Agricultural economists are surprised that relatively few livestock producers use futures and options, despite the severe price swings common in cattle and hog markets. Kansas State University economist Brian Coffey says adoption is increasing, but remains below earlier expectations.
Livestock contracts cover feeder cattle, live cattle, lean hogs, and the pork cutout. Producers, feedlots, packers, and processors can use those markets to transfer part of their price exposure to other participants.
For cattle feeders, a hedge can reduce uncertainty surrounding the eventual selling price of finished animals. That allows managers to focus more closely on feed efficiency, performance, and other production decisions they can control.
Futures and options do not eliminate all risk or guarantee profitability. Basis changes, margin requirements, contract specifications, and market timing can discourage participation or leave a hedge imperfectly matched to actual livestock.
Coffey says well-functioning futures markets remain essential to agriculture. Greater education and carefully designed marketing plans could help more producers use available contracts without creating risks they do not understand.