Tim Petry Livestock Economist Agribusiness and Applied Economics.
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1 Tim Petry Livestock Economist Agribusiness and Applied Economics Lean Hogs.ppt
2 Livestock, Dairy, Poultry Outlook Hog & Pigs Report, Mar, Jun, Sep, Dec Market Reports www2.rma.usda.gov/livestock LRP, LGM (Chicago Mercantile Exchange) Futures and Options (Livestock Marketing Information Center)
3 Mil. Head 8.0 DECEMBER 1 HOG BREEDING HERD U.S. Inventory Livestock Marketing Information Center Data Source: USDA/NASS Mil. Head 60 DECEMBER 1 MARKET HOGS U.S. Inventory Livestock Marketing Information Center Data Source: USDA/NASS
4 40,000 lbs, 400 cwt Hog carcasses that fall within the packer base weight range Feb, Apr, May, Jun, Aug, Oct, and Dec Lean Hog Trading terminates on 10 th business day Cash settlement based on CME Lean Hog Index Daily limits: $3/cwt
5 Two day average of Head count Average net price Average carcass weight Reported by USDA-AMS in LM_HG201 National Daily Direct Hog Prior Day Report Slaughtered Swine ( CME LEAN HOG INDEX Tue, 02/19/08 Negot. Negot. Negot. SPMF SPMF SPMF Daily CME Head Average Average Head Average Average Weighted Lean Hog Net Date Day Count Net Pric Carc. Wt Count Net Pric Carc. Wt Price Index Change 02/19/08 Tue 29, , /18/08 Mon 29, ,
6 LM_HG201 Des Moines, Iowa Wed, Feb 20, 2008 USDA Market News This report is based on information provided by companies that agreed to continue to participate in Livestock Mandatory Reporting on a voluntary basis. NATIONAL DAILY DIRECT HOG PRIOR DAY REPORT - SLAUGHTERED SWINE Slaughter Data for Tuesday, February 19, 2008 Barrows and Gilts (Live and Carcass Basis): 382,940 NEGOTIATED OTHER SWINE OTHER TOTALS/ MARKET OR PORK PURCHASE WTD AVG FORMULA MARKET ARRGMENT FORMULA Producer Sold: HEAD COUNT 29,972 52, ,375 45, ,635 CARCASS BASE PRICE AVERAGE NET PRICE LOWEST NET LOT HIGHEST NET LOT AVERAGE LIVE WT AVERAGE CARCASS WT AVERAGE SORT LOSS AVERAGE BACKFAT AVERAGE LOIN DEPTH (LD) LOINEYE AREA (LD Converted) AVERAGE LEAN PERCENT (Packer Buying Programs)
7 cme lean hog futures settlement prices as of 02/20/08 07:00 pm (cst) MTH/ ---- DAILY --- PT EST ---- PRIOR DAY ---- STRIKE OPEN HIGH LOW LAST SETT CHGE VOL SETT VOL INT APR K MAY JUN JLY AUG OCT DEC FEB B APR TOTAL EST.VOL VOL OPEN INT. TOTAL
8
9 Index SEASONAL PRICE INDEX -- SLAUGHTER HOGS Iowa - Southern Minnesota, Jan Mar May Jul Sep Nov Max. Index Avg. Index Min. Index Livestock Marketing Information Center
10 BARROW AND GILT PRICES Iowa - So. Minnesota, Carcass Base Price, Weekly $ Per Cwt Avg JAN APR JUL OCT Livestock Marketing Information Center
11 Thou. Head 2500 FEDERALLY INSPECTED HOG SLAUGHTER Weekly Average, By Month Avg JAN MAR MAY JUL SEP NOV 2007 Pounds 202 AVG DRESSED WEIGHT - BARROWS & GILTS Federally Inspected, Monthly Livestock Marketing Information Center Data Source: USDA/NASS Avg JAN MAR MAY JUL SEP NOV 2007
12 BASIS is difference between a cash price and the CME futures price. HEDGING eliminates risk of adverse price movement, except for the risk of the basis being different than expected. CASH (+) FUT (-) CASH
13 Futures Price Actual Livestock Sale Date Futures IA/MN N. Dakota Cash Price Sep Oct Nov Dec Jan Mar Apr May Jun Jul Aug
14
15 Feb MAY LHFUT $73 / cwt EXPECTED BASIS BREAKEVEN - 68 BROKERAGE - (included in BE) EXPECTED PROFIT 5
16 Price Decrease Price Increase Short $73 $73 Long Cash BE Profit 5 5
