Cattle producers must choose a time and a price to sell. Futures and options markets offer producers pricing opportunities every day. A few forward pricing tools producers can use are selling futures contracts, buying put options and forward contracting.
Pertinent questions when evaluating a pricing opportunity include: Is the price acceptable? Is the price likely to move higher or lower? If the price moves, how far and how fast might it move? Can your business withstand a big, possibly abrupt, price move lower? In short, can you survive a volatile market?
Producers can use a combination of the various pricing mechanisms. For example, a pricing strategy may consist of a portfolio where some production is forward contracted, some hedged with futures, some protected with options or a price risk insurance product like Livestock Risk Protection (LRP), and some "unprotected" and sold at the prevailing cash market price.
For more, please click here.