Help on Hedging with Futures
You are a farmer growing corn, soybeans and feeding feeder cattle for sale as fat cattle for slaughter.
You have planted 200 acres of corn and 200 acres of soybeans. You also have room for 100 head of calves that will be fed to be fat cattle for slaughter. The beans will be sold in the cash market when harvested (Nov 2015), and the corn will be sold for cash (Dec 2015). The feeder cattle can be purchased in December 2015 and will be ready to be sold in the cash market on August 2016 as fat cattle.
Your expected cost of production is $600/acre for corn and $300.00/acre for soybeans. Your expected yields are 170 bushels/acre in the corn crop and 45 bushels per acre for soybeans. You will need to buy feeder cattle in the cash market in December 2015. The calves are expected to weigh 600 pounds when purchased and 1,200 lbs when sold for slaughter in late July/earlyAugust, 2016. The cost of feeding the calves out to slaughter weight is $175 plus the cost of 60 bushels of corn you will need to buy in Dec 2015.
Use the close for futures from the November 9, 2015 close for the CBOT and CME to evaluate your hedging opportunities.
The expected basis at market time is –$0.44/bu for corn, -$0.65/bu for soybeans, -1.00/cwt for feeder
cattle and -$0.50/cwt for fat cattle
What are the target prices (hedging Nov 9, 2015) for hedging the purchase of feeder cattle on Dec 15, 2015 and the purchase of corn required to feed those cattle to slaughter weight.
What are the Nov 9 target prices for hedging the sales of corn, soybeans and fat cattle using futures contracts?
Suppose that (at marketing time): March 2016 corn closes at $3.75; Jan 16 soybeans close at $8.50; and Jan 16 feeder cattle close at $185.50 and Aug 2016 Live Cattle close at $115.00. The actual basis at marketing time is -$0.40 for corn, -$0.50 for soybeans, +$0.50 for feeder cattle and $0.00 for live cattle.
Assume the farmer hedged close to 80% of the expected production (or purchase) of each product. Next assume that the farmer actually harvested 60 bushels per acre for the soybeans, 185 bushels per acre for the corn, bought 100 feeder calves weighing 605 pounds and sold 100 fat cattle weighing 1,250 pounds each. Demonstrate the results (actual price received or paid) of the hedging transactions using futures contracts and calculate the profits realized from the hedged portion corn and soybeans sold.
5 bonus points – Calculate profits for the farmer for the portions of corn and soybeans that were sold but not hedged.
10 bonus points - Calculate the profits for the farmer from the cattle sold that were hedged and the profit from those that were not hedged.