Calls can help offset higher input prices. “Sometimes it’s hard to lock in a high corn price,” Ellis says. “Cattle feeders may use the opportunity to take out call options. That will keep corn from going too high and they can take advantage of a likely lower feeder cattle price.”

By buying a call, the price is protected if the price runs up. For example, with March corn futures at $6.85, the at-the-money strike price has about a 25-30¢/bu. premium. If volatility causes the price to surge toward $8, the value of the option will also increase, which can offset much of the cost to you, Ellis says.

“If the corn price goes down, you’re only out the cost of the premium, which will be offset by the lower corn price,” he says.

He adds that feeder cattle calls can also help cover high prices. “If you pay $145/cwt. for feeders and feel the market still has upside potential, you can buy the call and take advantage of a higher price. That can help offset their high cost to start with, and possibly add to a finished cattle profit margin.”

Stan Bevers, Texas AgriLife Ex-tension economist in Vernon, TX, says successful commercial feeders are likely using sound risk management that can help their customers who retain ownership.

“If I’m feeding my own calves, I’m hoping the feedlot manager or risk management manager will point out risk management strategies needed for my feeding period,” he says.

He says if commercial feeders aren’t using a crush, “they’re certainly looking at the figures and seeing what it looks like for future cattle prices.”

Ellis says options premiums “are expensive,” but still provide a method of managing risk. “Risk management is really important,” he says. “It’s so volatile out there. You never know what’s going to happen with the next crop of corn. If there’s another dry year, carryover stocks will be even lower. And higher prices could follow.”

He says Livestock Risk Protection insurance is another risk management tool. “But when you take out those policies, you’re locked in. With options, you can get out of them any time you want,” he says. 

Larry Stalcup is an Amarillo, TX-based freelance writer.