Nigel and Kate Kerin

This the first of a short series of case-study articles on interesting and creative cattle trades that have taken place during the past 12 months.

A PROMINENT New South Wales cattle trader says buying and selling heifers in 2024 has created a bigger margin than the boom years of 2021-22 – after he purchased 4500 head earlier this year.

But it is not the trading side of the story that is the most important information for Nigel Kerin, it is the use of forward contracts and other financial tools to reduce the risk of the trade that he thinks the cattle industry should be paying attention to.

Alongside running one of the country’s leading Merino studs (Kerin Poll) and a developing Wagyu seedstock business (Kerin Wagyu), Nigel and wife Kate, along with their son Joseph and his wife Caitlyn have become known for their well-calculated trades on large numbers of cattle.

These modern price protections and swaps remove the anxiety created by fluctuations in the cattle market.

One of the best-known trades was a $6.2m deal in 2021, where they ran one of the country’s largest artificial insemination programs on high quality Angus heifers when the market boomed coming out of the drought.

This year they capitalised on what Mr Kerin believes was low confidence in the market with heifers trading at their biggest discount to steers in eight years.

They started buying Angus heifers in April and eventually ended up with 4500. 2500 were locked into a forward contract with a feedlot, another 500 were sold through the StoneX swaps tool and the rest were AI’d and will be sold as PTIC heifers.

Doing the research

Before the Kerins start buying any cattle for a trading opportunity they make sure they have enough grass to put on the kilograms for the next four months. They then run the numbers to see if the trade will bring in a big enough margin to meet the commitments of the business.

While market outlooks are a part of running the numbers, Mr Kerin said emotion in the market was another key factor to trading that was not often included in outlooks.

Despite forecasts of an El Nino-induced dry summer, plenty of good grass growing rain had fallen across large parts of Queensland and New South Wales.

In this case, it was the buy in price of heifers that attracted the Kerins to the trade.

“It was a no brainer to look at heifers because I could not buy black steers and make the same margin,” Mr Kerin said.

“It’s all about selling your grass to the highest bidder.

“I think a lot of the reason people don’t trade heifers is because they have to preg test them before sending them to a feedlot.”

While all the known drivers of the market were looking good, Mr Kerin wanted to see if any confidence had come back after the market crashed last year and put financial stress on producers.

He called several specialist livestock financiers, or non-bank lenders, to see if producers were jumping back into the market. Given most had loaned less than 50pc of their finance, it was clear that restocker competition was going to be lethargic – going against the predictions of analysts and agents who expected a strong market, driven by restockers.

“You can soon work out the sentiment in the industry by talking to the non-bank lenders,” he said.

“Because if restockers/traders are out of the market and not borrowing money from the non-bank lenders, it is telling you that they are not going to be bidding against you and they are not going to force the feedlots to keep up with them on price – which simply meant the market wouldn’t rally.”

Nigel Kerin started purchasing heifers in April between 260c and 300c/kg, he then locked some into a forward contract at 370c/kg, took a swap contract at 365c/kg and artificially inseminated the rest to be sold as PTIC heifers.

Locking in a forward contract

With a lack of competition buying the heifers, there was likely to be a lack of competition selling them on the other end – which is where the forward contracts came into place.

Having purchased the heifers between 260c and 300c/kg, Mr Kerin said he was offered to lock in 2500 on a forward contract price of 370c/kg.

“When we were offered 370c/kg, I knew I had to jump on it because it was such good money and it was clearly not going to go above 400c because people weren’t borrowing money,” he said.

“Why would the feedlots want to give you more money when they know no one is bidding against them? But you are still getting 80c/kg more on your sell price than your buy price, which is unheard of when you are trading – usually you are buying for 20-30c/kg more.”

Using the swaps tool

While the forward contract was a deal too good to pass up, Mr Kerin said he wanted to learn how to manage price and market risk using the StoneX Australian Cattle Swap, which was launched to the Australian cattle industry in 2022.

The Kerins opened an account earlier this year and sold 500 head, equivalent to 200,000kg across 20 contracts for 365c/kg liveweight. The contracts were sold in September to settle across the month of November. The settlement price was 366.75c/kg.

Ripley Atkinson

Given the settlement price was 1.75c/kg (a total of $3500) dearer than the original price, Mr Kerin had to pay the difference (the margin call) back to StoneX – meaning he still only received 365c for the heifers.

But the main idea for the Kerins was to protect against the downside risk of the heifer price crashing, while the buyer of the swap was protecting against having to pay more than 365c.

