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Outsmart the cattle market? Don't even try

Outsmart the cattle market? Don't even try
We were tempted to speculate, but cooler heads prevailed

I have three things for you this week: a rant, a lesson that might serve you well when it comes to selling cattle, and a quick request.

First is the rant. We have 186 fat heifers ready for market today. We bought the cattle several months ago, and expected the cattle to weigh 1,200 pounds at market time. 1,200 pounds multiplied by 186 heifers equals 223,200 pounds of production.

A CME live cattle contract is 40,000 pounds. We bought the cattle with profit in mind, and thus hedged around 50% of the production by selling three October live cattle futures contracts at the time of purchase. As the months went on, we increased our hedges to 90% sold.

Note to myself: the true hedge is buying back the contracts once we sell the cash cattle.

We are pleased with the death loss count and also the rate of gain. The live cattle market has had a $10 bumpy decline since July, and the Tyson buyer called last week to purchase them. We did sell the cash cattle, and I immediately lifted the hedges and bought back the futures contracts.

Now, here's the lesson. I want to put this in writing primarily for my own use. I will reference this blog the next time I think I can outsmart the market. When we sold the cash cattle, I said, "Hey Dad, the market has been down so much lately, you know we could hold on to those hedges and make some money if the market continues lower."

He immediately responded, "You are speculating!"

He was right: the true hedge is buying back the contracts once we sell the cash cattle. In retrospect, I am glad I did not speculate and hold the hedges since the market bounced back this week. If that were the case, our brokerage account balance would have decreased.

In the long run, selling the cash cattle today would be the same as selling them last week, but only if we executed the proper hedge. We would have netted more from cash sales but less in the brokerage account by selling the cattle today versus last week. Basis risk is a story for another time.

A true hedge keeps us from hitting the jackpot but limits our losses. Hedging is a valuable tool that helps us lock in margins and continue feeding cattle.  

Lastly, I have a request for readers. How do you protect your profits when selling cattle?

The opinions of Maria Cox are not necessarily those of Farm Futures or the Penton Farm Progress Group.

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