What Are You Going to Do With Your Calves?
If you have not already decided what you are going to do with your spring-born calves, now is an excellent time to start thinking. As of this writing (June 29), cattle prices have been strong, but there is always a danger that prices may level off or even drop. Historically, cattle prices tend to be lower during the fall months of October and November due to the supply of spring-born calves sold at that time. Pricing your cattle now may be a way to capture some of the strength in today's market. You can do this a number of ways.
One strategy would be to hedge your calves with stocker cattle futures contracts. The contract months for which the new stocker cattle contract is listed are October, November, December, January, February, and March. This contract specifies 25,000 pounds of 500-599 pound medium and large frame No. 1 feeder steers.
Therefore, this contract should cover about 50 head of 500-pound calves or roughly half a truckload of 500-pound cattle. Hedging with this new cash-settled contract should work well for producers with small cowherds.
By hedging your steer calves with $85.25 stocker cattle futures contracts plus an expected basis in Oklahoma City of $6.07, you would secure a price around $91.32/cwt. Remember that basis is the difference between the futures price and the local price. However, you would not be able to take advantage of any increase in price, if you hedged using futures contracts.
One of the obstacles of futures hedging is the margin call. Sometimes more money is needed to stay in the futures market. This money is returned to you when you are finished hedging, but can sometimes cause cash flow problems before your hedge is completed. Hedging with futures contracts is more limiting; but as they say, "A bird in the hand is worth two in the bush."
Another alternative would be to buy put options. Options will limit your downside risk while still leaving you the chance to cash in on a favorable change in price. Buying a $84 stocker put option for $3.35/cwt plus a $6.07 expected basis should give you a minimum price for your steer calves around $86.72/cwt. This option protects you against a downturn in the market, while still giving you the chance to sell your calves for a higher price.
Forward contracting is also an alternative. Depending on where you live, you should be able to contract your cattle to a feedlot, stocker operator, or on a video sale. Most forward contracts are only made for a few weeks ahead of time, though, and not made for selling very far into the future. Like hedging, forward contracting does not let you cash in on price increases, but it is less risky and you do not have to worry about margin calls.
The last alternative is to do nothing. You could just close your eyes and see what you get for your calves in October. While this is probably the easiest marketing plan, it is by far the most anxiety-ridden plan. You could roll a seven and win big. Then again, you might lose it all.
Editor's Note: Bo is a junior Agricultural Economics major at Oklahoma State University who served a three-month internship with the Agricultural Division.