As an agricultural livestock producer, you’ll know that the market for cattle can be volatile. Ensuring success in this market means implementing a host of measures ranging from catering to niche demands. Ultimately, you should have a strong grasp on live cattle marketing.

However, forward contracting as a form of insurance against market volatility can reap its rewards if done right, but cause loss if a mistake is made. That’s why forward contracting (or cattle futures) is a precarious market to enter.

However, before you decide to start forward contracting your feeder or live cattle, you have to know how it works. Let’s expand on the process.

Forward Contract Basics

A forward contract is a legally binding agreement between two parties: a producer/seller/hedger and a buyer/speculator. This agreement settles the type of cattle, quantity, date of exchange, and the future price. What’s essentially happening is that you’re selling a portion of your cattle in advance for a price that’s being set in the present.

What does this do? It helps guarantee that you’ll be making a certain level of sales and bringing in revenue at a suitable price point. Usually, the price is determined using futures pricing discovery to negotiate an amount that strikes a balance between profit for the hedger and the speculator.

This is a risk management tool, and its primary purpose is not to make you a lot of profit. Instead, it works to make your income stable enough to withstand a drop in prices.

Types of Forward Contracts

There are two main kinds of forward contracts that you can engage with. The first is a basis contract. Some speculators will offer contracts that stipulate a basis price. The basis price is the predicted price point based on seasonal cattle rates.

However, futures price discovery can alter these prices, which is why basis contracts can seem appealing. This type of forward contract allows the seller to lock the futures price in the contract later. You could maximize your income from this contract by capitalizing on a climb in prices after the basis contract has been settled.

The other type of contract you should know about is a flat price contract. This means that a guaranteed price is set at the time of contract settlement, and that price will have to be respected.

While this option sounds better upfront, cattle futures contracts are often bought and sold as well, and a set price contract can be harder to sell than a basis contract.

How to Negotiate in Cattle Futures

Negotiating and standing your ground when dealing with speculators is essential, but it can be intimidating for producers. The key is to get updated Ag marketing, live cattle marketing, and commodity broker marketing updates based on business analysis of daily trends.

With your free one-month trial of The Robinson Review, you can receive these vital news updates on the futures market every day! Contact us for further risk management marketing and trading marketing knowledge.