Documents
Resources
Learning Center
Upload
Plans & pricing Sign in
Sign Out

Livestock Futures

VIEWS: 6 PAGES: 41

  • pg 1
									Livestock Futures

Why Futures
• Limit Risk
– – – – Feed costs Performance Death loss Disease

• Managed risk through improvements in production practices • Market risk is uncontrollable

Chicago Mercantile Exchange
• CBT (Chicago Board of Trade) started in 1848
– Traded wheat & corn – Forward contracting to secure a fixed price

Chicago Mercantile Exchange
• CBT (Chicago Board of Trade) started in 1848
– Traded wheat & corn – Forward contracting to secure a fixed price

• Chicago Butter and Egg Board
– – – – Est. 1898 for poultry and dairy products Traded seasonally due to storage (winter – early spring) 1916 WWI contracts couldn’t be delivered on Government said only stored commodities

• During this early time only 48 brokers traded

Chicago Mercantile Exchange
• 1960’s desire of producers, packers and merchants
– Needed a way to forward contract

• Government granted permission
– – – – 1964 Live cattle 1966 Live hogs 1971 Feeder cattle 1995 Lean hogs

What is a Futures Contract
• An agreement to buy or sell a commodity at a date in the future
– – – – Commodity Quantity – set by the exchange Quality – standards are set based on US quality grades Delivery Points – where commodity is to be delivered to
• Live cattle – Norfolk, NE • Cash Settlement – based on current market

– Feeder Cattle and Lean Hogs on Cash Settlement

Commodities
• Livestock
– Live cattle, Feeder cattle, Lean hogs

• Meats
– Pork Bellies

• Dairy Products
– Milk, Butter

• Grains
– Corn, Wheat

• Ag products
– Coffee, Orange Juice, Sugar, Cotton

Specifications
Live Cattle • Contract size 40,000 lbs • Live wt 1,100 – 1,300 lbs • Minimum 55% choice balance 45% select • Yield Grade 1,2,3 • No outlier carcasses • • • • Min and Max price fluctuation $1.50, 3.00, 5.00, 7.00/cwt Last Day ~ last business day of the month Trading hours ~ 9:05am - 1:00pm Traded – Feb, Apr, Jun, Aug, Sept, Oct, Nov, Dec

Min and Max Price Flucuations
Live Cattle • 1.50 for three days • 3.00 for three days • 5.00 for three days • 7.00 for three days
Allows for more rapid change to match up with market place

Specifications
Feeder Cattle • Contract size 50,000 lbs • Live wt 700 – 849 lbs • Criteria med – large frame, muscle #1

• • • •

Min and Max price fluctuation $1.50/cwt Last Day ~ last Thursday of the contract month Trading hours ~ 9:05am - 1:00pm Traded – Jan, Mar, Apr, May, Aug, Sept, Oct, Nov

Specifications
Lean Hogs: • Contract size 40,000 lbs • Minimum 50% Lean

• • • •

Min and Max price fluctuation $2.00/cwt Last Day ~ 10th business day of the month Trading hours ~ 9:10am - 1:00pm Traded – Feb, Apr, May, Jun, July, Aug, Oct, Dec

Futures
• Who can trade?
– Anyone can buy or sell futures contracts – If you sell a contract you are obligated to deliver a contract or settle via cash – Obligation can be removed by purchasing the contract back

Types of buyers / sellers
1) Speculator:
- Anybody that buys or sells a contract but doesn’t own the commodity. - The speculator guess what the market will be and either buys or sells in an effort to make money

2) Producer:
- Use the futures to lock in a purchase or sale price of a given commodity. - They are responsible for delivery but most offset their position with a buy or sell trade before contract deadline

Hedging
1) Short hedge:
Is used when you plan to sell a commodity in the future and you would like to lock in a sale price

2) Long hedge:
Is used when you plan to purchase a commodity in the future and you would like to lock in a purchase price

Hedging
1) Short hedge:
Is used when you plan to sell a commodity in the future and you would like to lock in a sale price Protecting From Falling Prices

2) Long hedge:
Is used when you plan to purchase a commodity in the future and you would like to lock in a purchase price Protecting From Rising Prices

Hedging
• How do you make a trade??

