Options Desk Manager @ Plains People Trading & Consulting:
Seraphina Gold
“The Queen of Odds”
✅ What is OTC Hedging?
OTC (Over-the-Counter) contracts are privately negotiated agreements between two parties—usually a cattle feeder and a packer, or a feeder and a risk management firm. Unlike standardized CME futures, OTC contracts allow customization of:
- Price formula: Fixed price or CME futures month + negotiated basis.
- Delivery window: Specific dates aligned with your feeding cycle.
- Quantity: Head count or pounds.
- Settlement method: Cash settlement or physical delivery.
- Other terms: Weight tolerances, grade specs, and regional adjustments.
This flexibility makes OTC a powerful tool for feeders who need precision hedging beyond what exchange-traded futures offer.
✅ How OTC Works for Cattle Feeders
- Lock in a basis-adjusted price tied to CME futures.
- Match contract terms to your marketing window and projected finish weights.
- Reduce basis risk that futures alone cannot hedge.
- Combine OTC with CME futures/options for directional price protection.
✅ Pros of OTC Hedging
✔ Customization: Tailor contracts to your operation’s needs (delivery, weight, grade).
✔ Basis Control: Lock in regional basis, reducing local price risk.
✔ Flexibility: Adjust terms for holidays, weather delays, or packer schedules.
✔ Margin Stability: Secure profit targets before market volatility hits.
✔ Relationship Advantage: Often negotiated directly with packers or trusted counterparties.
✅ Cons of OTC Hedging
✖ Counterparty Risk: No exchange clearing—depends on the financial strength of your counterparty.
✖ Liquidity: Harder to exit or offset compared to CME futures.
✖ Transparency: Prices are negotiated, not publicly quoted—requires trust and market knowledge.
✖ Regulatory Oversight: Less standardized than exchange-traded contracts.
✖ Complexity: Requires strong understanding of basis, formulas, and risk exposure.
✅ Best Practice for Feeders
- Use OTC to hedge basis and timing risk.
- Layer CME futures/options for directional price risk.
- Maintain a written risk management plan with clear margin targets.
- Work with reputable counterparties and confirm credit terms.
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