|
| Author |
Message |
~SH~
Rancher
Joined: 14 Feb 2005
Posts: 5426
Location: South Western SD
|
 Posted: Mon Aug 16, 2010 10:49 am Post subject: |
 |
|
When I send my calves to a feedlot and simultaneously purchase enough feeder cattle futures contracts at $96 to cover all the cattle I am feeding and the board falls to $86 by the time those cattle are finished, the CME pays me that difference. If the CME feeder cattle futures rises to $106 in that time frame, I pay the board that difference.
Are you calling that a "short" position? Yes or no
~SH~
|
|
| Back to top |
|
fedup2
Member
Joined: 10 Feb 2005
Posts: 794
|
| Posted: Mon Aug 16, 2010 1:25 pm Post subject: |
|
|
Just dropped in to say hello and see who was still around. Doesn’t look as things have changed much! 
You are correct Sandhusker. If you own cattle whether as a rancher or feeder, you want to put a “floor” under the price by going short futures or purchasing put options. What ever the price drops for the physical product you are holding, you will make up with your short futures position.
In the case of feeders, they would also want to put a “ceiling” on their feed costs by buying call options or going long futures. What ever the price of corn goes up, they would cap with the profits made in their long futures position.
By being long the physical product such as cattle & being long futures, you are speculating, not hedging. If you sell your cattle and take a futures position, either long or short, you are speculating, not hedging. If you also farm & don’t want to pay storage & also feel the price of wheat is going up, you can sell the wheat off of the combine & go long futures or buy call options. This can be part of your marketing plan, but is also speculating! Hedging is protecting the price of the product you hold (in this case cattle) or your future needs (corn) and any other position is speculating!
A packer or consumer will put on a Long hedge to protect against future raising prices (long futures or call options) just as the feeder does with corn.
This is they way it has been in the 17 years that I have been trading futures and options so unless something has changed when I was sleeping last night, It should still work that way!
Hope everyone is well and doing fine!
|
|
| Back to top |
|
Oldtimer
Rancher
Joined: 10 Feb 2005
Posts: 24333
Location: Northeast Montana
|
| Posted: Tue Aug 17, 2010 11:30 am Post subject: |
|
|
| Quote: |
Published August 16 2010
GIPSA responds to rule misunderstandings
By: Daryll E. Ray and Harwood D. Schaffer,
KNOXVILLE, Tenn. — The USDA’s Grain Inspection, Packers and Stockyards Administration made two announcements July 26 via a letter signed by Edward Avalos, undersecretary for marketing and regulatory Programs, USDA. The comment period on GIPSA’s proposed livestock competition rule has been extended to Nov. 22. In addition, Avalos released a four-page document to “clarify” the rule.
“It has become apparent that there are misunderstandings” concerning the proposed rule, Avalos says. “This rule does not limit or prohibit marketing agreements, the use of premiums or other value-added activities. The rule does not require anyone to do business with any particular person or require packers to pay all producers the same price.”
We have converted “misconceptions” into questions and then quote a portion of USDA’s response.
Q. Would the provision on competitive injury allow producers to sue companies without having to show competitive injury?
A. If a producer filed a claim on matters dealing with practices that could cause competitive harm, such as manipulation of prices, the producer would need to show harm or the likelihood of harm to competition. If a producer filed a claim on matters that do not involve competitive harm, such as retaliatory conduct, using inaccurate scales or providing a grower sick birds, proof of competitive injury or the likelihood of competitive injury would not apply.
Q. Would the rule cause increased litigation because of the provision on competitive injury or harm?
A. The lack of clarity on the issue of competitive injury currently causes litigation. The rule seeks to clarify the issue and reduce litigation.
Q. Would the provision on packer-to-packer sales eliminate marketing agreements or other value-added activities and take away the incentive to produce meat products that consumers prefer?
A. The proposed rule seeks to prevent collusion and price manipulation caused by the sharing of pricing information between packers. It does not ban packers from owning their own livestock. When a packer sells livestock to another packer, the information signals important market information about price and supply levels. With high levels of consolidation and vertical integration, firms may be able to affect the prices of sales on the open market. There is nothing in this provision that limits or eliminates marketing agreements. Instead, the proposed rule would provide integrity in the market to prevent manipulation of prices on the open market and in marketing agreements.
Q. Will the packer-to-packer provision now require packers to sell livestock across the country to other packers willing to buy livestock?
A.: The rule prohibits only direct sales between packers. A packer could sell to individuals, market agencies, dealers or other buyers.
Q. Would poultry growers and swine production contract growers be guaranteed a return of 80 percent with their production contracts?
