Hedging is an important price risk management strategy for cattle producers to consider.  Choosing between futures and options hedging and selecting an appropriate contract and contract month requires the producer to synthesize information about historical price relationships.  It is also important for the producer to understand basis risk associated with a given hedging position using historical price data. 

Many cattle producers must use a cross-hedge, whereby they hedge using a futures contract for another commodity. For example, a seller of 550 pound calves in Wyoming may hedge using the feeder cattle contract for 650-850 pound cattle.  The price-weight relationship implies that a pound-or-pound hedge is not appropriate in this situation.  Instead, research suggests that a ratio hedge should be constructed, whereby more than one pound of feeder cattle futures is used to hedge one pound of lighter weight cattle.  Hedge ratio models will provide information to producers about appropriate hedging strategies.

The CME Group has an excellent guide dealling with hedging livestock futures and options.  It is available at https://www.cmegroup.com/trading/commodities/files/AC-215_SelfStuy_GuideNYMEX.pdf