• Factors to consider when making a trade.

Market Terminology
• Bear Market • Bull Market
• Cash Market

• Position
– Long – Short

Transactions
• Broker • Clearing House • Guarantees all transactions • Commodity Futures Trading Commission (CFTC)

Why Futures

nd 2

Lecture

Opening an Account
Two kinds of Brokers 1) Full service ~ Consult – knows your situation Gives advice Provides market information Commission – so much per trade

Opening an Account
Two kinds of Brokers 1) Discount ~ Execute orders only Does not give advice
Will not let you know if you are in a bad position only does what you tell them to do

Opening an Account
How do you decide which broker to use 1) Time 2) Understanding 3) Risk

Opening an Account
Established Line of credit - Used for margin calls
“monies that offset losses” - Key – Lender has to understand Ag Market system - Lender understands market volatility

Opening an Account
CFTC ~ Commodity Futures Trading Commission - est. by an act of congress 1974 - Approves and oversees rules of trading

Requires 1) Personal Information 2) Risk Disclosure 3) Brokerage Firm Agreement 4) Hedge Account designation

Opening an Account
1) Personal Information - Annual Income - Net worth - Liquid assets - number of years hedging

Opening an Account
2) Risk Disclosure - Understand futures - Realize losses may occur - Position will be liquidated if performance bond calls are not met

Opening an Account
3) Brokerage Firm Agreement - Agreement to let brokerage firm do transactions - Agree to meet performance bond calls

Opening an Account
4) Hedge Account designation - Lists the commodities you plan to trade in

Opening an Account
1st – visit with lender 2nd – Visit with Broker 3rd – Have performance bond money - Monies are used to offset losses ( deposit) - Clearing House Exchange (in CME) - oversees disbursement of payments - Payments made through brokerage firm

Types of Orders
1) Market Order – 2) Price Limit Order -

3) Stop Order -

4) Stop order close -

Types of Orders
1) Market Order – Placed at market, only filled if an opposite
position is taken

2) Price Limit Order -

3) Stop Order

4) Stop order close

Types of Orders
1) Market Order – Placed at market, only filled if an opposite
position is taken

2) Price Limit Order – Fill at price or better, broker will wait if
market is moving in your favor

3) Stop Order -

4) Stop order close

Types of Orders
1) Market Order – Placed at market, only filled if an opposite
position is taken

2) Price Limit Order – Fill at price or better, broker will wait if
market is moving in your favor

3) Stop Order a) Sell stop – placed below the market b) Buy stop – placed above the market 4) Stop order close

Types of Orders
1) Stop Order a) Sell stop – placed below the market – used when in a sort position b) Buy stop – placed above the market –offset long position
Sell Stop

80
Sell stop at 80 Below the market Buy

75

Types of Orders
1) Stop Order a) Sell stop – placed below the market – b) Buy stop – placed above the market –

Sell Stop

82 80
Sell stop at 80 Buy

Sell stop at 82 (below the market)

80

75

75

Types of Orders
1) Stop Order a) Sell stop – placed below the market – b) Buy stop – placed above the market –

Sell Stop

82 80
Sell stop at 80 Buy

Sell stop at 82 (below the market)

Buy stop at 80

80

75

75

Types of Orders
1) Stop Order a) Sell stop – placed below the market – b) Buy stop – placed above the market –

Sell Stop

82 80
Sell stop at 80 Buy

Sell stop at 82 (below the market)

80

Buy stop at 80
Buy stop at 77

75

75

Types of Orders
1) Stop Order a) Sell stop – placed below the market – b) Buy stop – placed above the market –

Sell Stop

82 80
Sell stop at 80 Buy

Sell stop at 82 (below the market)

80

Buy stop at 80
Buy stop at 77

75

75

What Happens with an Order?
Call Broker Place order
Broker calls the firm’s clerk on the CME floor

Clerk gives it to a runner
Runner gives it to trader in pit

Trader in pit does what order says… If filled gives filled order back to runner who gives it to the clerk
Clerk process order and calls broker

Broker documents trade

Opening an Account
What affects Performance Bond?

Value of your position changes day to day Required to maintain minimum of $600 dollars in acct Open account with $800


								
To top