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Using Futures to Hedge Feeder Cattle in Florida
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Title: Using Futures to Hedge Feeder Cattle in Florida
Physical Description: Fact Sheet
Creator: VanSickle, John J.
Publisher: University of Florida Cooperative Extension Service, Institute of Food and Agriculture Sciences, EDIS
Place of Publication: Gainesville, Fla.
Publication Date: 2001
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Acquisition: Collected for University of Florida's Institutional Repository by the UFIR Self-Submittal tool. Submitted by Melanie Mercer.
Publication Status: Published
General Note: "Published December 2001.'
General Note: "FE 329"
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Source Institution: University of Florida Institutional Repository
Holding Location: University of Florida
Rights Management: All rights reserved by the submitter.
System ID: IR00001940:00001

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Using Futures to Hedge Feeder Cattle in Florida1 John J. VanSickle and David Wagner2 1. This is EDIS document FE 329, a publication of the Department of Food and Resource Economics, Florida Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida, Gainesville, FL. Published December 2001. Please visit the EDIS website at http://edis.ifas.ufl.edu. 2. John J. VanSickle, professor, and David Wagner, graduate research assistant, Department of Food and Resource Economics, Florida Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida, Gainesville, FL. The Institute of Food and Agricultural Sciences is an equal opportunity/affirmative action employer authorized to provide research, educational information and other services only to individuals and institutions that function without regard to race, color, sex, age, handicap, or national origin. For information on obtaining other extension publications, contact your county Cooperative Extension Service office. Florida Cooperative Extension Service/Institute of Food and Agricultural Sciences/University of Florida/Christine Taylor Waddill, Dean. As most producers of agricultural commodities already know, prices for their products can fluctuate significantly from the start time of production until the product is ready to be sold in the local cash market. Changes in prices can generate higher profits for the producer if the price rises and the individual producer still has the planned amount of product for sale. More often than not, however, it seems that prices move lower and generate unanticipated losses. These prices can potentially go low enough to the point of unprofitabilty after accounting for all production costs. One way to potentially eliminate the price risk that producers are ordinarily exposed to in the cash market is to take a futures position that is roughly equal but opposite to the position that they hold in the cash market. Feeder cattle futures contracts are traded on the Chicago Mercantile Exchange (CME), and they consist of 50,000 pounds of 700-849 pound Medium Frame #1 and Medium and Large Frame #1 feeder steers. Feeder cattle futures contracts are traded in the months of January, March, April, May, August, September, October, and November. Although many of the feeder cattle animals sold in the cash market are smaller than the 700-849 pound range called for in the CME feeder cattle futures contract, the futures contract may still provide an excellent risk management tool. It is critical, however, that the prices of each weight class are properly studied at different times of the year and compared to the prices for the feeder cattle futures contract in order to accurately predict what the basis will be in the cash market. Understanding what the basis is, and what it can mean to the hedger, is quite possibly the most important key in any hedging strategy. Cash prices in the local market and the futures prices of the same commodity will generally move together (either up or down), but they will not always move in a one-to-one ratio. Basis, simply put, is the cash price of the commodity (feeder cattle, in our case) minus the futures price for the same commodity. If the cash price in the local market for feeder cattle is 80 cents per pound and the futures price for the nearby contract (the closest month to us) is 90 cents per pound, then the actual basis at the local cash market is 10 cents under (80 90 = -10). The basis will differ across locations in the cash market due to delivery costs and the supply and demand at any one particular location. As an example of hedging with the futures market, a producer who plans to sell approximately 500,000 pounds of feeder cattle in his local cash market is currently "long" regarding feeder cattle because he owns them. To hedge this price risk until

