what happened
In mid-March, June live cattle futures were trading above $186, the highest price since late fall. This was also when highly pathogenic avian influenza (HPAI), also known as avian influenza, was detected on several dairy farms. Without a clear understanding of the potential impact on cattle, traders quickly exited their long positions, causing June live cattle prices to fall by $12.00 in a matter of weeks. I had a lot of questions. Is it possible that the beef supply is contaminated with HPAI? Is it possible that the virus can spread to humans? There was a recognition that the potential impact loomed large. Does the decline in prices reflect other factors, such as continued inflation, rising consumer debt, or a stronger US dollar? The most likely conclusions are listed above.
Why this is important
It is still unclear whether avian influenza will have long-term effects on cattle herds. It doesn't seem that way at the moment. However, the market has reminded us how quickly prices can fall. In this case, prices fell due to various demand concerns other than bird flu. The market has reminded us that price declines can be rapid and unrelenting as fundamentals and perceptions change. Price increases can last for a long time (as in the case of cattle futures). Still, it only takes a little bit of bad news for a trader to exit a long position, go short, or both. It's almost impossible for anyone to guess something like HPAI. Anticipating that bull markets can change quickly and preparing for this possibility is part of a good risk management strategy.
What can you do?
Consider using different strategies to protect the price of what you produce. Understand the tools in your marketing toolbox. A good strategy in an uptrending market is to use a trigger point that is lower than the point at which the market is currently trading. Once you hit these trigger points, you are a seller. In the futures market, these are called stop orders. As the price rises, you can move your stop closer to where the market is trading. Some people refer to this strategy as using a trailing stop.
Another strategy is to purchase a put option that sets a price floor. If the price continues to rise, you can decide to roll to a higher strike price to increase the price floor, or keep the original option as a safety net.
Rewarding price increases with futures contracts is also a risk-shifting strategy. Forward selling can be a powerful tool if the price reaches a point where you are satisfied with the return on investment.
The key to good risk management is staying informed, which requires continually exploring, considering, and implementing strategies that work best for you. Please discuss this with your advisor. Please ask lots of questions and deepen your knowledge. There's an old saying: “Knowledge is power.” Knowledge also leads to confidence.
Editor's note: If you have any questions about this aspect, please feel free to contact Bryan Doherty at Total Farm Marketing: 800-334-9779.
Disclaimer: The data contained herein is believed to be from sources reliable but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involves significant risk of loss and is not suitable for everyone. You should therefore carefully consider whether such trading is suitable for you in light of your own financial situation. Instances of seasonal price fluctuations or extreme market conditions do not imply that such fluctuations or conditions are or are likely to occur. Futures prices already factor in seasonal aspects of supply and demand. No representation is made that scenario planning, strategy, or discipline will guarantee success or profits. Any decisions you make to buy, sell, or hold futures or options positions based on such research are entirely your own and should not be deemed endorsed or attributed in any way by Total Farm Marketing. yeah. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered as an Introducing Broker with the Commodity Futures Trading Commission (CFTC) and is a member of the National Futures Association. SP Risk Services, LLC is an insurance agency and equal opportunity provider. Stewart-Peterson Inc. is the publisher. A customer may have ties to all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. Unless otherwise noted, the services referenced are those of Stewart-Peterson Group Inc. Presented for solicitation.
About the author: With 30 years of wisdom at Total Farm Marketing and a following across the grain belt, Brian Doherty has a deep passion for clients, their success, and long-term, rewarding relationships. Dougherty is a senior marketer.He is involved in Farm Marketing as Vice President of Advisor and Brokerage Solutions. He has a deep understanding of tools and markets, and listens and communicates with purpose and clarity to help clients understand their decisions.
