Matthew Diersen, risk and business management specialist for the Ness School of Management and Economics, South Dakota State University, said, “There are several ways to manage price risk when marketing cattle.”
Some producers spread out sale dates, while others use forward contracts, Diersen said in a newsletter to Extension agents from the Livestock Marketing Information Center called In The Cattle Markets. Some prefer to use futures and options, and still others prefer utilizing insurance products like Livestock Risk Protection.
USDA INFORMATION
The USDA’s Agricultural Marketing Service reports forward contract activity, Diersen said. Forward contracting fed cattle has received attention recently as contracts are discussed in the realm of other marketing arrangements.
The current level of cumulative contracted cattle, at 1.4 million head, is up from 1.1 million in 2020 but below the 1.6 million in 2019, Diersen said. Forward contract volume of feeder cattle is close to last year.
In early July, Superior Livestock had sales for 500- to 600-pound north central steers trading near $180 per cwt, up from about $160 a year ago, he said. However, compared to the October feeder cattle futures price, the implied basis is much narrower than at this time last year.
FUTURES AND OPTIONS
Futures and options volumes are more difficult to discern, Diersen said. In 2016, survey respondents used futures and options for cattle, but their extrapolated totals seem low for the U.S.
The Commitment of Traders reports show producers with more short than long futures positions, he said. These likely are very large feedlots and packers that must report positions.
Some feedlots may be part of the producers with long feeder cattle futures positions, Diersen said. Producers hedging cattle are more likely to be counted among the nonreportable short holders, which tend to exceed the nonreportable long holders.
Among the nonreportable positions, the futures open-interest is much larger than the options open-interest across both contracts, he said.
OTHER OPTIONS
The most transparent information is available for LRP, Diersen said.
The 2021 fiscal year ended on June 30, and the higher premium subsidy likely shifted demand for coverage, he said. Head covered sharply increased to a record 180,660 fed cattle, with the number of policies sold increasing almost five-fold compared with a year earlier.
The coverage was most used in Nebraska, but there was volume across the major feedlot states, Diersen said. A look at the participation data suggests the highest coverage levels were the most popular.
The number of head covered still is a low percentage of the total number of cattle on feed, he said, equating to about 6,000 contracts worth of live cattle.
CATTLE, BEEF RECAP
Fed cattle traded this week at $120 per cwt on a live basis, up $2 to down $2 from last week. Dressed-basis trad was at $195, steady to down $2.
The USDA choice cutout Tuesday was up $1.80 per cwt at $269.73, while select was up $3.02 at $253.94. The choice/select spread narrowed to $15.79 from $17.00 with 126 loads of fabricated product and 31 loads of trimmings and grinds sold into the spot market.
The USDA reported Tuesday that basis bids for corn from livestock feeding operations in the Southern Plains were unchanged at $1.86 to $1.91 a bushel over the Sep futures and for southwest Kansas were unchanged at $0.70 over Sep, which settled at $5.48 3/4 a bushel, down $0.01.
The CME Feeder Cattle Index for the seven days ended Friday was $153.97 per cwt up $0.12. This compares with Tuesday’s Aug contract settlement of $160.70 per cwt, down $1.50.