Market outlook

[Rod]

Anyone have an educated guess on the market for the new year? I Have a large group ready for sale and am contemplating when to sale. There are so many theories as to whats gonna happen to the market. Some say Canadian market will be opening soon. Any suggestions would be appreciated.

Thanks
Rod

 

[ManyHorses]

Hi Rod,
I'm a cattle rancher and commodities trader specializing in cattle and grains... My suggestion would be to hedge your cattle NOW by buying what's called a 'Put' for each 40-50,000lbs.

You risk nothing more than the premium... This is nothing more than insurance against the market taking a dive from these lofty prices.... You should be protecting your herd investment the same way you protect you home or your health.

No advertising

Richard

 

[G&L Cattle]

Many Horses sounds educated--- now for an edjucated guess.................


G&L

 

[ManyHorses]

It ain't no 'edujucated guess' when it comes to the fact that ranchers and farmers are always the last ones to make a profit and the first ones to take a loss...

Right now, by buying an 'April 88 cent Put' a rancher could protect 40,000# of his cattle from now till April 1st of 2005 for $1390.00... with absolutely no risk beyond the $1,390.00 option premium.

On 50 head of 800# cattle, it's only going to cost him slightly more than 1 head to entirely insure himself that he'll get the current extremely high market prices.

Sound pretty 'edjucated' to me... Richard

 

[Cattle Rack Rancher]

Why, particularly would you buy April Puts? How about if you aren't planning to deliver until June. Also 800 lbs for finished cattle sounds awful light to me. How would you make this a perfect hedge. Can you deliver against this contract?

 

[ManyHorses]

I used April to give him until April 1st to sell his cattle... If he sold them two weeks from now he would sell the April Put and if cattle prices went down, make a profit on the Put approximately equal to the loss on 40,000# of his cattle... or if cattle prices went up he' make more money on his cattle and sell the Put a an approximate loss to additional cattle profit on the cattle - What it does is lock up his position so he neither gains or loses on his speculating on cattle prices. DON'T SPECULATE!

Live and Feeder Cattle contracts don't come in every month... the next months would protect him until June 3rd where cattle prices have already fallen to 82 cents in anticipation of the Canadian borders being reopened to cattle imports. A June 82 Put would cost $1,410.00... and then out to August, etc.

If you were wanting deliverability... and since you are already 'long' the cattle... I'd sell a 'Call' against your cattle. So rather than pay a premium for a Put, you'd sell the Call and reap the premium. If prices went down you would either buy back the Call at a lower price and profit against the loss on your cattle... or deliver your cattle against the Call price you sold.

Live Cattle contracts come in $40,000# increments and Feeder Cattle contracts are 50,000# increments - It's highly unlikely you'd have a perfect hedge for very long because your cattle keep growing... and the 'insured' amount needing coverage grows likewise.

Hope this helps

 

[Texan]

Anyone have an educated guess on the market for the new year? I Have a large group ready for sale and am contemplating when to sale.

Rod, you seem to have gotten a good commodities sales pitch but no answer. The figures you were given on buying puts must have been for fed cattle. If you had any fat cattle ready, you probably wouldn't be asking us what to do. Late spring feeder contracts have been trading at around $99 to $100. That's a 5 or 6 dollar discount compared to January. Is this because of border rumors or the normal higher numbers of spring yearlings? My guess is a little bit of both.

One thing you left out was what class of cattle you have to sell. Your key words to me were "ready for sale." My advice is that you sell cattle when they're ready if the market is acceptable at the time. I gambled just a little bit with some late calves, hoping to have a steady market into Spring and some good gains to get a little bit extra. But, I had already sold enough calves to recover costs and break even. The ones I've got left can't hurt me.

 

[Caustic Burno]

Rod this guy is another leach in the line to the grocery

 

[ManyHorses]

Caustic Burno... I'm a cattle rancher probably a lot like you. Sorry if I sound a bit too 'edjucated' but I guess I am... and since I found this site earlier today, I'm willing to step out and share my knowledge without any 'axe to grind'... I have nothing to offer you other than my knowledge.

Texan... You're on the right track with the numbers.

Here's a little trick for you... As long as I'm not intending deliverability, I use either Feeder or Live cattle contracts to my own best advantage... I NEVER SPECULATE and either hedge my own cattle, or buy a Put or Call and spread against it, thereby immediately getting all my money back and locking in my profit range and risk.

Hope this helps, Richard

 

[ManyHorses]

One other thought...
I'm expert enough on this subject that I'm writing a book on trading meats and grains, geared towards the rancher and farmer...and in the book I say...

"Sometimes it's a lot easier to control 40,000# of cattle from my keyboard than it is to have 'em standing there looking at you"!

I reguarly to the salebarns and see all these guys buying cow/calf combos, feeders and stockers at outrageous prices just to 'stay in business' over the winter months.... doomsday thinking! If they knew how, they'd do better hedging cattle on their keyboards rather than risking their capital and doing all that work out in the 'north forty'.

Again, hope this helps, Richard

 

[Ryder]

He said he was a trader. He didn't say he was a broker.
What about it Richard. Are you a broker or do you just trade?

 

[ManyHorses]

Ryder,
I am not a broker, have no connections with the brokerage business, have nothing to sell, and have no profit motive.

I am however well-educated, experienced and successful... and I am writing a book to teach ranchers and farmers how to hedge and trade in the meats and grains like I do.

Farmers and ranchers spend too much time EARNING their money and not enough time LEARNING how to safeguard it... For example, how many ranchers are sitting at the dinner table worrying about the Canadian border opening back up and don't know what to do about it?

Commodities trading for farmers and rachers is all about managing the risk you already have, not about creating more of it or speculating in the market.