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Using Futures to Hedge Feeder Cattle in Florida 2 the feeder cattle are sold, the hedger can take an equal but opposite position in the futures market. A hedger using the futures markets would normally use the futures contract with a delivery at least one month after the month he is planning to sell in his local cash market. This is done in case the producer has to postpone the sale of his cattle and to avoid the added price volatility that can often accompany futures prices in the delivery month. A producer who plans to sell 500,000 pounds of feeder cattle in the cash market in October can go short (sell) 10 November feeder cattle futures contracts (10 contracts x 50,000 pounds per contract = 500,000 pounds). The price at which the producer sells the futures contract would be the price received for the feeder cattle in October except for the difference in the price between the cash market and the price of the futures contract when the actual feeder cattle are sold. This difference between the local market cash price and the futures price is called basis, and basis is always present for hedgers as a potential source of risk. Prices in the cash market and the futures market follow each other due to arbitrage. Arbitrage is the buying (or production) of a commodity in one market and then selling in another market in order to profit from a difference in the prices. If Okeechobee's local cattle market price were 81 cents a pound and the Ocala cash price were 89 cents a pound, there is a potential for eight cents per pound profit by taking cattle from the Okeechobee market to the Ocala market to sell. This situation will always correct itself, however, because as more producers take their cattle to the Ocala market, the supply at Ocala will increase, lowering the price in Ocala. These price changes will occur until the potential for profit by trading in these markets is removed. A producer should also factor in the costs of transportation for moving the product between markets. Producers who live equidistant between Okeechobee and Ocala will almost always take their animals to the market with the higher price. Its easy to calculate the actual current basis by knowing the current cash price in the local market and the current futures price on the nearby contract, but it is more difficult to predict what the basis will be six months from now. Understanding basis is important, however, for the hedger to accurately predict the net returns he can expect if using futures markets to hedge. If the futures market is offering 91 cents per pound for the November contract and the expected basis for the local cash market is eight cents under, a producer could theoretically go short (sell) in the futures market and lock in a price of 83 cents (futures price + basis, or 91 + -8 = 83) for the cattle to be sold in October. If 83 cents per pound is acceptable, the producer might go ahead with this hedging strategy. By doing so, he has eliminated most of the price risk associated with the feeder cattle market because there are two equal-but-opposite positions in the feeder cattle market. To demonstrate the risk protection from the previous hedging strategy, if we assume the price of feeder cattle in November goes down to 80 cents in the futures market, the hedger profits 11 cents per pound because he was short the feeder cattle contract. However, if the futures price drops from 91 to 83, the price in our local cash market is likely to also fall. If the actual basis equals the expected basis at eight cents under, the local cash price would be 72 cents (80 + -8). The hedger has made 11 cents in the futures market, but the cash market is 11 cents lower. The hedger still ends up with the 83 cents (72 cents cash price + 11 cents futures profit), the price that was locked in six months previously. Many call this a perfect hedge because the actual basis equals the expected basis. The hedger has to be able to effectively predict what the difference will be between the futures and cash markets in order to manage the most risk. Throughout the year, the basis can change significantly. Sometimes the basis can move in a direction that proves to be advantageous and allows additional profits. The opposite also can happen, and this is why there is still some source of risk in this hedging strategy. If the futures price fell 11 cents (80 cents per pound) and the local cash price fell only eight cents (75 cents per pound), the basis has gone from the anticipated 8 cents under to only five cents under (75 80 = -5) and is said to have narrowed. In this example, this worked to the hedger's advantage because he made an 11-cent profit in the futures market, but only lost eight cents

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Using Futures to Hedge Feeder Cattle in Florida 3 in the local cash market, so he has made three cents per pound on the basis narrowing. The opposite can also happen, and if the basis had widened from 8 cents under to 10 cents under, the hedger would have received two cents per pound less. This shows how the short hedger profits when basis narrows more than expected and loses money when basis widens more than expected. This basis risk is significantly smaller than the price risk that would have occurred without the hedge. What does all of this mean for the producer who wants to eliminate the risk associated with the ever-changing price for feeder cattle? A hedge in the futures market will only provide the anticipated return (net price) if he is able to accurately predict the basis. Data from the Ocala and Okeechobee cattle markets in Florida were collected for the years 1994 through 1999. These data include prices for the different weight classes of animals. The average basis for each month of the year was calculated for each weight class of animal in each market and is shown in Tables 1 and 2. The producer can use the data in Tables 1 and 2 to estimate the expected basis in the Ocala and Okeechobee markets. He simply has to know what size animal he will be selling, in which market he will be selling, and in what month he will be selling. Let us say that a producer plans on having 100 head of cattle in the 550-600 pound range per animal for sale in the Ocala market in November. If the current futures price for the January feeder cattle contract (the first traded month after November) is $90.55 per hundredweight, Table 1 can be used to estimate an expected price if the cattle are hedged. The average basis for animals of this weight in the Ocala market in November was -$10.88, more commonly referred to as $10.88 under. This means that the local cash price is expected to be $10.88 per hundredweight less than what the futures market price will be for the January contract in November. With an expected basis of $10.88 under, a producer would estimate that he could lock in an expected price of $79.67 per hundredweight for feeder cattle using the futures markets (futures price + basis, or 90.55 + -10.88). The key element to developing hedging strategies is understanding the basis patterns for the product in the local market. A pattern is evident for both markets (Ocala and Okeechobee). The basis is at its highest in late winter and spring and then falls throughout the summer, stabilizing in the fall and early winter. The Okeechobee market actually sees a slight rebound of the basis in the early fall. Prices also tend to correlate with the different weight classes of cattle in the two different markets. The lighter the animals, the higher the price for them will be, and therefore the higher the basis. The main problem with using estimated basis to project a price for each of the weight classes at different times of year is that they are only estimates based on averages. Just because the average basis was -$10.88 for the 1994-1999 period does not mean that the basis will always be $10.88 under. The problem is that the basis can still change and end up working against the hedger. In order to provide a worst-case scenario for the hedger, this study also offers separate numbers for the basis for each weight class at each time of the year that represents the lowest we expect the basis to be with 95 percent confidence in this estimate. These new basis estimates, shown in Tables 3 (Ocala) and 4 (Okeechobee), are designed for the hedger to account for a margin of error when setting up a hedge. Tables 3 and 4 have been calculated based on the standard deviations for the basis measurements for each market in each month of the year. The more variable the basis in the sample period, the greater the chance that the basis will be significantly different than the average estimates. For example, the short hedger using the Ocala market for 550-600 pound feeder cattle in the month of November, going short futures at $90.55 with an expected basis of $10.88 under results in an expected price of $79.67. Under the worst-case scenario, the hedger is 95 percent confident that the basis will be no lower than $16.17 under, yielding a worst-case expected price of $74.38 ($90.55 16.17). Both estimates should be weighed against the price objectives for the rancher and the ability to assume the risk in this hedging scenario as compared to the speculative risk of having this hedge.

