Benji, pretty much anyone that can meet and maintain the account minimums can trade futures, cattle or otherwise. Some of the author’s assertions sound like a bad episode of Yellowstone. If you want more details, given I am off today, I thought I would expand on the article. Otherwise, stop here.
I know this is overkill and not the question Benji asked, but after working in the industry for years to see things so poorly explained in articles like this just frustrate me to no end.
This article is a hot mess, IMHO. The author mentions the following:
System is rigged in favor of big meat over ranchers
Volatility of the pandemic created historically bad prices for ranchers
Ranchers don’t get their fair share of the boxed beef dollar
Formula contract pricing reduces competition and price transparency for ranchers
Only speculators contribute to futures price increases for cattle (just LOL)
If you want to write that article, then write that article. There are hundreds of them out there. Not going to debate any of those positions here, but I do question how what happened to the Easterday Ranch relates to any of the above points.
Easterday was not some struggling rancher who lost grandpa’s 160 acres the family had owned since the 1880’s. It was one of the largest, most diversified farming operations in the PNW. Given its size and longevity, I suspect Easterday was a very viable operation thru good times and bad.
Outside of Cody being the antithesis to Hillary Clinton’s cattle futures trading experience the explanation of how cattle futures work is just terrible.
LC futures- Live Cattle futures, contract size 40,000 lbs
Roughly 30-35 head of fat cattle weighing 1200-1250 lbs ready for slaughter. Basically a “pot load” of cattle in the shiny, aluminum, double decked (pot belly) cattle trailers on the highway. Actually, not shiny, but covered in runny, corn laden cattle crap.
FC futures- Feeder Cattle futures, contract size 50,000 lbs
60-65 head of feeder cattle weighing 700-750 ready for the feedlot to be fattened for the kill (see above). Again, this is about a truck load. Note if you have 65-70 head to load you can damn sure bet SD dad or Tom dad would get those boys on the truck with a note to the driver to avoid the KDOT scale house on the way to the feedlot.
The author mentions only buying a futures contract from a “stockbroker.” You buy AND SELL futures contracts, and you do it on margin. Probably like $1,500 will allow you to buy or sell a contract worth $50-60,000. If the price goes in your favor you build equity. If the price moves against you then a margin call requires you to put in more money. See the boys in the investing thread if any questions.
Basic Hedge example using their numbers:
This is highly simplified ignoring basis (differences between futures and cash price, discounts, delivery periods, etc). It even ignores the fact you can hedge the feed costs (second biggest expense next to the animal) using grain futures.
Buy feeders to put on feed with a breakeven of $1.30. You SELL futures contract for $1.34 to lock in the $.04 margin.
Cattle are fat and cash/futures are at $1.50 (prices go up)
Sell cash cattle for $1.50 - $1.30 breakeven you make $0.20 on cash
BUY back futures at $1.50 - $1.34 original sale you lose $0.16 on futures*
Net you made your $0.04 margin
*note must meet margin calls to keep your short sale to end of the trade
Cattle are fat and cash/futures are at $1.20 (prices go down)
Sell cash cattle for $1.20 - $1.30 breakeven you lose $0.10 on cash
BUY back futures at $1.20 - $1.34 original sale you make $0.14 on futures
Net you made your $0.04 margin
Cody was not hedging in any sense of the word. My guess is he was putting on a “Texas hedge.” He was long cash cattle and probably long cattle futures in the hopes of doubling up. Bottom line he was really bad at speculative trading of cattle futures. He had/has a serious gambling addiction. He could have as easily been losing millions at a casino.
Yes the cattle sector has went thru some very tough times. Ranchers and farmers are honest, hard working folk. However, they are human and prone to greed and corruption just like everyone else. I just feel like maybe that’s more of the story here.
The author also states futures and scale are the only way to survive in the cattle industry. For the subsidy crowd here USDA offers multiple programs for price protection in the livestock sector. There are other ways to manage the risk outside of futures.
https://www.rma.usda.gov/Policy-and-Procedure/Insurance-Plans/Livestock-Insurance-PlansTom
