Extension
Date of this Version
1984
Abstract
This NebGuide discusses how to estimate when it might be profitable to deliver on a live cattle futures contract and outlines delivery costs and procedures.
Although most hedgers do not actually make delivery on a live cattle futures contract, the threat of delivery is an important feature of the futures market. A producer who hedges using the futures market normally offsets the futures position by buying back a futures contract and selling the slaughter cattle on the cash market.
However, there are times when it is advantageous to actually deliver on the contract. Actual delivery should be made only when the basis during contract maturity is wider than anticipated and greater than the delivery cost.
In theory, the price difference (basis) between the futures and the cash markets should be less than the delivery costs; hence no deliveries are made. But, as is often the case, reality may differ from theory, and there are times when the basis is greater than the delivery costs.
Comments
© 1984, The Board of Regents of the University of Nebraska on behalf of the University of Nebraska–Lincoln Extension. All rights reserved.