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Using Futures to Hedge Feeder Cattle in Florida 4 Tables 1 and 3 demonstrate that although the average basis for the Ocala, November, 550-600 pound cattle is $10.88 under, it can in fact end up much lower. The data indicate that with 95 percent certainty the basis will be no lower than $16.17 under. The $5.29 difference between these two basis estimates should be taken into consideration since the basis may be lower than the average of $10.88 under. Tables 5-22 calculate target prices based on a set of assumed closing prices for all months of feeder cattle contracts. There are two target prices, one calculated using the average basis for the given market and weight class of animals, and the second calculated using the 95 percent confident lower bound for the basis. The target price will be lower when using the 95 percent confident lower bound basis because of the additional margin for error that is factored in to the lower bound estimates based upon the variability of the past basis data. This basis study should be useful to producers of feeder cattle. A properly executed hedge using the futures markets can only provide protection against fluctuating cattle prices. The hedge still leaves the producer exposed to basis risk, and that is why it is essential that producers do their homework on properly estimating basis for their local cash market. The results provide a guideline, and the serious hedger should use data for his own specific situation if he does not fall into one of these markets.

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Using Futures to Hedge Feeder Cattle in Florida 5 Table 1. Average basis for Ocala market. Ocala Market Feeder Cattle Weight Classes and Basis 350-400 400-450 450-500 500-550 550-600 600-650 650-700 700-750 750-800 January11.585.841.74-2.93-6.27-9.33-10.71-12.15-11.78 February16.279.945.882.15-2.05-7.18-6.48-9.00-6.28 March16.0513.428.454.45-0.10-5.31N/A*-9.28-10.30 April 15.6410.445.921.47-2.36-6.81-7.52-12.77-9.75 May 11.367.663.80-1.62-5.11-7.03-10.91 June 6.981.76-0.07-2.60-4.55-8.37-6.73 July 2.61-1.39-4.45-7.84-8.93-9.31-12.08 August4.40-1.36-4.31-7.36-8.41-10.21-10.91-9.66 September4.37-1.25-5.07-8.33-9.26-10.39-9.87 October3.48-1.28-5.41-8.97-10.69-11.02-12.65-14.16 November3.20-0.49-5.24-8.14-10.88-13.08-14.83-15.71-17.80 December 0.58 -2.94 -5.71 -8.17 -10.63 -10.88 Indicates that data were unavailable to calculate an average basis for that weight class in that month. Table 2. Average basis for Okeechobee market. Okeechobee Market Feeder Cattle Weight Classes and Basis 350-400 400-450 450-500 500-550 550-600 600-650 650-700 700-750 750-800 January 9.384.411.38-1.31-3.68-4.98-6.92-6.28-11.54 February16.5211.546.226.221.71-1.53-2.52-6.59N/A* March 19.0012.217.663.231.58 -2.51-5.84 April 13.399.566.670.95-2.22-5.59 -6.79 May 12.557.252.87-0.04-2.69-6.04-9.24-6.73 June 5.782.34-0.62-2.96-4.22-11.70-11.03 July -1.13-4.35-5.88-7.85-8.60-10.77-9.10-9.80-15.99 August 1.46-3.03-6.30-7.91-8.40-9.19-9.94-9.32-10.71 September6.190.49-3.12-5.95-8.24-7.37-8.92-10.12-9.56 October 4.10-0.06-2.89-7.02-9.95-10.84-10.96-9.68 November3.47-1.51-3.80-7.34-9.18-10.08-11.40-12.85 December 3.15 -0.91 -4.17 -6.70 -8.53 -10.25 -12.36 Indicates that data were unavailable to calculate an average basis for that weight class in that month.

