Options Trading Passport Program

When using a selling hedge (or short hedge), your livestock commodity is still sold in the traditional cash market.

To place the hedge, you sell an appropriate amount of futures contracts (table 1 on page 3 provides specific contract quantities). This initial sale in the futures market offsets your current or expected cash market position of holding or producing the livestock commodity.

The initial sale in the futures market (placing the hedge) is anticipatory, and typically made well before production of the actual livestock commodity is concluded. Futures contracts are generally available between one and two years in advance.

To lift the hedge, the futures position is offset when the livestock commodity is sold on the cash market. The following example involves the sale of fed cattle. However, a short hedge can also be used by producers selling other livestock products, such as weaned calves, feeder cattle, and milk.

A Fed Cattle Hedging Example This example is designed to show how your net price as a hedger is determined by a combination of the futures market and the cash market. Several important issues are not explicitly addressed, including what proportion of your production to hedge, when to place and lift the hedge, the broker’s commission, and margin calls. The focus of the example is on how the outcome of a short hedge relates to both a cash position and a futures position.

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