Price Risk Management Basics


Cost of Production

• The first and most important first step in developing a risk

  management program

• Calculates your costs

• Determines your breakeven

• Helps you establish a realistic target price for your cattle



The basis is the difference between the cash market and the

 futures at the time of delivery.


Forward Contracting

Forward contracts are written with a specific packing plant for

 future delivery.


• Basis is guaranteed

• Final price is guaranteed

• Premiums for exceeding contract specifications



• Packer has the ability to pull cattle and hogs when they need

  them rather than when the producer wants to deliver them.

• Contracted cattle are a captive supply to the packer



Contracts are sold directly off the Chicago Mercantile Exchange

 and are not committed to a specific packing plant.


• Deliver to the packer of your choice

• There is no captive supply



• Final price is not determined until the time of delivery

• No basis guarantee – basis is at risk



Puts and calls each offer an opportunity to take advantage of

futures price movements without actually having a futures


• The buyer of an option has the right, but not the obligation, to

 buy or sell a futures contract, at a specific price on or before a

 certain expiration date

• The seller of an option has the obligation to buy or sell a futures

 contract, at a specific price on or before a certain expiration date



Risk Management Worksheet