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Using Futures to Hedge Feeder Cattle in Florida 6 Table 3. 95% confident lower bound basis for Ocala market. Ocala Market 95% Confident Basis Will Be No Lower Than These Numbers 350-400 400-450 450-500 500-550 550-600 600-650 650-700 700-750 750-800 January5.731.75-3.45-5.91-9.84-16.95-14.05N/A* February12.085.551.78-1.98-5.70-10.48-9.87 March4.539.544.83-1.16-3.94-7.13 April 6.041.10-0.35-4.01-8.58 -9.71-13.47 May 7.493.50-2.10-6.69-9.90-10.06-13.45 June 2.24-3.43-4.54-8.48-12.82-17.88 July -0.86-3.67-6.71-11.76-13.69-13.72 August-0.27-6.76-8.06-10.82-11.69-15.19-15.60 September1.03-4.48-7.37-11.82-13.86-14.85-15.03 October -5.63-10.67-14.26-15.08-13.38-15.39 November-0.66-5.10-9.36-14.11-16.17-16.83-17.76-18.23 December -1.38 -7.89 -11.60 -14.59 -15.81 -17.23 Indicates that data were unavailable to calculate a lower bound basis for that weight class in that month. Table 4. 95% confident lower bound basis for Okeechobee market. Okeechobee Market 95% Confident Basis Will Be No Lower Than These Numbers 350-400 400-450 450-500 500-550 550-600 600-650 650-700 700-750 750-800 January 4.840.63-1.72-4.67-6.24-10.62-9.28-7.12N/A* February12.654.912.904.22-4.41-6.31-3.22-7.01 March 13.898.015.57-4.66-2.48 -8.35 April 10.775.760.08-4.53-10.94-12.89 May 5.302.55-2.34-4.64-6.34-9.84-14.44 June -0.27-2.37-4.67-8.63-8.31-12.76-17.11 July -4.41-9.08-8.09-10.45-12.69-11.81-11.31-16.80-20.87 August -2.11-4.79-8.59-10.14-11.25-12.77-13.47-15.76-13.36 September4.71-0.66-4.58-7.55-11.02-10.98-11.26-12.73 October 1.48-1.97-6.45-10.33-11.38-14.66-14.12-11.81 November0.53-4.06-6.09-9.55-12.12-13.68-13.65 December 0.63 -4.85 -7.90 -8.02 -10.90 -15.86 -14.73 Indicates that data were unavailable to calculate a lower bound basis for that weight class in that month.

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Using Futures to Hedge Feeder Cattle in Florida 7 Table 5. Target prices and lower bound target prices for 350-400 pound feed cattler in the Ocala livestock market for an assumed set of futures prices. Expected Cash Market Month Futures Contract Used for Hedge Average Basis 95% Confident Lower Bound Basis Futures Price Target Price 95% Lower Bound Target Price September 2001October 2001 4.37 1.03 88.4292.7989.45 October 2001November 20013.48 N/A* 89.2792.75 November 2001January 2002 3.20 -0.66 89.5092.7088.84 December 2001January 2002 0.58 -1.38 89.5090.0888.12 January 2002March 2002 11.58 5.73 88.97100.5594.70 February 2002March 2002 16.27 12.08 88.97100.24101.05 March 2002April 2002 16.05 4.53 89.00105.0593.53 April 2002 May 2002 15.64 6.04 88.45104.0994.49 May 2002 August 2002 11.36 7.49 90.45101.8197.94 June 2002 August 2002 6.98 2.24 90.4597.4392.69 July 2002 August 2002 2.61 -0.86 90.4593.0689.59 August 2002 September 2002 4.40 -0.27 88.70 93.10 88.43 Indicates that data were unavailable to calculate a lower bound basis for that weight class in that month in order to arrive at a target price. Table 6. Target prices and lower bound target prices for 350-400 pound feeder cattle in the Okeechobee livestock market for an assumed set of futures prices. Expected Cash Market Month Futures Contract Used for Hedge Average Basis 95% Confident Lower Bound Basis Futures Price Target Price 95% Lower Bound Target Price September 2001October 2001 6.19 4.71 88.4294.6193.13 October 2001November 20014.10 1.48 89.2793.3790.75 November 2001January 2002 3.47 0.53 89.5092.9790.03 December 2001January 2002 3.15 0.63 89.5092.6590.13 January 2002March 2002 9.38 4.84 88.9798.3593.81 February 2002March 2002 16.52 12.65 88.97105.49101.62 March 2002April 2002 19.00 13.89 89.00108.00102.89 April 2002 May 2002 13.39 10.77 88.45101.8499.22 May 2002 August 2002 12.55 5.30 90.45103.0095.75 June 2002August 2002 5.78 -0.27 90.4589.3286.04 July 2002 August 2002 -1.13 -4.41 90.4589.3286.04 August 2002 September 2002 1.46 -2.11 88.70 90.16 86.59

