Forward Contracting

What is forward contracting
Forward contracting is a way for cattle sellers and buyers to price their livestock ahead of an expected sale date. When used properly, forward contracting can reduce price risk and be used as another management tool for a producer. Due to substantial market fluctuations forward contracting of feeder cattle and calves is becoming more common for producers who desire to mitigate risk in their operations. Forward contracting offers a marketing alternative which may help individual producer’s situations. It should, therefore, be considered and evaluated along with other marketing choices. We provide this service to help cattlemen make more informed decisions on whether forward contracting is a suitable marketing alternative for them.  

Why to use forward contracting
A forward contract cannot guarantee a specific profit because of the specification requirements in the contract and possibility of increasing input costs during the life of the contract. However, a forward contract can reduce negative impact caused by sudden and unexpected changes in the spot market price. It is very important that sellers determine their breakeven price and decide what an acceptable rate of return is before forward contracting. (If you would like assistance in determining your breakeven,  please call our office to set up an appointment.) If this is done properly a producer can increase the security of their annual profits and better manage the operation.  

Other advantages of forward contracting
Agricultural lenders will often look favorably at farm managers using price risk management tools such as forward contracting. A farm manager, who uses good price risk management, will usually find that lenders are often much more willing to lend money or will lend it at a lower interest rate.  

A forward contract is a legal, binding commitment between a buyer and a seller. As with any legal contract, there are predetermined specifications and obligations for all parties involved. It guarantees a price for a specified amount and quality of product to be delivered at a certain time to a place specified in the contract. Regardless of who it is, anyone who uses a forward contract is attempting to reduce price risk by “locking in” a price well ahead of an expected date. A forward contract is for producers who desire to take the marketing of their cattle to the next level and out of spot market pricing.

This service is completely new to most cow-calf producers (and some stocker/ backgrounders) and therefore is met with some distrust. However, we offer it because it is a vital tool in managing the volatility of today’s marketplace. If you would like to find out more of how to make this work in your operation simply give us a call!  

If you have questions or would like to place an order, please contact us at (931) 996-2253 or info@totalcattlesolutions.com