Key Points:

1.A futures contact is a standardized agreement stating the commodity, quantity, quality and delivery point or cash settlement.
2.Price is discovered in futures trading by the interaction of buyers and sellers, representing supply and demand, from all over the country and around the world.
3.Sellers remove their obligation to deliver on a sold contract by buying back a contract before the delivery date.
4.Buyers remove the obligation to take delivery on a purchased contract by selling back the contract before the delivery date.
5.A short hedge protects the seller of a commodity against falling prices.
6.A long hedge protects the buyer of a commodity against rising prices.
 

Key Points:

1.Commodity exchanges provide the location, electronic marketplace and rules for trading.
2.CME Clearing acts as the seller to every buyer and the buyer to every seller. It also is the central depository of required good-faith deposits (performance bonds) that act to guarantee contract performance by all parties.
3.Everyone who trades futures must have an account with a futures brokerage.
4.Hedgers transfer risk to speculators, who take on risk in pursuit of profit.

Key Points:

1.Futures contract specifications are developed to reflect industry standards.
2.Futures contract specifications change over time to reflect changing industry standards.
3.It is important to know how your livestock compare to the specifications of the CME Group contracts.
 

Key Points:

1.Basis is the cash market price minus the futures price at the completion of production.
2.For a short hedger, the more positive (stronger) the basis, the higher the price received for livestock.
3.For a long hedger, the more negative (weaker) the basis, the lower the price paid for livestock.
4.Knowing the expected basis enables a hedger to translate a futures price into an expected local cash price. The hedger can compare that to the expected break-even price and decide whether or not to hedge.

Key Points:

1.A short hedge protects a livestock seller against falling prices.
2.Selling livestock futures helps to lock in a sale price for livestock to the extent that basis turns out as expected.
3.A short hedge is completed by simultaneously buying back the futures contracts and selling the livestock in the cash market.
4.If prices fall, the lower cash price is offset by a gain in the futures market.
5.If prices rise, the loss in the futures market is offset by a higher cash market price.
6.Realized basis determines how advantageous the hedge results are.