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Using Futures to Hedge Feeder Cattle in Florida 8 Table 7. Target prices and lower bound target prices for 400-450 pound feeder cattle in the Ocala livestock market for an assumed set of futures prices. Expected Cash Market Month Futures Contract Used for Hedge Average Basis 95% Confident Lower Bound Basis Futures Price Target Price 95% Lower Bound Target Price September 2001October 2001 -1.25 -4.4888.4287.1783.94 October 2001November 2001-1.28 -5.6389.2787.9983.64 November 2001January 2002 -0.49 -5.1089.5089.0184.40 December 2001January 2002 -2.94 -7.8989.5086.5681.61 January 2002March 2002 5.84 1.75 88.9794.8190.72 February 2002March 2002 9.94 5.55 88.9798.9194.52 March 2002April 2002 13.42 9.54 89.00102.4298.54 April 2002 May 2002 10.44 1.10 88.4598.8989.55 May 2002 August 2002 7.66 3.50 90.4598.1193.95 June 2002August 2002 1.76 -3.4390.4592.2187.02 July 2002 August 2002 -1.39 -3.6790.4589.0686.78 August 2002 September 2002 -1.36 -6.76 88.70 87.34 91.94 Table 8. Target prices and lower bound target prices for 400-450 pound feeder cattle in the Okeechobee livestock market for an assumed set of futures prices. Expected Cash Market Month Futures Contract Used for Hedge Average Basis 95% Confident Lower Bound Basis Futures Price Target Price 95% Lower Bound Target Price September 2001October 2001 0.49 -0.66 88.4288.9187.76 October 2001November 2001-0.06 -1.97 89.2789.2187.30 November 2001January 2002 -1.51 -4.06 89.5087.9985.44 December 2001January 2002 -0.91 -4.85 89.5088.5984.65 January 2002March 2002 4.41 0.63 88.97100.5193.88 February 2002March 2002 11.54 4.91 88.9793.3889.60 March 2002April 2002 12.21 8.01 89.00101.2197.01 April 2002 May 2002 9.56 5.76 88.4598.0194.21 May 2002 August 2002 7.25 2.55 90.4597.7093.00 June 2002 August 2002 2.34 -2.37 90.4592.7988.08 July 2002 August 2002 -4.35 -9.08 90.4586.1081.37 August 2002 September 2002 -3.03 -4.79 88.70 85.67 83.91

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Using Futures to Hedge Feeder Cattle in Florida 9 Table 9. Target prices and lower bound target prices for 450-500 pound feeder cattle in the Ocala livestock market for an assumed set at futures prices. Expected Cash Market Month Futures Contract Used for Hedge Average Basis 95% Confident Lower Bound Basis Future Price Target Price 95% Lower Bound Target Price September 2001October 2001 -5.07 -7.3788.4283.3581.05 October 2001November 2001-5.41 -10.6789.2783.8678.60 November 2001January 2002 -5.24 -9.3689.5084.2680.14 December 2001January 2002 -5.71 -11.6089.5083.7977.90 January 2002March 2002 1.74 -3.4588.9790.7185.52 February 2002March 2002 5.88 1.7888.9794.8590.75 March 2002April 2002 8.45 4.8389.0097.4593.83 April 2002 May 2002 5.92 -0.3588.4594.3788.10 May 2002 August 2002 3.80 -2.1090.4594.2588.35 June 2002 August 2002 -0.07 -4.5490.4590.3885.91 July 2002 August 2002 -4.45 -6.7190.4586.0083.74 August 2002 September 2002 -4.31 -8.06 88.70 84.39 80.64 Table 10. Target prices and lower bound target prices for 450-500 pound feeder cattle in the Okeechobee livestock market for an assnumed set of futures prices. Expected Cash Market Month Futures Contact Used for Hedge Average Basis 95% Confident Lower Bound Basis Futures Prices Target Price 95% Lower Bound Target Price September 2001October 2001 -3.12 -4.58 88.4285.3083.84 October 2001November 2001-2.89 -6.45 89.2786.3882.82 November 2001January 2002 -3.80 -6.09 89.5085.7083.41 December 2001January 2002 -4.17 -7.90 89.5085.3381.60 January 2002March 2002 1.38 -1.72 88.9790.3587.25 February 2002March 2002 6.22 2.90 88.9795.1991.87 March 2002April 2002 7.66 5.57 89.0096.6694.57 April 2002 May 2002 6.67 0.08 88.4595.1288.53 May 2002 August 2002 2.87 -2.34 90.4593.3288.11 June 2002 August 2002 -0.62 -4.67 90.4589.8385.78 July 2002 August 2002 -5.88 -8.09 90.4584.5782.36 August 2002 September 2002 -6.30 -8.59 88.70 82.40 80.11