A. Under the proposed rule, producers are to be offered production contracts with a sufficient period of time that provide the opportunity to recoup up to 80 percent of the cost of their capital investment. Producers would not be guaranteed an 80 percent return on investment. This rule would not affect provisions in production contracts to deal with poor performers such as termination for cause.
Q. Will companies no longer be allowed to provide premiums to producers?
A. There is no provision in the proposed rule that would limit or eliminate the ability of companies to provide premiums to reward producers for providing certain quantity or quality of livestock. The proposed rule simply requires that if differential pricing is offered, the packer, swine contractor or live poultry dealer must maintain records to document the business justification for that pricing arrangement.
Q. Will the rule take away producers’ ability to maintain the privacy of business transactions because all transactions will be reviewed and then posted on a government website open to public access?
A. There is nothing in the proposed rule that suggests GIPSA would review all transactions, nor require these transactions be made available on its website. To increase transparency, GIPSA is proposing packers, swine contractors and live poultry dealers provide sample contracts and poultry growing arrangements to GIPSA. In return, GIPSA will make sample contracts available on its website. Any trade secrets, confidential information and identifiable information would be removed and not made available on GIPSA’s website.
Editor’s Note: Ray is director of the University of Tennessee’s Agricultural Policy Analysis Center in Knoxville. Schaffer is a research assistant professor at APAC. |
|
|
| Back to top |
|
Sandhusker
Rancher
Joined: 10 Feb 2005
Posts: 18081
Location: Nebraska
|
| Posted: Thu Aug 19, 2010 7:56 pm Post subject: |
|
|
| ~SH~ wrote: |
When I send my calves to a feedlot and simultaneously purchase enough feeder cattle futures contracts at $96 to cover all the cattle I am feeding and the board falls to $86 by the time those cattle are finished, the CME pays me that difference. If the CME feeder cattle futures rises to $106 in that time frame, I pay the board that difference.
Are you calling that a "short" position? Yes or no
~SH~ |
Read what Fedup said. I've already explained this enough.
This is basic, high school ag stuff, SH.
|
|
| Back to top |
|
~SH~
Rancher
Joined: 14 Feb 2005
Posts: 5426
Location: South Western SD
|
| Posted: Sat Aug 21, 2010 11:38 am Post subject: |
|
|
Sandhusker,
Why did you divert the question?
Here it is again.....
| Quote: |
When I send my calves to a feedlot and simultaneously purchase enough feeder cattle futures contracts at $96 to cover all the cattle I am feeding and the board falls to $86 by the time those cattle are finished, the CME pays me that difference. If the CME feeder cattle futures rises to $106 in that time frame, I pay the board that difference.
Are you calling that a "short" position? Yes or no |
Just answer the question Sandhusker.
Diverting the question means you don't know and are playing your illusionary games again.
There is nothing speculative about locking in your cattle feeding profit by purchasing futures contracts for the month they will finish.
Here is the previous question you diverted...
| Quote: |
Going back to the real time numbers I presented above, if I locked the cattle in at $96 for December and the board is $86 when the cattle are finished and the cash ("spot") market is $85.50, I will have only lost $.50 per cwt (basis) because the board will pay me the difference between $86 and $96.
If I am wrong, by all means SHOW ME where I am wrong. Not just cheap talk again.
If I lock these cattle in on the board the same day I take the cattle to the feedlot, do you not consider that a "LONG" position?
Answer these questions Sandhusker..... |
Any bets Sandhusker will continue to divert just like he always does?
~SH~
|
|
| Back to top |
|
Sandhusker
Rancher
Joined: 10 Feb 2005
Posts: 18081
Location: Nebraska
|
| Posted: Sat Aug 21, 2010 9:39 pm Post subject: |
|
|
| If your contract made money when the price went down and lost you money when the prices went up, you had a short position.
|
|
| Back to top |
|
~SH~
Rancher
Joined: 14 Feb 2005
Posts: 5426
Location: South Western SD
|
| Posted: Sun Aug 22, 2010 12:21 pm Post subject: |
|
|
Sandhusker,
Your answer says nothing about when the contract was purchased.
I am going to try this one more time. If I am going to feed yearlings for 100 days and I lock those cattle in on the CME "DEC" board for live cattle (when I expect them to finish) the same day I take the cattle to the feedlot, do you consider that a "LONG" position on the board or a "SHORT" position ?????
There is only two possible answers to the example listed above Sandhusker:
1. LONG POSITION
2. SHORT POSITION
Don't give me another diversionary statement.
There is nothing "speculative" about locking your profit in on the board. This is risk management 101.
Fedup, you are welcome to answer the same question.
~SH~
|
|
| Back to top |
|
Sandhusker
Rancher
Joined: 10 Feb 2005
Posts: 18081
Location: Nebraska
|
| Posted: Sun Aug 22, 2010 1:19 pm Post subject: |
|
|
WHEN the contract was purchased has nothing to do with it!
