Beef magazine recently ran a series of articles by Private Market Analyst Nevil Speer explaining various aspects of the futures markets.
Beef has graciously given its permission for Zia Ag Consultants and Zia Commodities to rerun those articles. This is the fourth in the series, edited for style.
USING FUTURES, OPTIONS FOR HEDGING
There’s often lots of misunderstanding around futures markets. For that reason, this space has been highlighting some basic principles around using futures and options contracts for hedging purposes (primarily from the cattle feeding perspective simply for example’s sake).
This week’s illustration highlights the differences between open interest and relative positions among the various classes of traders – that is, it delineates a weekly snapshot of aggregated positions among the respective stakeholders.
A couple of definitions are important to provide some context:
–Open Interest: total number of outstanding futures contracts for a given commodity (ex. Live cattle).
–Long: An initial buy position (obligation to accept delivery of a futures contract).
–Short: An initial sell position (obligation to make delivery of a futures contract).
–Hedger: Entity using the futures and/or options market to manage price risk (a commercial).
–Speculator: Entity assuming risk in a futures position with an aim to profit from price change (a non-commercial).
–Spread: Simultaneous purchase of one contract and the sale of a separate contract.
–Non-reportable: Traders with small positions who fall below the specified CFTC threshold for individual reporting.
LONGS VS SHORTS
Live cattle futures open interest on June 11 was 359,965 contracts. Note the total of long positions exactly matched the short positions: for every buyer there must be a seller, and vice versa.
To that end, there’s no limit to the number of contracts that can be traded – as long as there’s a willing buyer to match with a willing seller (and vice-versa).
That’s an important concept and represents a fundamental difference from the equity market in which market participants buy and sell a finite number of shares for a given company.
However, the make-up of the futures positions won’t necessarily be the same. For example, commercial traders (hedgers) were long 129,564 contracts versus being short 188,522 contracts.
Meanwhile, non-commercial traders (speculators) were long 113,250 contracts but short just 44,311 contracts.
(As a side note, the spread positions will always match – by definition, spreading entails the simultaneous purchase of one contract and sale of a separate contract).
Those reports are updated weekly by the Commodity Futures Trading Commission for all commodities and can be accessed by navigating to the Commitments of Traders tab on the CFTC website.
Additionally, the CFTC publishes a disaggregated report providing greater detail among respective stakeholders – including delineation of positions held by “managed money” (i.e. fund positions).
Aggregate positions change over time and the inferences that follow change, too, but that’s an issue for next time.
CATTLE, BEEF RECAP
Cash cattle trade last week was noted at $105 to $108 per cwt on a live basis, steady to up $1 from the previous week, and at $175 on a dressed basis, up $3 to $5.
The USDA choice cutout Monday was up $0.54 per cwt at $238.06, while select was down $1.05 at $211.66. The choice/select spread widened to $26.40 from $24.81 with 69 loads of fabricated product sold into the spot market.
No cattle were tendered for delivery against the Aug contract Monday.
The CME Feeder Cattle index for the seven days ended Friday was $137.66 per cwt, down $2.17 from the previous day. This compares with Monday’s Aug contract settlement of $138.65, up $1.30, and the Sep contract settlement of $136.00, up $2.75.