Futures and options have traditionally been used by commodity livestock farmers to help mitigate risk in their production operations.  However, these same tools can be used by specialty livestock producers.  Although specialty livestock contracts may specify a fixed price, more often the price is specified as a premium to local cash prices or futures prices.  So specialty livestock producers are vulnerable to commodity price volatility.

Specialty livestock producers can use the same futures and options tools used by commodity producers.  If your contract price is specified as a premium to the local cash price, you need to adjust your results by the size of the premium.  For example, if you estimate that you can hedge commodity hogs for $50.00 and your specialty contract designates a $5.00 premium over local cash price, you simply add $5.00 for an estimated price of $55.00.  If you estimate you can place a floor price under commodity hogs at $45.00 by using the options market, the floor price for your specialty hogs is $50.00.

If your contract specifies your price as a premium to futures price, the process is simplified because you don’t need to adjust for basis.

The first step is to understand the Basics of Livestock Marketing.  Developing a Hog Marketing Plan is another useful article.

Hedging is a useful tool in mitigating price risk.  Hedging of Livestock provides you with an understanding of how to use this tool.  Livestock Options Market is another important marketing tool.

Regardless of what risk management tool you use, a thorough Understanding of Livestock Basis is critical if you are using these or similar grains.  Historic basis levels provide you with estimates of future basis levels.  Iowa Lean Hog Basis, Iowa Live Cattle Basis, Iowa Feeder Cattle Basis and Understanding and Using Milk Price Basis provide you with important Iowa information for predicting future basis movements.

More information on livestock price risk management is provided in the box at the right.