There is a lot of speculation as to what the market will be doing come May, August or November, 2008. Scott McKennon, Regional Vice President at Farm Credit Services in Russellville, Ark., gave his input on the options producers can find with booking and hedging sale prices for the months to come.
McKennon explained that booking is determining a set price you will receive for your crop (animal or plant), through negotiations with either a cattle company or a grain elevator.
Hedging sets the price you can purchase or sell at, but it is done through a stock broker or commodity broker.
Booking, McKennon said, is a very common with row crop farmers, but should be looked at closer by cattle producers, because of volatile markets threatening bottom line profits at year-end.
Who can utilize futures?
When involved in a stocker cattle operation, you buy 500-weight calves, and feed them out to 850 lb. and sell them, McKennon said. “I think it’s vital that you lock in that 800 lb. animal and determine what price you will receive for them,” he added.
“Some of my larger stocker loans contract their cattle through Eastern Cattle Co. The producer buys from Eastern, Eastern delivers the cattle, they feed out to 850 lb.”
McKennon said that Eastern, (and likely other, similar cattle companies) allows you to lock in a sales price the day they deliver cattle. “Then you’re only real risk is death loss,” he said.
“If you don’t lock in that price, and you buy those 500 lb. animals at $1.10 per pound and the market goes south and you end up selling for $0.90 per pound, you’re gonna lose money. Versus if you could’ve locked in at $1.05 per pound, you've got your profit built in.”
Options for fertilizer prepayments
“I’ve got a few customers that farm in the Arkansas river valley who have already purchased the fertilizer they’re going to use for 2008,” McKennon said. With the anticipation that fertilizer prices are gonna go higher once the peak demand season arrives, spring and early summer can be an ideal time to pre-purchase, he added.
Loans for prepayments
“Whether on a row crop or cattle operation, producers can set up an operating loan where money is made available to go in and pay for operating expenses they'll incur during the year.” When the fruits of that operation come to fruition, be that grain or cattle, you then pay that operating loan off. Typically, operating loans are for shorter terms.
“As individuals, you can shop around and contract through a local co-op or feed store,” McKennon suggested.
Why would you not book it?
“It would be just like if a convenience store was running an ad that said if you'll buy all your gas from me for the next 12 months, I’ll sell gasoline to you for $1 a gallon. People should strongly consider locking in their sales price, and thus locking in a profit.”
He suggested producers sit down and analyze their cash flow and see what kind of price they need to make an acceptable profit.