Where's the money?

[Alan]

The 250 was a pretty outrageous statement

.

Thanks Campground, I too feel that it was not a very well thought out. The 250 per head was off the top of my head, but I also looked at my situation and not the real picture. In my four years of my hobby I have only paid for about 10% of my hay, a very good friend gives me hay that he baled on his place, my family and I just help him get it in the barn and we enjoy a BBQ after...nice time, part of the life I love with cattle. So no real feed cost, also I have already stated I spend ZERO on pasture improvment, (other than inital bush hog and some spraying black berries), that is changing. I don't include other cost such as buildings and equiptment or fencing, I don't use the place for taxes (never made a profit) and I figure I'll recover much of the cost of doing business through resale, years down the road. Someday I hope to make this a business for tax purposes but because of my other business's I don't want to show a net loss year after year on this place, the loss is factored into the value of enjoyment, quality of life if you will.

I do make more than some on my calves, but my point of this post is as a business for the amount of effort in produce and raising a calf (15 months, I do turn calfs every 12 months or so) 250 dollars profit is not much of an income. I realize you can be more aggressive in marketing your stock but that is more labor intensive for little more profit...I do it because I love it.

Thanks again Campground, the 250 stirred enough up that I felt I should explain my situation more, it's not the common situation, I should have express it from a more realistic point.

BTW, love the Polled Herefords, my bull is a half brother to a bull named Kreedance (reserve bull in Denver, 2003 or 2002) with a good milk EPD and a low calving EPD. I do believe my problem is about half my cows have terrible milk EPD's or none listed. But a couple of years ago I started buying on EPD's mostly looking for high milk and WW EPD's. As a yearling bull, my bull gave us 7 bull calves, 0 hiefers, all about the 90 to 95 pound range ( I weighed them). 3 cows were first time heifers, all calves hit the ground in about 20 minutes strong and up and running in another 20 minutes... so even with no replacement heifers the bull has earned another year. I think my problem is with my cows and pasture, but as with any enjoyable hobby we'll improve.

Glad your sticking around Richard.

Thanks to all that has been helpful
Alan

 

[Oldtimer]

Oldtimer...

You make yourself out to be a horseman... So you'll appreciate this...

Kinda looks like a few spoiled studs around here... Best way to handle them is to put 'em out to pasture with the bred mares... let 'em get their teeth kicked in a few times.

Richard

And when I get around a horse trader that trys every way to sell me an old horse thats been around the country for years, I keep a tight hold on my billfold pocket............ Sometimes the $100 sales pitch on a $50 horse can scare away the buyers...............
Oldtimer

 

[Craig-TX]

It's been a long day but I'll take a stab at this for the fun of it. Straighten me out if I make a mistake.

Let's take your #1 as the better example because #2 is a little light to do this with, but the principle still applies.

You've already eliminated the rancher with only 15 steers to sell at a time. That would be most ranchers. You've now limited your advice to the rancher who has around 65 steers to sell at a time. That would be relatively few ranchers.

Anyway, a couple of points about your strategy:

Long 1 March Feeder Cattle 102 Put @ 3.775 cents for $1,887.50
Short 2 March Feeder Cattle 97 Puts @ 1.950 cents for $1,950.00 (2x$975.00)
Net cash to your account $62.50 ($1,950 less $1,887.50) less commission and fees.

On those three trades the commission would eat up more than the $62.50 unless you're doing this on some on-line account with no broker to sanity check your moves. Not counting commissions again when you sell them. But that's not the big issue.

What I've done at this point is give myself the opportunity to sell 50,000# of cattle at 102

Only if the market was over 102 at maturity. Otherwise you would be selling at below-market prices.

and at the same time buy 'em back at 97

How? You don't hold that option, you sold two of those options to somebody else. You went short on two puts at 97. If prices swing they have your IOUs. If favorable to them they can exercise on you and make you pony up for 100,000# of cattle. They will pay you 97 and it will cost you whatever the market is at that time. You will eat the difference.

But either way it goes, you can't do both at the same time. You can't buy at 97 and turn around and sell at 102. The boys in Chicago aren't that dumb.

