Text Box: Cattle Indicator Contract Case Study Text Box: HOME Text Box: Home Text Box: Back Text Box: Use of the Platinum Agribusiness Cattle Indicator Contract to secure steer trading margins. Scenario: It is April 2008 and you are buying angus steers at 250kg live weight for 190c/kg. Purchase cost = $475 per head. You intend to feed for 180 days and achieve target weight of 450kg. But what will the final price be? And what will happen if the season deteriorates? Action: You take a Cattle Indicator Contract with Platinum Agribusiness based on the Eastern Young Cattle Index maturity at the end of September at 320c/kg dressed weight. Expected Outcome: Long term analysis suggests that prices paid by feedlots for Angus steers average approx 10c/kg dressed weight above the EYCI. You locked in to the EYCI at 320c/kg dressed weight and adding the 10c/kg gives 330c/kg – or 178c/kg live weight. At 450kg this equates to $801 per head and a gross profit of $326 per head. Market Falling: Say the EYCI falls to 250c/kg by September. On this basis you would expect the feedlot to be paying 260c/kg. But your final price would be 330c/kg: your EYCI value of 320 plus the 10c/kg extra (the difference between the feedlot value and the EYCI at the time of delivery). So, your expected margin has been maintained and you are 70c/kg better off than if you had not taken the contract. Market Rising: On the other hand what if the EYCI rises to, say, 390c/kg by September. Now you would expect the feedlot to be paying 400c/kg. Your final price would be unchanged at 330c/kg: your EYCI value of 320 plus the 10c/kg extra. So even though you are 70c/kg worse off compared to doing nothing the important part was that your margin of $326 per head was maintained. Early forced sale: One of the great advantages of the Cattle Indicator Contract is that it provides price protection against an early forced sale—particularly in the event of a widespread deterioration in seasonal conditions. In this case it is most likely that the EYCI will have fallen—but your final price will still be based on your EYCI value of 320 c/kg. Your margin may be less because the cattle are being sold early but at least you will not be losing on price as well!

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