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LIVESTOCK FUTURES MARKETS

LIVESTOCK FUTURES MARKETS. PRICE RISK. PRICE RISK INVENTORY UNKNOWN AND VARIABLE PRICES. LIVESTOCK PRODUCERS FACE RISK FROM: PRICE OF THEIR PRODUCTS PRICE OF INPUTS. Weekly Lean Hogs. Weekly Corn. CHICAGO MERCANTILE EXCHANGE LIVE CATTLE LEAN HOGS FEEDER CATTLE PORK BELLIES.

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LIVESTOCK FUTURES MARKETS

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  1. LIVESTOCK FUTURES MARKETS PRICE RISK

  2. PRICE RISK INVENTORY UNKNOWN AND VARIABLE PRICES

  3. LIVESTOCK PRODUCERS FACE RISK FROM: PRICE OF THEIR PRODUCTS PRICE OF INPUTS

  4. Weekly Lean Hogs

  5. Weekly Corn

  6. CHICAGO MERCANTILE EXCHANGE LIVE CATTLE LEAN HOGS FEEDER CATTLE PORK BELLIES

  7. LIVE CATTLE CONTRACT SIZE: 40,000 LBS DELIVERY MONTHS: FEB, APRIL, JUNE, AUG, OCT, DEC HOURS OF TRADE : 9:05 AM TO 1:00 PM LIMIT: $1.50/CWT

  8. LEAN HOG CONTRACTS: CONTRACT SIZE : 40,000 LBS DELIVERY MONTHS: FEB, APRIL, JUNE, JULY, AUG, OCT, DEC. HOURS OF TRADE: 9:10 AM TO 1:00 PM LIMIT MOVE: $2.00/CWT

  9. FEEDER CATTLE CONTRACTS: CONTRACT SIZE: 50,000 LBS DELIVERY MONTHS: JAN, MARCH, APRIL, MAY, AUG, SEPT, OCT, NOV. TIME OF TRADE: 9:05 AM - 1:00 PM

  10. LEAN HOGS LIVE HOG CONTRACTS WERE REPLACED WITH LEAN HOG CONTRACTS IN 1996 WHY? 70% OF U.S. HOGS ARE BOUGHT ON CARCASS BASIS

  11. A LIVE ANIMAL YIELDS APPROXIMATELY 74%, THUS A LEAN HOG VALUE IS EQUIVALENT TO THE LIVE HOG PRICE DIVIDED BY .74

  12. SO IF LIVE HOGS ARE PRICED AT $40.00/CWT A LEAN EQUIVALENT WOULD BE 40/.74 = $54.00

  13. THE CURRENT MARGIN ON A LEAN HOG CONTRACT IS ABOUT $1000 (THE EXCHANGE SETS THE MINIMUM)

  14. EXAMPLE APRIL HOGS ARE TRADING AT ABOUT $70/CWT $70/CWT X 40,000 LBS = $28,000 MARGIN IS ABOUT 3.5%

  15. LIVESTOCK BASIS 1) LOCATION 2) QUALITY 3) FOR DEFERRED CONTRACTS -- ANTICIPATED SUPPLY AND DEMAND

  16. HOGS CURRENT CASH = $69.00 JUNE FUTURES = $70.60 JULY FUTURES = $70.10 AUGUST FUTURES = $68.25 OCTOBER FUTURES = $57.85

  17. BASIS OVER TIME PRICE DIFFERENCES + 0 - TIME

  18. WHY MUST CASH AND FUTURES COME TOGETHER? ARBITRAGE BETWEEN THE FUTURES AND THE CASH

  19. The first step is to calculate break-even price. Break-even price = Cost of producing an animal/weight

  20. AFTER BREAK-EVEN PRICE IS OBTAINED – WHAT IS THE PROFIT POTENTIAL? JUNE LEAN HOGS ARE TRADING AT $70.00/CWT OR $50.00/CWT LIVE ANIMAL BASIS

  21. LOCALIZED FUTURES PRICE = FUTURES - EXPECTED BASIS $70.00 - $1.00 = $69.00 MINUS BREAK-EVEN OF $62.00 PROFIT = $7.00/CWT

  22. HOW MANY CONTRACTS TO HEDGE? 40,000 LBS OF CARCASS = 54,054 LBS OF LIVE ANIMALS AT 240 LBS/ANIMAL = 225 HOGS

  23. CALL YOUR BROKER AND SELL X NUMBER OF LEAN HOG CONTRACTS

  24. WHEN THE HOGS ARE MARKETED --- YOU BUY BACK THE CONTRACTS.

  25. APRIL 11 -- SELL 1 JUNE LEAN HOG @ $70.00/CWT JUNE 1 BUY BACK 1 JUNE LEAN HOG @ $58.00/CWT GAIN ON FUTURES = $12.00/CWT

  26. SO NET PRICE = $58.00 - $1.00 + $12.00 =$69.00 PROFIT = $69.00 – $62.00 = $7.00

  27. ALTERNATIVE SCENARIO PRICE CONTINUE TO MOVE HIGHER

  28. APRIL 11 -- SELL 1 JUNE LEAN HOG @ $70.00/CWT JUNE 1 BUY BACK 1 JUNE LEAN HOG @ $84.00/CWT LOSS ON FUTURES = $14.00/CWT

  29. SO NET PRICE = $84.00 -$1.00 –14.00 = $69.00 PROFIT = $69.00 -$62.00 =$7.00/CWT

  30. ESTABLISHING A PURCHASE PRICE FOR INPUTSCORN AND SOYBEAN MEALFEEDER CATTLE

  31. A BREAK EVEN PRICE IS ESTABLISHED USING PARTICULAR INPUT PRICES

  32. TO ESTABLISH THAT BREAK EVEN A PRODUCER COULD PURCHASE CORN AND MEAL FUTURES TO PROTECT FROM A PRICE INCREASE.

  33. WHAT IS THE COST OF CORN? FUTURES PRICE (+/-) EXPECTED BASIS

  34. IF YOU ARE PLANNING ON FEEDING HOGS THIS SUMMER YOU WOULD PROBABLY LOOK AT JULY CORN IT IS TRADING AT $3.15/BU LETS ASSUME YOUR BASIS IS $ -.05/BU LFP = $3.10/BU

  35. CALL YOUR BROKER AND BUY ENOUGH CONTRACTS TO COVER YOU NEEDS (OR THE PORTION OF YOUR INPUTS YOU WISH TO COVER)

  36. ADVANCES TO $3.80/BU THEN : BOUGHT @ $3.15 SOLD @ $3.80 PROFIT OF $ .65 IF THE PRICE OF JULY CORN

  37. THE CASH PRICE OF CORN WOULD BE $3.75/BU REDUCE THE COST OF YOUR CORN PURCHASE BY THE PROFIT ON YOUR FUTURES TRADE $3.75 - .65 = $3.10

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