, Jun, Aug, Oct, Dec
• Strike prices available in 2/cwt intervals
  nearby contracts may have 1/cwt intervals
• Terminate on first Friday of contract month

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Why use options?

• Price? cash
• Price? futures
• Price ? options
• Options will always be 2nd best

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MTH/ --- SESSION ---
PT STRIKE OPEN HIGH LOW LAST
SETT CHGE OK APR04 LIVE CATTLE OPTIONS PUT 62
.025 .025 .025 .025 CAB
---- 64 .050 .050 .050 .050
.025 -25 65 ---- ---- ----
---- .025 -25 66 .050 .050
.050 .050 .025 -50 67 ----
---- ---- ---- .050 -25 68
.050 .050 .050 .050 .050 -25 69
---- ---- ---- ---- .075
-25 70 .125 .125 .100 .100
.075 -50 71 .125 .125 .100
.100 .100 -25 72 .125 .125
.100 .100 .100 -50 73 ----
---- ---- ---- .125 -50 74
.150 .150 .125 .150 .150 -50 75
.200 .200 .200 .200 .200
-75 76 .350 .350 .250 .250
.250 -150 77 ---- ---- .350A
.350A .300 -225 78 .500 .500
.400 .400 .400 -250 79 .600
.600 .550A .550A .525 -375 80
1.000 1.000 .700A .700B .700
-550 81 1.100 1.100 1.000 1.000
.975 -725 82 1.750 1.750 1.400
1.500 1.400 -1000 83 ---- ----
2.100A 2.100A 1.775 -1275 84 ----
---- 3.400A 3.400A 2.425 -1325
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Put Option(same assumption as previous)
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April 2 (First Friday)
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Summary
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Feeder Cattle Contract

• 50,000 lbs, 500 cwt
• 700-849 lbs (72-60 head)
• USDA Medium and Large Frame, 1
• Jan, Mar, Apr, May, Aug, Sep, Oct, Nov
• Cash settlement
• Daily limits?

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Feeder Cattle Futures Pit-Traded prices as of
03/16/04 MTH/ --- SESSION ---
PT STRIKE OPEN HIGH LOW
LAST SETT CHGE MAR04 90.000 90.500
89.900 90.500 90.500 650 APR04 88.300
89.550 88.300 89.400 89.325 1375 MAY04
86.950 88.200 86.950 88.100 88.100
1300 AUG04 88.150 89.000 88.150 88.900
88.950 875 SEP04 88.100 88.500 88.100
88.500B 88.500 500 OCT04 88.150 88.700
88.150 88.675A 88.675 725 NOV04 88.700
88.700 88.500 88.525B 88.525 175
JAN05 ---- 88.300B ---- 88.300B 88.300
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N.D. Feeder Cattle BasisRule of Thumb

• E to W along I-94
• Highway 2 deduct 1 to 2
• 700 850 par -4 to 4
• 600 700 5
• 500 600 10
• 400 500 15
• 850 950 -5

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Feeder Cattle Options

• Jan, Mar, Apr, May, Aug, Sep, Oct, Nov(same as
  futures)
• Strike price available in 2/cwt intervalsnearby
  two contracts at 1/cwt intervalsexpiring
  contract may have 0.50/cwt intervals
• Terminate on last Thursday of contract month same
  day as futures expire and cash settlement

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MTH/ --- SESSION ---
PT STRIKE OPEN HIGH LOW LAST
SETT CHGE ZF MAY04 FEEDER CATTLE OPTIONS
CALL 10000 ---- ---- ---- ----
.125 25 8000 ---- ---- ----
---- 9.025 1200 8200 ---- ----
---- ---- 7.275 1100 8400 ----
---- ---- ---- 5.625 975 8600
---- 3.800B ---- 3.800B 4.200
850 8800 2.400 2.825 2.400 2.825
3.000 700 9000 1.450 1.800 1.450
1.800 2.000 500 9200 1.000 1.000
.950 1.000 1.300 400 9400 ----
.550B ---- .550B .550 50 9600
---- ---- ---- ---- .350
100 9800 ---- ---- ---- ----
.225 50
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When should I pull the trigger?
Most difficult part of using Futures and Options
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Livestock Marketing Information Center
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Livestock Marketing Information Center
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Livestock Marketing Information Center
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Futures Projected Feeding Potential

• Expected
• FUT BASIS Price
• MAY FC 87 0 87
• MAY CORN 3.05 -.30 2.75
• OCT LC 77 -3 74
• FC 700 _at_ 87 609.00
• CORN 70 _at_ 2.75 192.50
• OTHER 98.50
• Total Costs 900
• Total lbs. 1250

BE 72
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Recommendations

• Fall sales of calves
• Prices should be profitable for several years
• Futures market is difficult to use because of
  different seasonal price patterns,
  specifications, basis, etc.
• Buy out-of-the money puts to protect against
  disasters (9-11-01, BSE, etc.)
• Backgrounded calves
• Put options or futures particularly for later Feb
  and Mar sales
• Basis should be estimated
• Fed cattle
• Use futures contracts
• Options premiums are relatively expensive
• Contract size, specifications, basis, etc., are
  conducive even to small lots
• If profitable (or breakeven) price can not be
  locked in, do you really want to take the
  additional risk??

