What Happened
Cattle futures plunged near $40 per hundredweight (cwt) over the last five weeks, after peaking in mid-October. A steady uptrend for prices from the beginning of the year had December cattle futures rallying from near $190 per cwt to $248 per cwt, or an increase of over 30%. The rally came to an abrupt halt as the market shed over 15% in value in a mere six weeks. A nearly 10-month uptrend was cut by more than half in a very short period of time. The point is that the cattle market showed us just how quickly bull markets can lose steam and sell off abruptly.
Why This Is Important
Seeing how quickly markets can change is a sober reminder of the risks associated with increasing prices. Rallies historically tend to fall apart quickly once the market loses upward momentum. The higher a price goes, the more it is likely for buyers to hesitate to buy at even higher prices, and sellers become more prominent once a decline begins. More importantly, this event should teach producers that continuous risk management is paramount. The idea that bull markets can continue indefinitely can be proven wrong in quick fashion.
Outlook is one thing and strategy is another. Those who were consistently purchasing puts in the cattle complex may have felt as though they were beating their head against a wall. Continuous higher prices left many puts worthless at the end of their contract month. As with anything that doesn’t seem to work well, it is human nature to back away. As reflected in previous articles, marketing never takes a day off, and the higher a market goes, the more critical it is to stick to a strategic approach. In this case, that strategy was the suggestion of purchasing options to establish a price floor and leave the top side open for price advances due to a limited supply of beef.
What Can You Do?
Stay consistent and vigilant with marketing. Farming — and therefore, marketing — requires a professional approach. Trying to outguess the markets on a hunch may work occasionally; it probably doesn’t work most of the time. What can work well, however, is a consistent approach that fits your risk tolerances. Communicate with the people in your management circle that can help you achieve your goals and needs.
Find What Works for You
Work with a professional to find the strategy or strategies best suited for your operation. Communication is important. Ask critical questions and garner a full comprehension of consequences and potential rewards before executing. The idea is to make good decisions for the operation rather than emotionally charged responses to market moves, which are always dynamic.
Editor’s Note: If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: (800) 334-9779.
Disclaimer: The data contained herein is believed to be drawn from reliable sources 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 involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Examples of seasonal price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences or likely to occur. Futures prices have already factored in the seasonal aspects of supply and demand. No representation is being made that scenario planning, strategy, or discipline will guarantee success or profits. Any decisions you may make to buy, sell, or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. 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 with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of the National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation.
About the Author: With the wisdom of 30 years at Total Farm Marketing and a following across the Grain Belt, Bryan Doherty is deeply passionate about his clients, their success, and long-term, fruitful relationships. As a senior market advisor and vice president of brokerage solutions, Doherty lives and breathes farm marketing. He has an in-depth understanding of the tools and markets, listens, and communicates with intent and clarity to ensure clients are comfortable with the decisions.