If you buy a contract that increases in value as prices go down and decreases in value as prices go up, you have a short position.
If you have a contract that increases in value as the prices go up and decreases in value as prices go down, you have a long position.
Now, how can I possibly make this any simpler?
|
|
| Back to top |
|
~SH~
Rancher
Joined: 14 Feb 2005
Posts: 5426
Location: South Western SD
|
| Posted: Sun Aug 22, 2010 3:16 pm Post subject: |
|
|
| ok
|
|
| Back to top |
|
fedup2
Member
Joined: 10 Feb 2005
Posts: 794
|
| Posted: Sun Aug 22, 2010 3:46 pm Post subject: |
|
|
The minute you owned cattle, you held a LONG position in the cattle market! If you intend to feed these cattle for 100 days, you must feel the market is strong enough for you to make a profit. To protect this profit, you must take a SHORT position in the futures market.
If the price drops, the money that you lose on your cattle will be offset by your SHORT futures position!
If you owned the cattle & had a LONG futures position, you would lose money on both if the price dropped! You are not hedged! You are speculating!
In the case of a packer, if they sold xxx pds. of beef for future delivery to East Overshoe Romania for xxx$$$s, they would take a LONG futures position. If the price of cattle goes up while they are purchasing this beef, they would make enough money on their LONG futures position to cover the increased costs on the actual physical product, thus locking in their profit.
No one is diverting your question, SH! You are 180 deg off on your understanding of futures positions. The futures market does not care if you own cattle or not! It does not care if you plan to feed 10 days or 100 days! It doesn’t give a darn what your plans are!
If you hold a SHORT futures position and the market goes DOWN, you make money! If the market goes up, you lose money!
If you hold a LONG futures position, just the opposite is true.
|
|
| Back to top |
|
~SH~
Rancher
Joined: 14 Feb 2005
Posts: 5426
Location: South Western SD
|
| Posted: Mon Aug 23, 2010 11:33 am Post subject: |
|
|
| Quote: |
Fedup: "If you intend to feed these cattle for 100 days, you must feel the market is strong enough for you to make a profit. To protect this profit, you must take a SHORT position in the futures market.
If the price drops, the money that you lose on your cattle will be offset by your SHORT futures position!" |
That is correct. The only difference is that I am calling this a "LONG" position on the Futures market due to the time frame involved, since the cattle will not be finished until December. You are calling this a "SHORT" futures position.
The same confusion exists between the terms "buying a futures contract" and "selling a futures contract". You are paying for the contract yet you are actually selling it to someone else hence the term "selling the board".
| Quote: |
| Fedup: " You are 180 deg off on your understanding of futures positions." |
I totally understand futures positions for risk management purposes. I have used both hedges and put options. Where we differ is in our terminology for the same action.
| Quote: |
| Fedup: "The futures market does not care if you own cattle or not! It does not care if you plan to feed 10 days or 100 days! It doesn’t give a darn what your plans are!" |
I am well aware of that. I was pointing out the time frame as to why I consider it a "LONG" position rather than a "SHORT" position.
| Quote: |
| FedUp: "If you hold a SHORT futures position and the market goes DOWN, you make money! If the market goes up, you lose money!" |
As you stated above, the money that is lost on the cattle will be offset by the money I made with my futures position which you call a SHORT position. Been there, done that! I have also had to pay margin calls when the cattle market went up.
I understand the concept totally Fedup, the difference is in our terminology. As mentioned, it's just like someone saying "I bought the board" when they actually "sold the board". I use the term "LONG" because of the time frame involved from when the cattle are bought and when they are fed out. If that is the wrong term, I stand corrected on the correct terminology but I don't stand corrected on my understanding of managing my financial risk because I've used both futures and options many times to manage my financial risk.
As far as the "Master of Illusion" (Sandhusker), I doubt he's ever used futures and options and I don't trust anything he says.
~SH~
|
|
| Back to top |
|
~SH~
Rancher
Joined: 14 Feb 2005
Posts: 5426
Location: South Western SD
|
| Posted: Mon Aug 23, 2010 11:55 am Post subject: |
|
|
| Quote: |
| “The cattle futures market is susceptible to downward price movements – in contradiction of supply/demand fundamentals, when beef packers, who may hold a physical hedging position in the market, also engage in substantial speculative short selling of the market. The effect of the beef packers’ speculative short selling is to lower not only the futures market price, but also the cash spot market price, which is intrinsically tied to the futures market. |
Sandhusker,
If, as you say, I am wrong that short positions are used for speculation, why Bullard's concern with "speculative short selling"??
Hmmm???
~SH~
|
|
| Back to top |
|
|