17 Price Decrease Price Increase Short $73 $73 Long BASIS -5 INC DEC INC DEC Cash BE Profit
18 Similar to an insurance policy PUT: right to a short futures contract CALL: right to a long futures contract Buyer pays market determined premium Seller receives premium
19 Feb, Apr, May, Jun, Aug, Oct, Dec Strike prices available in $2/cwt intervals nearby contracts may have $1/cwt intervals Terminate same as futures
20 Price Price Price? cash futures options Options will always be 2 nd best
21 Nov MAY LH PUT $73 PREMIUM -2 EXPECTED BASIS BROKERAGE MINIMUM EXPECTED PRICE 71 BREAKEVEN 68 MINIMUM EXPECTED PROFIT 3
22 Price Decrease Price Increase MAY PUT MAY FUT PREM CASH BE PROFIT 3 8
23 Price Decrease Price Increase CASH OPTION 3 8 FUTURES 5 5
24 $ Per Cwt FEB BARROW AND GILT PRICES Iowa - So. Minnesota, Carcass Base Price, Weekly APR MAY JUN JUL AUG OCT DEC Avg JAN APR JUL OCT Livestock Marketing Information Center
25 Tim Petry, Livestock Economist
26 Feeder Cattle (beef, dairy, Brahman) Under 600 lbs Steers or heifers lbs Steers or heifers Fed cattle Hogs Lambs (9/17/07)
27 Similar to put options 13% of premium is subsidized Crop insurance agents do not have to offer List of approved agents at: www3.rma.usda.gov/apps/agentsslpi/result.cfm
28 Based on CME lean hog index Futures, options, and LRP based on carcass weight Available at or DTN Live weight conversion =.74
29 Weekly lengths: 13, 17, 21, 26 Policy size: Any # up to 10,000 head per SCE 32,000 maximum per year
30 Coverage prices and rates change daily and are posted on the USDA Risk Management Agency (RMA) web site Coverage levels will range from 70 to 100 percent of expected price
31 Payment based on difference between COVERAGE PRICE (CP) & CME LEAN HOG INDEX (CME) CP = $75/cwt CME = $70 $5/cwt payment Producers must submit 04-LRP-Claim Form within 60 days of end of contract
32 Date Placed End Date Coverage Price Prem. Actual Price Indemnity Payment 10/10/07 01/08/ Net 02/06/ /05/ /09/
33 Price Cost/cwt End Date Current Cash Price / / /19
34 Advantages Small numbers can be hedged Premium subsidized 13 percent No brokerage or margin Receive higher prices in bull market Available in months where no futures/options All coverage prices available daily Disadvantages Not flexible like futures and options Can be suspended at any time
35 1. Submit eligibility application form with insurance agent 2. Select a SCE (coverage prices and premiums are available after 5 PM (CST) except holidays) 1. Number of head 2. Policy length closest to marketing date 3. Estimated average market weight 4. Choose coverage price 3. Pay premium to agent 4. Agent submits SCE form electronically (hours are between 5 PM and 9 AM (CST), Tues-Sat only)
36 Offers protection against decline in hog feeding margin Gross Margin for Swine market value of market hog less soybean meal and corn costs Sold only on second to last day of month
37 Farrow to Finish Operation Finished weight = 250 lbs (live weight) Soybean meal price and corn price = price 3 months prior to swine target marketing month Feeder Pig Finishing Operation Finished weight = 250 lbs (live weight) Soybean meal price and corn price = price 2 months prior to swine target marketing month SEW Pig Finishing Operation Finished weight = 250 lbs (live weight) Soybean meal price and corn price = price 2 months prior to swine target marketing month
38 Any Questions?
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