Minimum Floor Price Contracts for Feeder Pigs and Early Weans.
The Hog Market from time to time goes through poor price periods. During those times Sentiment and the Futures Market seem to be on a roller coaster ride downwards, going from bad sometimes to worse. What can you do to reduce the negative financial impact of a period of severe prices?
Consider using our Early Wean and Feeder Pig Floor (Waived Delivery) Contract. This contract incorporates a futures based price floor that gives some protection from an excessive financial loss in the event of a severe collapse in the price of Early Weans and Feeder Pigs. Note that the Price Floor in this contract provides protection from a price fall in the Lean Hog Futures.
In times of extremely low or extremely high Feeder Pig (FP) or Early Wean (EW) prices the Chicago Mercantile Exchange lean hog futures does not perfectly mirror what is happening in the "cash" market. However, a futures based floor still provides some extent of price protection.
Waived DELIVERY Contract with a Spot Purchase Price and Futures Based Floor
The feeder fig or early wean price you get is determined from two separate components:
- The futures based floor price.
- The picked up purchase price.
Futures Based Floor Price
The floor price we can offer you will be a negotiated % based on a “futures price” for the early weans or feeder pigs.
- The futures price for feeder pigs is a percentage (e.g. 77%) of the 4-months out Chicago Mercantile Exchange (CME) lean hog futures on the Thursday of the week before you are selling your pigs.
- The futures price for early weans is a percentage (e.g. 52%) of the 6-months out CME lean hog futures on the Thursday of the week before you are selling your pigs.
Please see “Schedule A” below for the CME lean hog contracts used for each day of the year.
Example of the Calculation of the Futures Based Price
The Burns’ Family Farm signed a Feeder Pig Contract with us with a US$34 futures based floor that is based on 77% of the 4 months out CME lean hog futures. The contract is for 1000 pigs a week and the price floor cost the Burns’ US$1.25 per pig.
For pigs the Burns’ are delivering on June 12, 2002 we use the closing price of the October lean hog futures (see schedule A for the full list of futures used throughout the year) on the Thursday of the week before, that’s June 6.
On Thursday June 6 the October lean hog contract closed at US$39.825
The futures based floor is calculated like this:
US$39.825 x 77% = US$30.66 - the futures based price is US$3.33 lower than the floor the Burns’ paid for.
The futures based contract pays the Burns’ US$3.33 per FP for the pigs delivered this week. After subtracting the US$1.25 the Burns’ paid for the floor they gain:
US$3.33 – US$1.25 = US$2.08 per pig from the futures based price contract floor.
For the 1000 pigs delivered that week the Burns are paid a US$3,330 from the futures based floor contract.
The Picked Up Purchase Price
The Burns still have to sell the 1000 head load. How do they do this? The price floor contract – waived delivery gives the Burns the right to sell their Feeder Pigs to WHO EVER they decide to sell to (including us) at the highest price they are offered.
If the Burns decide to offer the load of pigs to us then the purchase price is the BEST "SPOT" PRICE WE CAN OFFER. The Burns DO NOT HAVE TO deliver the pigs to us they retain the right to shop around and accept a better price from another buyer before they decide to commit the delivery to us.
Final Purchase Price
Eventually the final purchase price in a combination of the futures based price and the picked up purchase price.
Notes:
- This Contract DOES NOT confirm a minimum total purchase price for your pigs. The flexibility you have to shop around for the best price being offered in the cash market also exposes you to any difference between the cash market price and the Futures Price. Think of this as a BASIS between cash Feeder Pig and SEW price and the Futures based price. This Contract does provide you with some price protection based on a drop in the Futures price.
- NOTE: During severe low or high price periods in the cash market the accuracy of the Futures price to reflect cash prices reduces.
- This Contract will improve the price you get as the lean hog futures price falls.
- If you choose a MONTHLY delivery schedule then you must nominate a week (1st week in the month, 2nd week in the month etc.) for cash market pricing or:
- You have to CONFIRM the exact number of EW or FP per delivery and the number of weeks or months and have all this signed up within the written contract we will send to you.
- The contract only takes effect AFTER a contract signed by us and sent to you has been signed and returned to us together WITH the contract Risk Management Fee.
Summary
Why do we think entering a contract with a price floor is a good idea?
- To eliminate the Basis in the contract (difference between the “cash” price and the futures based price) you will need to enter into a contract that prices the sale price of the FPs and SEWs using the % of the lean hog futures method.
- Trading feeder pigs and early weans on a “cash” basis leaves you totally exposed to downside price risk.
- These contracts will help to reduce the overall loss you might suffer in times of severely low prices while allowing you to retaining the ability to enjoy any upward movement in prices.
Entering into a short or longer term contract with a financially sound and reputable partner also provides advantages in planning. Whatever the case, we have the flexibility to negotiate fair prices, fees and deductions to cover any expected costs etc. Please Contact Victor Aideyan at 1-800 821-7418 to find out more.
Schedule A: Contracts Used in Calculating Futures Based Prices
* Simple average of adjoining lean hog futures used.