“Nigel was able to confidently continue with that trade, knowing that he was returning himself a good margin. He was comfortable with the price he sold the swap at and in turn the margin/kg of beef the price would generate,” StoneX Australian livestock and commodities Ripley Atkinson said.

“It is all about managing risk exposure to unfavourable price movements, in Nigel’s case that is protecting against downside risk and locking in a margin at the same time.”

Mr Kerin said the cost of using StoneX was minimal compared to the benefits of locking in the margin.

“The all-up cost of the StoneX swap, or some may call it an insurance policy, was 6c/kg – in other words stuff all,” Mr Kerin said.

Forwards contracts and swaps not just for traders

While Mr Kerin had done thorough research on where the market was heading, he said fluctuations in the market were irrelevant when locking in forward contracts and swaps.

“These modern price protections and swaps remove the anxiety created by fluctuations in the cattle market,” he said.

“We saw a lot of people make a lot of money in 2021-22, then they got their fingers burnt last year because the market crashed and they haven’t bought back in.

“When using these tools, it is not about what the market does – because the forward position and the swaps have created their own market.”

Mr Kerin said the risk management tools provided opportunities to reduce market anxiety right across the supply chain.

“If you are a breeder and you have enough grass to bring weaners onto the next stage, you can lock them into a swap. You can even do swaps for cull cows going into the grinding beef market,” he said.

“I can’t change the climate and I can’t change markets, but I can manage the risks.”

Mr Atkinson and Mr Kerin both agreed that the main risk associated with using a tool like swaps or forward contracts was not having enough feed to meet market specifications. Mr Kerin said making sure the feed was available is essential.

“Managing your grass is part of risk management, you need to know what is in your grass bank as much as you need to know what is in your money bank,” he said.

The circular economy

The Kerins’ trading operation is backed by a long-term agreement with the ANZ bank, who finance the purchase of livestock and cost of carry.

Mr Kerin said he would prefer to be borrowing money to make big trades and finding ways to better manage the risk, than running a ‘low risk, low return’ enterprise.

“My job is to make sure I don’t lose ANZ’s money and my thing is managing risk. You need an agent that is in there with you helping manage the risk, which eventually creates a circular economy where everyone is getting a feed and making money,” he said.

“If you look at this trade, the average buying price for the heifers was $720 and the cost of carry was $145, but I didn’t have to pay that because I was using OPM (other people’s money). All I had to come up with was $23.58/head, which was the interest bill on the buy price and the cost of carry.

“Then we covered it with a forward contract and we covered it with swaps.”

Mr Kerin said the use of forward contracts has helped his relationship with the bank.

“We just bought a new farm and when I rang the bank to tell them I was going to have a crack at it, the first thing they asked was if I had these heifers locked into forward contracts,” he said.

“This goes back to that circular economy, the banks will look after your business as long as you look after theirs – in other words don’t lost their money, it’s not yours.”

PTIC heifers still being sold

With 3000 head locked into forward contracts and swaps, the Kerins then AI’d the remaining 1500 in pursuit of a higher value add. He said he had been expecting rain in Victoria and other dry parts of NSW to spur on the restocker market.

Mr Kerin said he had been selling the pregnant heifers progressively over the past three months, with the last to be gone before Christmas –he was expecting them to average about $2000/head.

“There was no danger in keeping them, because if it didn’t rain and the restocker market didn’t take off, they would have been sold in the supermarket trade at a similar dollar-rate,” he said.

“We had feed and we had good weight gains, so there was no big urgency in selling. As they get closer to calving the more valuable they become because they reduce the cost of carry for the buyer.”

Industry working together

Mr Kerin said there was a lot to be gained from all sides of the supply chain working together through protecting their risks using forward contracts and swaps.

“The idea of creating a circular economy means everyone gets to win. By providing the contracts, the processors and lotfeeders cover their greatest risks, being supply and price. By taking the forward contracts, the producers cover their greatest risk, being market volatility.

“With the addition of a company like StoneX introducing the swaps into the Australian market, it adds another form of price protection that is open and active every day of the week, 12 months of the year. Sometimes you can’t get contracts when you want them, but you can always take a swap position.”

In reinforcing Mr Kerin’s point, Mr Atkinson said the engagement of all sides of the supply chain was essential to the success of the swaps market.

“The whole purpose of it is to help the Australian beef industry become more sophisticated in managing price risk,” he said.