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.

For more information on this topic, see the links listed below of articles posted on related Web sites.

Futures and Hedging

• Introduction to Futures Markets – Texas A & M University Extension -- Futures trading has a long history in the U.S. and in the world.
• Selling Hedge with Futures – Texas A & M University Extension -- Use a selling hedge to reduce the risk of price declines.
• Buying Hedge with Futures – Texas A & M University Extension -- Many agricultural products require risk management tools to stabilize input prices.
• Hedging Milk with BFP Futures and Options – Texas A & M University Extension -- Since the 1996 farm bill, milk prices have become more volatile.
• Milk Futures, Options and Basis – Texas A & M University Extension -- Hedging with futures and options can reduce milk price risk.

Options

• Introduction to Options – Texas A & M University Extension -- Options provide a flexible marketing tool to manage risk.
• Hedging with a Put Option – Texas A & M University Extension -- Put options are a flexible marketing tool.
• Options to Hedge Farm and Ranch Inputs – Texas A & M University Extension -- Call options are a flexible marketing tool.
• The Window Strategy with Options – Texas A & M University Extension -- Putting limits on prices advances and declines can manage risks.
• Using a Bear Put Spread – Texas A & M University Extension -- A spread is a tool to reduce the price of an option.
• Using a Bull Call Spread – Texas A & M University Extension -- A spread is a tool to reduce the price of an option.
• Rolling up a Put Option as Price Increases – Texas A & M University Extension -- A tool for improving your minimum price.
• Factors Affecting Option Premiums – Texas A & M University Extension -- Understanding option premiums help you to use them wisely.

Basis

• Knowing and Managing Grain Basis – Texas A & M University Extension -- Differences in grain prices are due to surpluses and deficits of grains.
• Livestock Basis – Texas A & M University Extension -- Knowing local basis is valuable when estimating purchase and sale prices.
• Crop Basis – University of Illinois.
• Basis for Selected North Dakota Crops – North Dakota State University Extension -- A knowledge of the basis is important to good marketing.

Related Topics

• Selecting and Working with a Broker – Texas A & M University Extension -- If you use futures and options, you need to broker to execute those trades.
• Definitions of Marketing Terms – Texas A & M University Extension.
• Specifications of Futures and Options Contracts – Texas A & M University Extension.