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Assume its December and a feeder cattle producer has agreed to provide 240,000 pounds of feeder cattle at the current market price in 3 months time (late March). Currently, the market price is $1.25/lb and the producer feels a good profit can be attained at that price given their management style.

However, the producer knows they can manage price risk by hedging feeder cattle contracts against a possible cash market decline. Assume the producer wants 100% price coverage. Currently available feeder cattle futures contracts and prices (prices are in dollars/lb): January $1.30 March $1.32 April $1.35 May $1.37

Question 1. Which contract month and price would you select from the above list to begin the hedge? ___________________

In late March, prior to delivery, feeder cattle prices fell 10% to $1.13/lb on the local cash market and since we are nearing delivery the futures price for an __________ contract has also nearly converged to the cash market levels with a price of $1.17/lb.

Question 2. Which month fills in the blank of the above sentence?

Question 3. For this livestock producer, the hedge is considered a short hedge (True or False).

Question 4. Assuming the producer closes the hedge and adds any gains/losses from the futures market, what is the final price received for the producer?

Date Cash Futures Basis December $1.25/lb 1.35/lb (Long or Short? $-0.10 Late March $1.13/lb 1.17/lb (Long or Short? $-0.04 Net Price Received? __________________

Sales Proceeds Planned: 240,000 Lbs * Planned Price in December ($1.25) = $300,000 With Hedging: 240,000 Lbs * Net Price at the end of the Hedge ($________ ) = $________ Without Hedging: 240,000 Lbs * Late March Cash Price ($1.13) = $271,200 Be prepared to answer at least one or two more questions from this analysis. If you filled out the table above and completed the Sales Proceeds section you will have the information needed to answer these random questions.

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