Tuesday, July 19, 2011

This Week In Cattle

I had a guy ask me yesterday about whether he should background his calves this fall and try to hedge a profit in now while prices are still really high. First, I congratulated this guy for having the foresight to think about how he was going to market calves before October 15.

Not that he isn’t a good thinker, because he is, but I have never known him to give too much thought to the most critical management function he can perform for himself and his business before fall.

The second thing I responded with was: “Never, never, never short an inflationary market…ever”

By “inflationary” I mean a commodity market that is going up in value because the value of the currency that supports said value is going down. Which is what we are seeing right now in the US and around the world.

By “short” I mean use a short hedge that requires you to pay margin calls when the market moves up. Not that I expect this market to go a lot higher and not that I expect it to go lower, I don’t know what to expect and frankly, it doesn’t matter what I think.

What matters and I can tell you this from some very hard-earned experience, is that there is nothing to be gained from trying to short inflationary patterns with a short-hedge. You will run up potentially massive margin calls and could potentially bankrupt yourself in the process.


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