Time is ripe for forward cattle contracts

Time is ripe for forward cattle contracts


Beef Cattle
Producers are looking to lock in today's prices for cattle delivered down the track.

Producers are looking to lock in today's prices for cattle delivered down the track.

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INTEREST in cattle forward contracts is intensifying as producers look to lock in today’s high cattle prices and tight supply creates ongoing tension on the purchasing side.

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INTEREST in cattle forward contracts is intensifying as producers look to lock in today’s high cattle prices and tight supply creates ongoing tension on the purchasing side.

Throw into the mix investors disgruntled with low interest rates and the scene is set for a thriving new trade that could change the face of beef producer price risk.

Real-time internet livestock marketer AuctionsPlus has been consistently offering around 1000 head in fortnightly forward contracts sales, with feeder steer deliveries out as far as December making around 370 cents per kilogram liveweight.

Agricultural market traders Riemann are now offering a risk management product to the livestock industry in the form of a cash settlement against the Eastern Young Cattle Indicator (EYCI) anywhere from a month to a year out.

Unlike the tailored Auctionsplus offering, and the expanded forward contracts processors and retailers have been offering this year in a bid to sure up supply, this is an over-the-counter (OTC), standardised product for a minimum 4000 kilograms carcase weight settled against an independent index.

The contracts are traded on the Mercari market, which is regulated by the Australian Securities and Investments Commission (ASIC).

Matt Dalgleish, from broker Ag Concepts Mecardo, explained the contracts work via a price and maturity date between producer and buyer being agreed upon.

If, for example, a forward price of 680c/kg is agreed via the Riemann product and on maturity the EYCI is trading at 650c/kg, the buyer pays the producer an additional 30c/kg.

In contrast, if the EYCI is trading at 710c/kg on maturity of the forward contract, the producer pays 30c/kg to the other side, he said.

These type of contracts have been available in the cattle game before, and are certainly not new to agriculture, but have not traditionally built the market liquidity to continue.

What has changed, according to broker Simon Quilty, Southern Aurora Group, is there has been a maturing of all the major segments of the domestic beef market.

“We have a strong live cattle market, strong processing, feedlot and live trade sector and in addition hedge funds are now willing participants,” he said.

“That will add a lot more liquidity to the market.”

Mr Dalgleish said this time around the market had a more sophisticated understanding of the product and there was a lot more interest in seeing it succeed.

NSW agriculture consultant Peter Schuster said there was more interest in selling forward than there had been in the past stemming from the unusual situation of record high cattle prices and an abundance of feed, meaning livestock was simply not on offer.

“On US dollar terms we are in record territory and that always makes people nervous, rightly so,” he said.

“Producers don’t want to miss out, they are looking to ensure they capitalise.

“Phenomenal weight gains are now being achieved - we are commonly seeing 2kg/day which on today’s market is $7/head/day.

“Producers naturally want to ensure they get today’s price if they hold on until tomorrow.

“Buyers are also looking to lock in deals to secure supply, particularly in the feedlot sector.

“And because interest rates are low, anyone with money to invest is looking to opportunities which potentially offer a higher return.

“It’s a perfect storm for forward cattle contracts.”

Livestock agent Chris Callow, Dunedoo, has clients from throughout NSW, Victoria and South Australia who have forward sold cattle through AuctionsPlus.

“What we are trying to achieve is the sale of cattle on a buoyant market for delivery down the track when historical graphs show the trend is for the market to dip,” he said.

“It’s a hedge - producers are putting a percentage of their production into this. It’s good business management.”

Mr Dalgleish said the beauty of the OTC contracts was that cattle prices were transparent - the best offer was there on the screen.

“That delivers market knowledge to the producer in an unprecedented way”, he said.

“And it gives producers an ability to manage their price risk, one of the key variables that determine profitability”.

If OTC cattle forward contracts take off in a strong way, a liquid and sophisticated market with an abundance of prices out to the future will pave the way for OTC options.

With this product, farmers can lock in a minimum price and pay a premium upfront so if the market goes down they are covered but they can still access a higher final price, Mr Dalgleish said.

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