Again, hope this helps,
Richard

 

[CattleAnnie]

Interesting thread. Always nice to learn more.

Thanks, all.

Take care.

 

[Diamond B Ranch]

Sounds to me like Richard makes sense.

Why be at the mercy of an uncontrollable market when you have options of protecting yourself? It's a new era in the cattle business and, in my opinion, rancher's have to adopt new business methods to thrive.

Welcome to the board Richard, and thanks for sharing your knowledge.

Chuck

 

[Craig-TX]

Please clarify a few points.

If you were wanting deliverability... and since you are already 'long' the cattle... I'd sell a 'Call' against your cattle.

It sounds like you are saying a rancher can/should write covered calls against the calves in his pasture? Not against a futures contract, but against his own stock on his own place? Bear in mind that we're talking about cow calf operations, not backgrounding operations.

you'd sell the Call and reap the premium. If prices went down you would either buy back the Call at a lower price and profit against the loss on your cattle...

Assuming he could, if a rancher sold a covered call for X price and the price dropped below X during the term of the option, why would the rancher want to buy back the call?

or deliver your cattle against the Call price you sold.

If prices went down why would the holder exercise his option to pay above-market prices and demand that the rancher deliver?

Craig-TX

 

[Campground Cattle]

I will go with Texan's,Dun's,Craig's, txag, Certherf,La4, even Caustic and many others. Many Horses I have been messing in this cow business for thirty years and made money. If it sounds to good to be true it most likely is.
You might be very educated as you say and you might have found the goose that laid the golden egg.
I am just a Old East Texas Redneck, I do know when I step in a pile.

 

[ManyHorses]

Whew... good questions... let me see if I can get all this in...

Keep in mind that only two kinds of cattle contracts are offered for trading - Live Cattle and Feeder Cattle - and each has it's own definitions, months, trading patterns, etc.

I would consider a cow/calf operation to be something of a hybrid between the LC and FC because of 1) the cow and calf age differential, and 2) the endless possibilities of what's done with each of them in the future. I don't know your numbers but would anticipate a combination of multiple LC and FC contracts proportionate to your poundage needing protection... not speculation.

In the above scenario, I'm talking only about protecting your 'growing' cattle investment against future declines in market price.

No, I'm not suggesting writing options against a futures contract - WRITING OPTIONS AGAINST A FUTURES CONTRACT IS NOT A 1:1 THING LIKE MOST PEOPLE THINK...THAT ONLY APPLIES IF YOU HOLD THE COMBINATION TO EXPIRATION! On the way there, you may well find your futures price changed, but the options didn't follow proportionately... this is what's know as the Implied Volatility differential.

I'm not sure what you mean by 'covered'... against his own cattle or a futures contract. Keep in mind that the right time to sell 'physically' may be a lot differenct than when to sell 'financially' when market prices are the best. If you really get knowlegable about futures and options, you can get yourself to the point where you'll be able to 'not buy' cattle at the wrong time of year just because they're cheap... they're cheap for a reason.

But if he hedged against his calves and it was time to sell from a 'physical' standpoint, he could do so and continue to hold the option to possibly take further advantage of the option... But now he's speculating rather than hedging because if he's wrong he can lose what he gained in the first place... so now he might want to consider either selling out of his position or selling (hedging) against it to mitigate his risk - managaging risk is what it's all about... not speculating.

Options are rarely exercised because it's more profitable to either sell or let them expire... and the Call holder would never exercise at a price below his strike price PLUS what he paid for the option... that's his real cost basis.

Hope this helps, Richard

 

[ManyHorses]

One more thought....

For you guys who doubt the value of using options (not futures!) consider this...

With cattle prices being at an all time high... and feedgrains at all time lows... What are you going to be doing six months from now when feedgrain prices have turned around to their historical prices and cattle prices maybe 'returned to earth'... not to mention the impact of the Canadian boder being opened back up...

Off to watch the auction.... Richard

 

[Craig-TX]

Whew... good questions... let me see if I can get all this in...

No, I'm not suggesting writing options against a futures contract... I'm not sure what you mean by 'covered'

By 'covered' I'm referring to the established option strategy. Selling a covered call means writing an option against your long position. You either hold the commodity itself or a contract on the commodity. Inversely, if you were selling a 'naked' call you'd be taking a position without an offsetting hard position in the underlying security or commodity.

But you've made it clear that you're recommending ranchers sell covered calls against their own livestock. Who is doing this, and how and where? What futures exchange?

If you really get knowlegable about futures and options, you can get yourself to the point where you'll be able to 'not buy' cattle at the wrong time of year just because they're cheap... they're cheap for a reason.

In other words, take all the risk out and guarantee yourself a profit. Why write a book about it? Why not just get rich quick and easy by practicing this formula?

the Call holder would never exercise at a price below his strike price PLUS what he paid for the option... that's his real cost basis.

Precisely. That's why it didn't make sense when you said:

If prices went down you would... deliver your cattle against the Call price you sold.

Craig-TX

 

[ManyHorses]

Hi Craig,

Ag futures and options are widely traded on the Chicago Mercantile Exchange... please visit www.cme.com.

Who trades 'em... the futures market is hugely larger than the NYSE and it's common practice for financial insitutions and commercial giants (Post, General Mills, Armour to insure themselves against price fluctuations and supply shortages. We 'little guys' are mere drops in the bucket.

i.e. If you were to get a bank loan on your cattle, most likely they'd either sell a call against them or buy a put to protect their investment in you via the loan.

I don't believe in any kind of formulas or get rich quick schemes... Writing a book geared towards farmers and ranchers is my way of spending the winter in Tucson, AZ and filling an obvious need in the marketplace.

Thanks for asking... Richard