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Using Futures to Hedge Feeder Cattle in Florida 10 Table 11. Target prices and lower bound target prices for 500-550 pound feeder cattle in the Ocala livestock market for an assumed set of futures prices. Expected Cash Market Month Futures Contract Used for Hedge Average Basis 95% Confident Lower Bound Basis Futures Price Target Price 95% Lower Bound Target Price September 2001October 2001 -8.33 -11.8288.4280.0976.60 October 2001November 2001-8.97 -14.2689.2780.3075.01 November 2001January 2002 -8.14 -14.1189.5081.3675.39 December 2001January 2002 -8.17 -14.5989.5081.3374.91 January 2002March 2002 -2.93 -5.91 88.9786.0483.06 February 2002March 2002 2.15 -1.98 88.9791.1286.99 March 2002April 2002 4.45 -1.16 89.0093.4587.84 April 2002 May 2002 1.47 -4.01 88.4589.9284.44 May 2002 August 2002 -1.62 -6.69 90.4588.8383.76 June 2002August 2002 -2.60 -8.48 90.4587.8581.97 July 2002 August 2002 -7.84 -11.7690.4582.6178.69 August 2002 September 2002 -7.36 -10.82 88.70 81.34 77.88 Table 12. Target prices and lower bound target prices for 500-550 pound feeder cattle in the Okeechobee livestock market for an assumed set of futures prices. Expected Cash Market Month Futures Contract Used for Hedge Average Basis 95% Confident Lower Bound Basis Futures Price Target Price 95% Lower Bound Target Price September 2001October 2001 -5.95 -7.55 88.4282.4780.87 October 2001November 2001-7.02 -10.3389.2782.2578.94 November 2001January 2002 -7.34 -9.55 89.5082.1679.95 December 2001January 2002 -6.70 -8.02 89.5082.8081.48 January 2002March 2002 -1.31 -4.67 88.9787.6684.30 February 2002March 2002 6.22 4.22 88.9795.1993.19 March 2002April 2002 3.23 -4.66 89.0092.2384.34 April 2002 May 2002 0.95 -4.53 88.4589.4083.92 May 2002 August 2002 -0.04 -4.64 90.4590.4185.81 June 2002August 2002 -2.96 -8.63 90.4587.4981.82 July 2002 August 2002 -7.85 -10.4590.4582.6080.00 August 2002 September 2002 -7.91 -10.14 88.70 80.79 78.56

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Using Futures to Hedge Feeder Cattle in Florida 11 Table 13. Target prices and lower bound target prices for 550-600 pound feeder cattle in the Ocala livestock market for an assumed set of futures prices. Expected Cash Market Month Futures Contract Used for Hedge Average Basis 95% Confident Lower Bound Basis Futures Price Target Price 95% Lower Bound Target Price September 2001October 2001 -9.26 -13.8688.4279.1674.56 October 2001November 2001-10.69-15.0889.2778.5874.19 November 2001January 2002 -10.88-16.1789.5078.6273.33 December 2001January 2002 -10.63-15.8189.5078.8773.69 January 2002March 2002 -6.27 -9.84 88.9782.7079.13 February 2002March 2002 -2.05 -5.70 88.9786.9283.27 March 2002April 2002 -10.10 -3.94 89.0088.9085.06 April 2002 May 2002 -2.36 -8.58 88.4586.0979.87 May 2002 August 2002 -5.11 -9.90 90.4585.3480.55 June 2002 August 2002 -4.55 -12.8290.4585.9077.63 July 2002 August 2002 -8.93 -13.6990.4581.5276.76 August 2002 September 2002 -8.41 -11.69 88.70 80.29 77.01 Table 14. Target prices and lower bound target prices for 550-600 pound feeder cattle in the Okeechobee livestock market for an assumed set of futures prices. Expected Cash Market Month Futures Contract Used for Hedge Average Basis 95% Confident Lower Bound Basis Futures Price Target Price 95% Lower Bound Target Price September 2001October 2001 -8.24-11.0288.4280.1877.40 October 2001November 2001-9.95-11.3889.2779.3277.89 November 2001January 2002 -9.18-12.1289.5080.3277.38 December 2001January 2002 -8.53-10.9089.5080.9778.60 January 2002March 2002 -3.68 -6.2488.9785.2982.73 February 2002March 2002 1.71 -4.4188.9790.6884.56 March 2002April 2002 1.58 -2.4889.0098.5886.52 April 2002 May 2002 -2.22-10.9488.4586.2377.51 May 2002 August 2002 -2.69 -6.3490.4587.7684.11 June 2002August 2002 -4.22 -8.3190.4586.2382.14 July 2002 August 2002 -8.60-12.6990.4581.8577.76 August 2002 September 2002 -8.40 -11.25 88.70 80.30 77.45

