Western Canadian feedlot hedging

Discussion in 'Commodity Futures' started by zf trader, Nov 4, 2008.

  1. Just wondered about the use of futures by Canadian feedlots? Would a long cad future and short cattle future follow local cash markets closely. Is this common practice like in the grain markets?
  2. You want to be sure that the CME cattle contracts correlate tightly to your location before doing hedge trades.
  3. Not necessarily, as long as you know your basis it still works fine to hedge.
  4. If the contract doesn't correlate well, then you're not really hedged. You can potentially have two separate outright positions.
  5. The problem is the big ol US border and laws that govern crossing it with cattle. During the original BSE outbreak the border was completely closed to Canadian cattle, they dropped to almost nothing while the US futures went up(that would not have been a fun hedge). The newest wrinkle on this is the Country of Origin Labelling (COOL) that is being put into place over the next few months. There is a great deal of uncertainty as to how this will affect Canadian agriculture products. Apparently there are already US packers that don't want to handle Canadian product because they have to be segregated and if retailers have to keep them segregated on the shelf it is entirely possible they won't be interested in carrying them either. We could easily see the price of Canadian cattle going down as we lose the US market while the US cattle market rises. As a side note when the Canadian dollar dropped from almost par 1 month ago to under 80 cents, Canadian feeder cattle remained virtually unchanged. Ordinarily they would have jumped substantially at that kind of a move, but it is almost as if the market is pricing Canadian cattle with the assumption that the US market will not be available to sell into, which is very bad news for the Canadian cattle industry. And if we can't sell into the US (or we are severely limited) hedging using a US product won't help us.