A cattle feedlot might lock in a future sale price using Live Cattle futures if they believe current forward prices are sufficient to cover their projected input costs – feed, other additives, cost of land use, veterinary expenses, etc. – and still yield a profit. 

While very few contracts ultimately are taken through to physical delivery, the futures prices track physical market expectations. The production cycle is long, taking between 18 to 24 months from birth, so there is plenty of time for those expectations to shift based on factors, such as cattle health or the broader demand outlook. The ability to hedge along the way for different participants throughout the supply chain helps the industry manage risk, and the market thus reflects both the biological and financial realities of the cattle business.

On the other end of the financial spectrum are TBA mortgage-backed securities (MBS) futures, typically based on agency MBS issued by Fannie Mae or Freddie Mac. These are "To-Be-Announced" securities, meaning the actual pools of mortgages are not specified at the time of trade but will conform to standard criteria (e.g., 30-year fixed-rate, 5.5% coupon). The mortgage originator essentially enters into a forward contract to deliver a standardized MBS in the future, typically one to three months out.

The MBS production chain begins with the origination of home loans, which are pooled, underwritten‌ and securitized. Just like cattle, there's a variable cost to "feeding" these loans – underwriting, servicing, hedging prepayment risk‌ and holding them on warehouse lines. Locking in a TBA sale price allows the originator to manage the spread between the cost of originating and warehousing mortgages and the expected secondary market price.

During the mortgage pipeline process, a significant risk for originators is that some loans committed to be pooled into a TBA security may not ultimately close, or "fall out." This "fallout risk" is akin to a cattle rancher having a certain number of calves that, for various reasons, do not reach the weight or quality required for inclusion in a feeder cattle lot. In the mortgage world, these fallout loans mean the originator still has a commitment to deliver a certain amount of MBS, but a portion of their expected collateral has evaporated. This necessitates managing the delivery of pools, often by sourcing alternative loans or entering into new TBA contracts. 

Just as the cattle market grapples with the biological uncertainties of livestock development, the mortgage market contends with the behavioral uncertainties of borrowers, making the management of this "pipeline" a constant balancing act between anticipated supply and firm delivery obligations.

In both cases, futures or forward contracts provide a mechanism to hedge the cost of production and lock in a margin. Both cattle and TBA markets involve an intermediate phase of value creation – raising and feeding cattle or warehousing loans – during which the producer is exposed to price risk. Each market offers a standardized contract to shift that risk to hedgers, and/ or arbitrageurs.

Moreover, neither product exists in final deliverable form at the point of initial contract sale. Whether it’s a calf in Kansas or a mortgage in Milwaukee, the underlying asset is still in production. The futures price reflects expected supply, demand, storage or land use costs‌ and basis risk (the difference in the market/spot price of a product and the price of the futures contract used to hedge it). In a very real sense, these contracts enable the commoditization of a production pipeline.