This establishes for a 5 cent trading range

5 cents can be a mighty narrow range for cattle to stay within over 99 days.

If the market goes up, the 102 Put loses money but is offset by the two short 97's making money at an equal or greater rate

How? Again, you don't own the puts. You shorted the puts by selling them to somebody else. They will make the money off you.

You state that your 'naked put' is

already about 4 cents under the 101.53 futures price and well out of range of me being 'put to' by the buyer.

Somebody out there is betting his cash that you are in range. The question becomes who's money is smarter - yours or his. Richard, for every position you take there is somebody out there taking the opposite position. They are laying out cash they are right and you are wrong. The dangerous thing about options is the leverage. It's not an even dollar bet. If you bet wrong it will cost you many dollars for every single dollar you initially put up.

Not to mention that the folks at the exchange are privy to a lot more inside knowledge than we are. So are the big packers and institutional investors. They are the smart money that the rancher is betting against. Another thing to consider… if the market starts to move big you can bet the traders will take care of their own portfolios and big customers first. The individual trader will get the leftovers - if anything is left over. If the market does not move big the whole thing was an exercise in futility and turned out to be unnecessary risk.

A couple more points:

There are huge risks in futures trading. All the major brokerage firms will require individual futures traders to meet some pretty stringent standards – for good reasons. First, they don't want to mess with investors who don't have the staying power or sophistication to weather the inevitable storms in futures and options trading. Even more importantly they don't want to get sued for being a party to an individual trader's financial ruin.

Well known and reputable firms will require private traders to have something in the order of:
* a proven net worth of $500,000 – $1 million
* an annual income of $150,000 – $250,000
* cash or liquidity of $100,000 bare minimum.
* minimum equity in the trading account of $25,000 – $50,000

And if a client wanted to go short (the way you are recommending) the brokerage firm will require a good faith margin deposit (cash or government securities) of around 50% on each contract or option. That would be around $25,000 per contract.

Nobody has to take my word or your word for any of this, they can call the local offices of Merrill Lynch, UBS, etc. in their own area and ask about it.

To do what you're recommending a rancher would have to 1) be quite well off financially to qualify, and 2) stake a lot of cash up front (up to $50,000+) -- all to "manage risk" on around $50,000 worth of cattle.

Craig-TX

 

[brokenmouth]

In law we have a saying...

so now on top being a commodities expert and a rancher and a golfer and a writer your also a lawyer. i write japanese poetry , play classical french harp and dabble in manhattan real estate when im not an astronaut. Sure gets in the way of my ranching

listen here esquire get over your complex and understand nobodys pickin on you. Theres a difference between gettin picked on and being expected to back up big talk after youve been talkin down to everybody

 

[ManyHorses]

Sssssssh.... Japanese say 'Don't speak with open mouth and closed mind...

Richard

 

[docgraybull]

I am also a newbie to cows. I train horses to feed my cows right now. Cows also keep the land cleaned up.

rc,
I wish I could train my horses to feed my cows and get my cows to keep the land cleaned up! You may be a newbie, but I bet there are a lot of other folks who would like to learn about this type of training! :lol:

 

[ManyHorses]

Craig-TX,

Thanks for posting a really well written, professional and informative article.... That's the kind of format members learn from and not the derogatory remarks of a few 'possee' members.

My slant on cattle producers is they buy too high and sell too cheap at both ends of the market.

And (strike me dead for saying this!!) but 'guys like me' are working the other side of the market by taking your cattle right now as you own them and forward selling 'em high and buying 'em low. What takes you months to produce, a good trader can 'collar' in a few minutes... i.e. the March options position I gave you.

I'm offering the members a unique insight into modern business practices that affect them all at the sale barn... probably a lot more than whatever breed they prefer to raise, or which bull they exposed their heifers to, etc, etc. My hope is with those members who learn to look forward with their cattle operations and kinda turn things around more in their favor.

I'm not selling or promoting any one or anything and never will... All I'm asking for is courtesy and respect for my 35 years of experience and the knowledge I'm willing to share.

Again, thanks againg for the great posting... Richard