Price volatility in feeder cattle markets has greatly increased over the last several years.  While there are many reasons for the increase in price volatility, some of the more common factors include volatility in grain and fed cattle prices, variability in weather, and an increased dependence on exports.  Price risk is becoming another factor that cattle producers must learn to manage, just like they would manage anything else on their operation.  This volatility is also most likely behind a recent increase in producer interest in learning more about strategies to manage price risk for feeder cattle.  

This publication is a follow-up to AEC 2013-01, Using Futures Markets to Manage Price Risk for Feeder Cattle.  The first publication provided an introduction to the futures’ market and outlined the basic use of futures and options, while this publication will discuss some advanced strategies that are commonly used by cattle producers for price risk management.  These strategies will all build upon those discussed in AEC 2013-01, so a basic understanding of futures and options is required.  If the reader is unfamiliar with those basic strategies, they are encouraged to master those, before moving to the advanced strategies discussed here.  

As a general rule, all futures based price risk management strategies involve trade-offs.  Usually, producers are giving something up, in exchange for gaining something.  For example, as was discussed in AEC 2013-01, when employing a straight hedge, the producer gives up upside price gain in order to eliminate downside price risk.  In the case of purchasing a put option, the producer pays some premium in order to eliminate some downside price risk.  These same types of tradeoffs will apply to the strategies discussed in this publication. 

Author(s) Contact Information: 

Kenny Burdine | kburdine@uky.edu