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Commodity Challenge
A Realistic Online Education Tool to Build
Producers Marketing and Decision Making Skills
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Commodity Challenge - overview

• An Online Marketing Simulation
• Producers trade Futures, Options, and Cash
  commodities
• Local Cash Prices are utilized
• Exercises conducted over 6-9 months
• Participants compete to secure the best prices
  for their commodities

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Commodity Challenge - Features

• Getting Started
• Producers will log on to the website
  www.commoditychallenge.com
• They will complete the following process to sign
  up for Commodity Challenge

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• Registration Steps
• UserName and Password
• Pick the Game
• Marketing Savy Quiz
• Develop Marketing Plan

Registration Step 2 Pick the Game to Play
Click the game Title to see a full description of
the game. Use the JOIN button to pick the game
you want to play.
Title Start/End Date Commodities
NE Cattle Feeders 2/01/2004-5/30/2004 Feeder
Cattle Corn Cattle
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Game Description
Game Title NE Cattle Feeders Description This
is a cattle feeding game, where you decide when
to place cattle on feed and when to take them off
feed. You can hedge feeder cattle, corn (for
feed) and live cattle. Start of
Game 9/2003 End of Game 6/2004
Cash Market Location Feedlot, NE Head Placed on
Feed 300 Weight When Placed on Feed 650 Pounds
of Gain Per Day 3 Pounds of Feed per Pounds of
Gain 6.15 Maximum Market Weight 1300 Head Taken
Off of Feed 290 Commission, Futures Options
(/Contract) 60
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Market News MidDay Comments - Corn futures are
trading 1/2 to 1 ¼ cents higher at
midday. Opening Comments Corn futures are
called steady to 1 cent lower. MidDay Comments
Corn futures are trading narrowly mixed at
midsession. ltltAll Newsgtgt Traders Notes Welcome to
Commodity Challenge! This online marketing
simulation is designed to improve your skills and
ultimately your profitability. Click on Help to
access the users guide, a good source for
step-by-step directions on using Commodity
Challenge. Before trading, we recommend printing
the users guide as a reference. Note You cannot
sell on the cash market until after the harvest
date for the game. If you are interested in
having a game set up for your specific needs,
please contact us.
Welcome T. Petry Your Account Commodity Price Corn
206.52 Soybeans 607.87 HRS Wheat 380.02 Last
Update (9/18/2003) Join a Different
Game Minnesota Game Top Rankings Corn
(9/18/2003) G. Hansen 209.88 T. Petry 206.52 K.
Boe 205 Soybeans (9/18/2003) R.
Jaehning 660.50 R. Kramer 612.07 S.
Slykerman 609 HRS Wheat (9/18/2003) J. Vander
vorst 572.35 E. Elseth 387.51 S. Paul 387.51
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Commodity Challenge 2.0 Users Guide

• Welcome
• Overview
• Sign Up to Play
• Playing the Game
• Home Page
• Menu
• Account Status
• Cash Trade
• Futures Trade
• Option Trade
• Open Orders
• Marketing Plan
• Library

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Commodity Challenge - Features

• Futures Trade
• Participants may sell buy or sell contract lots
  of a given commodity on current exchange prices
• Day trading is permitted with orders filled every
  ten minutes.
• Every trade is assessed a commission
• Available order types include Market, Set price,
  or stop.

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Commodity Challenge - Features

• Options Trade
• Participants may sell buy or sell options of a
  given commodity on current exchange premiums at
  all pertinent strike prices
• Day trading is permitted with orders filled every
  ten minutes.
• Every trade is assessed a commission
• Options tables available by clicking on a
  contract months quote

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Commodity Challenge - Features

• Account Status
• A summary of current positions
• Accounts for storage and unsold crop
• Futures and options hedging profits included
• Summarizes final price achieved for each commodity

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Commodity Challenge - Features

• Other Features
• Quotes futures, options, and cash
• Charting software allows charting of all futures
  contracts
• Interactive charting of local prices
• Basis Charting!!!