For the first time in a long, long time, you can hedge August feeders at a dead even basis. The $136.00 put closed at $5.85 producing a minimum sale price of $130.15 with the index reading today at $130.02. All the months prior for nearly 2&1/2 years, hedging was done at a discount and made more severe by the premium paid for the option. I don’t have a clue how high traders will push this market. What I do know is that you have seen a more friendly environment for which to manage risk than at present in a very long time. Hence, use it. There remains 3 more quarters to trade through and while the market is hot, use it to your advantage. I’ve attempted to stave off hedging as long as possible as I’ve anticipated the change in the basis. The change has materialized and I recommend using it. How you use it will be as important as you using it. First, if your inventory is to be marketed between now and May, you may consider a synthetic short futures position. Due to limited time, even if the market remains strong, detriment would not be anticipated great due to the call strike still allowing for a predetermined amount of upside potential. Recall that cattle being sold today, were most likely purchased at the lower end of the price range 3 to 4 months ago. Next, if they are summer/fall cattle, then a bear put spread is recommended. An at the money put would be complimented with an out of the money put with at least a $10.00 spread. The achievement attempting to be spending a lesser amount on premium, with a predetermined downside factor, and the knowledge of having to make another decision if the $126.00 area is exceeded. The belief is the $126.00 area won’t be exceeded. If it is though, then you make another decision, but the compliment is that you don’t have to make it under duress as you already captured 2/3 of the initial decline to the $126.00 area. The goal here is to minimize premium paid in order to write off less from your final sale bill.
The price action remains a primary wave 1. The 5th wave of primary wave 1 has extended. There may still be some left to the upside, but today’s price action was such that I perceive a great deal of it was a “get me out” mentality from those who hedged too soon. I’m not talking about just this week, I’m looking at those with hedges under $122.00. This week still have a few crooks and turns with the majority of the cash trade looming, choice boxes lower today, and the on feed report Friday. It doesn’t appear that the cold storage report will have much of an impact.