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Using Futures to Hedge Feeder Cattle in Florida 12 Table 15. Target prices and lower bound target prices for 600-650 pound feeder cattle in the Ocala livestock market for an assumed set of futures prices. Expected Cash Market Month Futures Contract Used for Hedge Average Basis 95% Confident Lower Bound Basis Futures Price Target Price 95% Lower Bound Target Price September 2001October 2001 -10.39-14.8588.4278.0373.57 October 2001November 2001-11.02-13.3889.2778.2575.89 November 2001January 2002 -13.08-16.8389.5076.4272.67 December 2001January 2002 -10.88-17.2389.5078.6272.27 January 2002March 2002 -9.33 -16.9588.9779.6472.02 February 2002March 2002 -7.18 -10.4888.9781.7978.49 March 2002April 2002 -5.31 -7.13 89.0083.6981.87 April 2002 May 2002 -6.81 N/A* 88.4581.64 May 2002 August 2002 -7.03 -10.0690.4583.4280.39 June 2002August 2002 -8.37 -17.8890.4582.0872.57 July 2002 August 2002 -9.31 -13.7290.4581.1476.73 August 2002 September 2002 -10.21 -15.19 88.70 78.49 73.51 Indicates that data were unavailable to calculate a lower bound basis for that weight calss in that month in order to arrive at a target price. Table 16. Target prices and lower bound target prices for 600-650 pound feeder cattle in the Okeechobee livestock market for an assumed set of futures prices. Expected Cash Market Month Futures Contract Used for Hedge Average Basis 95% Confident Lower Bound Basis Futures Price Target Price 95% Lower Bound Target Price September 2001October 2001 -7.37 -10.9888.4281.0577.44 October 2001November 2001-10.84-14.6689.2778.4374.61 November 2001January 2002 -10.08-13.6889.5079.4275.82 December 2001January 2002 -10.25-15.8689.5079.2573.64 January 2002March 2002 -4.98 -10.6288.9783.9978.35 February 2002March 2002 -1.53 -6.31 88.9787.4482.66 March 2002April 2002 N/A* 89.00 April 2002 May 2002 -5.59 -12.8988.4582.8675.56 May 2002 August 2002 -6.04 -9.84 90.4584.4180.61 June 2002 August 2002 -11.70-12.7690.4578.7577.69 July 2002 August 2002 -10.77-11.8190.4579.6878.64 August 2002 September 2002 -9.19 -12.77 88.70 79.51 75.93 Indicates that data were unavailable to calculate either an average basis or lower bound basis for that weight class in that month to arrive at a target price for an assumed set of futures prices.

PAGE 13

Using Futures to Hedge Feeder Cattle in Florida 13 Table 17. Target prices and lower bound target prices for 650-700 pound feeder cattle in the Ocala livestock market for an assumed set of futures prices. Expected Cash Market Month Futures Contract Used for Hedge Average Basis 95% Confident Lower Bound Basis Futures Price Target Price 95% Lower Bound Target Price September 2001October 2001 -9.87 -15.0388.4278.5573.39 October 2001November 2001-12.65-15.3989.2776.6273.88 November 2001January 2002 -14.83-17.7689.5074.6871.74 December 2001January 2002 N/A* 89.50 January 2002March 2002 -10.71-14.0588.9778.2674.92 February 2002March 2002 -6.48 -9.87 88.9782.4979.10 March 2002April 2002 89.00 April 2002 May 2002 -7.52 -9.71 88.4580.9378.74 May 2002 August 2002 -10.91-13.4590.4579.5477.00 June 2002August 2002 -6.73 90.4583.73 July 2002 August 2002 -12.08 90.4578.37 August 2002 September 2002 -10.91 -15.60 88.70 77.79 73.10 Indicates that data were unavailable to calculate either an average basis or lower bound basis for that weight class in that month in order to arrive at a target price. Table 18. Target prices and lower bound target prices for 650-700 pound feeder cattle in the Okeechobee livestock market for an assumed set of futures prices. Expected Cash Market Month Futures Contract Used for Hedge Average Basis 95% Confident Lower Bound Basis Futures Price Target Price 95% Lower Bound Target Price September 2001October 2001 -8.92 -11.2688.4279.5077.16 October 2001November 2001-10.96-14.1289.2778.3175.15 November 2001January 2002 -11.40-13.6589.5078.1075.85 December 2001January 2002 -12.36-14.7389.5077.1474.77 January 2002March 2002 -6.92 -9.28 88.9782.0570.69 February 2002March 2002 -2.52 -3.22 88.9786.4585.75 March 2002April 2002 -2.51 -8.35 89.0086.4980.65 April 2002 May 2002 N/A* 88.45 May 2002 August 2002 -9.24 -14.4490.4581.2176.01 June 2002August 2002 -11.03-17.1190.4579.4273.34 July 2002 August 2002 -9.10 -11.3190.4581.3579.14 August 2002 September 2002 -9.94 -13.47 88.70 78.76 75.23 Indicates that data were unavailable to calculate either an average basis or lower bound basis for that weight class in that month in order to arrive at a target price for an assumed set of futures prices.

