AgDM newsletter article, October 2000
Live cattle futures and options: How have they done? Part 2.
By John Lawrence,
Extension Livestock Economist and Director of the Iowa Beef Center, 515.294.6290,
jdlaw@iastate.edu
Futures markets have been available since the mid-1960s and option markets since the early 1980s. Although we still hold educational meetings on how they work, relatively few producers use these tools. Below is a discussion of a recent analysis of futures and options and their effectiveness over the last decade.
Comparing futures and options strategies to the cash market
An analysis of simple futures and option strategies is summarized below. The cost of production estimates are based on Returns from Cattle Feeding, Handbook Decision Files B1-35 and B1-36. These estimates are based on feeding a yearling steer from 750 to 1250 pounds over a six month feeding period and a steer calf from 550 to 1150 pounds over 8 months. Futures were sold (hedge placed) when the cattle went on feed and were bought back (hedge lifted) when the cattle were sold. Similarly, put options were bought (call options sold) at start of the feeding period and were sold (call options bought back) at the end of the feeding period.
During the time period studied, returns were higher for the yearling feeders (Table 1) than calf feeders (Table 2). The 0 percent hedged column shows the estimated returns from staying in the cash market. Futures used at any level did not enhance price over the cash market because average returns were lower for all futures levels compared across all months. However, hedged yearlings sold in May and August had higher returns than the cash market. Calves sold in May and December had higher returns when hedged than the cash market.
Futures did reduce price risk. Hedging produced a higher minimum return and higher return at the 25th percentile (75 percent of the returns are better than this figure) than did the cash market. The 50th percentile, or median, return was higher for yearlings in the cash market than hedged and the calves had mixed results.
Table 1. Average returns for feeding steer calves, 550 - 1150 pounds, hedged at different levels, 1991-99 ($/head).
|
|
Percent
hedged
|
||||
|
Sold |
0% |
25% |
50% |
75% |
100% |
|
January |
$1 |
$-1 |
$-3 |
$-5 |
$-8 |
|
February |
17 |
13 |
9 |
5 |
1 |
|
March |
34 |
30 |
26 |
22 |
19 |
|
April |
28 |
25 |
23 |
20 |
17
|
|
May |
22 |
23 |
25 |
27 |
28
|
|
June |
11 |
10 |
8 |
7 |
6
|
|
July |
-7 |
-9 |
-12 |
-15 |
-17 |
|
August |
-8 |
-11 |
-14 |
-17 |
-20 |
|
September |
-13 |
-15 |
-18 |
-21 |
-23 |
|
October |
-13 |
-15 |
-17 |
-19 |
-21 |
|
November |
-14 |
-15 |
-16 |
-18 |
-19 |
|
December |
-24 |
-23 |
-21 |
-20 |
-18 |
|
Average |
3 |
1 |
-1 |
-3 |
-5 |
|
Minimum |
-126 |
-111 |
-102 |
-102 |
-101 |
|
25th percentile |
-58 |
-50 |
-39 |
-32 |
-28 |
|
50th percentile |
-2 |
1 |
2 |
-6 |
-3 |
Table 2. Average returns for feeding yearling steers, 750 - 1250 pounds, hedged at different levels, 1991-99 ($/head).
|
|
Percent
hedged
|
||||
|
Sold |
0% |
25% |
50% |
75% |
100% |
|
January |
$15 |
$15 |
$15 |
$15 |
$15 |
|
February |
26 |
23 |
20 |
17 |
13 |
|
March |
43 |
38 |
32 |
26 |
20 |
|
April |
37 |
33 |
29 |
25 |
21 |
|
May |
9 |
11 |
13 |
15 |
17 |
|
June |
-22 |
-23 |
-24 |
-25 |
-27 |
|
July |
-22 |
-23 |
-23 |
-24 |
-24 |
|
August |
-10 |
-10 |
-10 |
-10 |
-10 |
|
September |
2 |
-0 |
-2 |
-4 |
-6 |
|
October |
20 |
17 |
14 |
10 |
7 |
|
November |
34 |
30 |
26 |
22 |
18 |
|
December |
11 |
12 |
13 |
13 |
14 |
|
Average |
12 |
10 |
8 |
7 |
5 |
|
Minimum |
-139 |
-113 |
-92 |
-92 |
-93 |
|
25th percentile |
-41 |
-33 |
-24 |
-18 |
-20 |
|
50th percentile |
21 |
20 |
12 |
4 |
5 |
Table 3. Summary of returns to yearlings by month sold and risk management tool, 1991-99, ($/head)
Summary and distribution of returns by risk management tool
|
|
0% |
50% |
100% |
100% |
100% |
100% |
100% |
|
|
Hedge |
Hedge |
Hedge |
OTM PUT |
ATM PUT |
ITM PUT |
OTM |
|
|
|
|
|
|
|
|
FENCE |
|
Average |
$12 |
$8 |
$5 |
$6 |
$6 |
$7 |
$6 |
|
Minimum |
-139 |
-92 |
-93 |
-105 |
-108 |
-113 |
-93 |
|
25th Percentile |
-41 |
-24 |
-20 |
-29 |
-31 |
-27 |
-20 |
|
50th Percentile |
21 |
12 |
5 |
9 |
11 |
11 |
13 |
|
<-$30 (%) |
32 |
20 |
16 |
25 |
26 |
23 |
24 |
|
$30-0 (%) |
9 |
19 |
29 |
15 |
15 |
19 |
15 |
|
$0-30 (%) |
13 |
31 |
29 |
30 |
30 |
29 |
29 |
|
$30-60 (%) |
19 |
19 |
21 |
16 |
17 |
19 |
22 |
|
$60-90 (%) |
16 |
7 |
4 |
8 |
8 |
6 |
9 |
|
$90-120 (%) |
5 |
3 |
2 |
5 |
3 |
4 |
1 |
|
$120+ (%) |
6 |
0 |
0 |
2 |
2 |
1 |
0 |
Average return by month sold and risk management tool, 1991-99
|
Average return by month sold and risk management tool, 1991-99 |
|||||||
|
|
|
|
|
|
|
|
|
|
|
0% |
50% |
100% |
100% |
100% |
100% |
100% |
|
|
Hedge |
Hedge |
Hedge |
OTM Put |
ATM Put |
ITM Put |
OTM |
|
January |
$15 |
$15 |
$15 |
$16 |
$17 |
$21 |
$16 |
|
February |
26 |
20 |
13 |
22 |
22 |
24 |
20 |
|
March |
43 |
32 |
20 |
35 |
31 |
28 |
25 |
|
April |
37 |
29 |
21 |
27 |
24 |
20 |
22 |
|
May |
9 |
13 |
17 |
7 |
9 |
12 |
10 |
|
June |
-22 |
-24 |
-27 |
-29 |
-28 |
-26 |
-19 |
|
July |
-22 |
-23 |
-24 |
-34 |
-33 |
-28 |
-29 |
|
August |
-10 |
-10 |
-10 |
-15 |
-19 |
-20 |
-18 |
|
September |
2 |
-2 |
-6 |
2 |
3 |
8 |
-1 |
|
October |
20 |
14 |
7 |
22 |
23 |
23 |
19 |
|
November |
34 |
26 |
18 |
23 |
22 |
21 |
21 |
|
December |
11 |
13 |
14 |
0 |
1 |
0 |
6 |
The option strategies considered included: