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104859

Time to Fence Cattle Using Options

Cattle futures have experienced a strong bump in prices over the last two weeks, with October futures trading from under $106.00 per hundredweight to over $116.00, topping on August 4 at $116.35. Consolidation just under $116.00 and expectations that ample supplies will be available to meet consumer needs suggest that cattle prices are in a long-term downward trend and rallies should be sold. Increased competition between pork and poultry are also likely variables to keep rally potential in check.

However, the biggest variable that could keep cattle prices struggling in the weeks and months ahead is availability of cheaper feed and a long-term downtrend for feed prices. We are now four crop years removed from tight grain supplies due to the drought of 2012. A very ample buildup of corn and wheat supplies (both in the U.S. and worldwide) could prompt producers to go back into the cattle business, choosing to feed heifers and cows as an alternative to selling at discounted prices. This year’s Midwest weather has been mostly outstanding. High-yielding wheat crops, as well as expectations for a record-large corn crop, will keep feed availability at a historically high level, with corn carryout expected at a very large 2.2 billion bushels.

One strategy that can establish a price floor and yet leave the topside open is a fence strategy using options. The mechanics are purchasing a put and selling an out-of-the-money call. We like this strategy, as it leaves a window for prices to appreciate. The short call will either expire without value and cheapen the cost of the put that is purchased, or futures will rally high enough, in which case the short call option will be exercised. If the short call is exercised, you’ll be assigned a short futures at that strike price (a higher price level than currently exists). With October cattle trading just under $115.00, consider purchasing October $114.00 puts and selling $118.00 calls.

 

If you have questions or comments, or would like help in creating a balanced strategy for your operation, contact Bryan at Top Farmer Intelligence (800-TOP-FARM ext. 129).

Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.

Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Hypothetical performance results have many inherent limitations. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Reproduction of this information without prior written permission is prohibited. This material has been prepared by a sales or trading employee or agent of Stewart-Peterson and is, or is in the nature of, a solicitation. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Stewart-Peterson. Stewart-Peterson refers to Stewart-Peterson Group Inc. and Stewart-Peterson Inc. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with both companies. Accordingly this email is sent on behalf of the company or companies providing the services discussed in the email.

 

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