PAGE 14

Using Futures to Hedge Feeder Cattle in Florida 14 Table 19. Target prices and lower bound target prices for 700-750 pound feeder cattle in the Ocala livestock market for an assumed set of futures prices. Expected Cash Market Month Futures Contract Used for Hedge Average Basis 95% Confident Lower Bound Basis Futures Price Target Price 95% Lower Bound Target Price September 2001October 2001 N/A* 88.42 October 2001November 2001-14.16 89.2775.11 November 2001January 2002 -15.71-18.2389.5073.79 71.27 December 2001January 2002 89.50 January 2002March 2002 -12.15 88.9776.82 February 2002March 2002 -9.00 88.9779.97 March 2002April 2002 -9.28 89.0079.72 April 2002 May 2002 -12.77-13.4788.4575.68 74.98 May 2002 August 2002 90.45 June 2002 August 2002 90.45 July 2002 August 2002 90.45 August 2002 September 2002 -9.66 88.70 79.04 Indicates that data were unavailable to calculate either an average basis or lower bound basis for that weight class in that month in order to arrive at a target price for an assumed set of futures prices. Table 20. Target prices and lower bound target prices for 700-750 pound feeder cattle in the Okeechobee livestock market for an assumed set of futures prices. Expected Cash Market Month Futures Contract Used for Hedge Average Basis 95% Confident Lower Bound Basis Futures Price Target Price 95% Lower Bound Target Price September 2001October 2001-10.12-12.7388.4278.3075.69 October 2001November 2001-9.68 -11.8189.2779.6077.46 November 2001January 2002-12.85 N/A* 89.5076.65 December 2001January 2002 89.50 January 2002March 2002 -6.28 -7.1288.9782.7081.85 February 2002March 2002 -6.59 -7.0188.9782.3881.96 March 2002April 2002 -5.84 89.0083.16 April 2002 May 2002 -6.79 88.4581.67 May 2002 August 2002 -6.73 90.4583.72 June 2002August 2002 90.4583.72 July 2002 August 2002 -9.80 -16.8090.4580.6573.65 August 2002 September 2002 -9.32 -15.76 88.70 79.38 72.94 Indicates that data were unavailable to calculate either an average basis or lower bound basis for that weight class in that month in order to arrive at a target price for an assumed set of futures prices.

PAGE 15

Using Futures to Hedge Feeder Cattle in Florida 15 Table 21. Target prices and lower bound target prices for 750-800 pound feeder cattle in the Ocala livestock market for an assumed set of futures prices. Expected Cash Market Month Futures Contract Used for Hedge Average Basis 95% Confident Lower Bound Basis Futures Price Target Price 95% Lower Bound Target Price September 2001October 2001 N/A* 88.42 October 2001November 2001 89.27 November 2001January 2002 -17.80 89.5071.70 December 2001January 2002 89.50 January 2002March 2002 -11.78 88.9777.20 February 2002March 2002 -6.28 88.9782.70 March 2002April 2002 -10.30 89.0078.70 April 2002 May 2002 -9.75 88.4578.70 May 2002 August 2002 90.45 June 2002 August 2002 90.45 July 2002 August 2002 90.45 August 2002 September 2002 88.70 Indicates that data were unavailable to calculate either an average basis or lower bound basis for that weight class in that month in order to arrive at a target price. Table 22. Target prices and lower bound target prices for 750-800 pound feeder cattle in the Okeechobee livestock market for an assumed set of futures prices. Expected Cash Market Month Futures Contract Used for Hedge Average Basis 95% Confident Lower Bound Basis Futures Price Target Price 95% Lower Bound Target Price September 2001October 2001 -9.56 N/A* 88.4278.86 October 2001November 2001 89.27 November 2001January 2002 89.50 December 2001January 2002 89.50 January 2002March 2002 -11.54 88.9777.43 February 2002March 2002 88.97 March 2002April 2002 89.00 April 2002 May 2002 88.45 May 2002 August 2002 90.45 June 2002 August 2002 90.45 July 2002 August 2002 -15.99-20.8790.4574.4669.58 August 2002 September 2002 -10.71 -13.36 88.70 77.99 75.34 Indicates that data were unavailable to calculate either an average basis or lower bound basis for that weight class in that month in order to arrive at a target price for an assumed set of futures prices.