The U.S is the largest producer of grain fed beef in the world due to its abundance of pasture suitable for grazing and its large supply of feed grains. Live cattle prices have been rallying to all time high prices, presenting numerous trading opportunities. Whether one is a rancher needing risk management tools or a speculator seeking trading opportunities, cattle futures provide the liquidity and transparency necessary for market activity.
Before taking advantage of these tools, one must understand the fundamentals of the market. There are two types of cattle futures to trade when addressing beef futures: feeder cattle and live cattle. While feeder and live cattle are related contracts, each has its own characteristics that affect supply and demand. Below, I will discuss the timeline of the cattle’s life cycle along with the features of each futures contract and the factors that affect these contracts.
The First Nine Months
Ranchers will traditionally breed their cattle in the summer which will produce calves in the spring. On average, a newborn calf will weigh 70 to 90 pounds at birth. Before a calf is considered a feeder, it has already been gone through the process of being born, weaned and sent out to graze for up to nine months.
Feeder cattle are weaned calves that have been raised to be 600-800 lbs.Once a calf reaches a minimum weight, it is sent to a feedlot with the goal of putting on weight aggressively. Traditionally, feeder cattle must be mature enough in order to go to the feedlot and be fattened prior to slaughter. The process of transforming feeder cattle to live cattle usually takes between 3 to 4 months. Once again, the feeder cattle put on weight aggressively in the feed lots to reach the desired finish weight of 1,000-1,300 lbs. Corn is the best way to quickly fatten feeder cattle; therefore, the price of corn has a direct effect on the price of feeder cattle.
Feeder cattle futures contracts:
- Symbol: FE (open outcry), FC (electronic trading)
- Contract size: 50,000 lbs. (of feeder cattle)
- Specs: 649 to 800 lbs
- Minimum tick: $0.00025 cents per pound (or $12.50 per tick)
- Limits: $0.03 (or $1,500 per contract)
*Feeder cattle futures are cash settled, so there is no delivery unlike the live cattle futures.
- Months traded: Jan, Mar, Apr, May, Apr, Aug, Sep, Oct, and Nov.
*To arrive at the value of the contract, simply multiply the price of feeder cattle times the size of the contract. For example, if feeder cattle are trading at a price of 1.46550, the total value of the contract is $73,275.00 (50,000 x 1.46550).
Live cattle futures began trading in 1964 at the Chicago Mercantile Exchange (CME) as the first non-storable futures contract. Live cattle are traditionally raised in the Midwest, Southwest, and California (in the US). The term live cattle refers to cattle that have reached the necessary weight for slaughter. Traditionally, live cattle remain on the feedlot for up to 5 months (after being moved from feeder) while they put on an additional 500 lbs. Feed lots go on to sell the live cattle to meat packers that slaughter the cattle. The average slaughter weight is about 1,250 lbs. While slaughtered cattle have value from their hide and other parts, the majority of the price comes from boxed beef cutouts. Boxed beef cutouts are the major cuts that are often deboned and are packed and sealed in cardboard boxes.
Live cattle futures contracts:
- Ticker symbol: LE (pit trading), LC (electronic trading)
- Contract size: 40,000 lbs. (of live cattle)
- Contract specs: 55% Choice, 45% Select, Yield Grade 3 live steers
- Minimum tic size: $.00025 cents per pound (or $10.00 per tick)
- Price limits: $0.03
- Months traded: Feb, Apr, June, Aug, Oct, Dec
*For example, to arrive at the price of live cattle futures that is trading at 1.24, multiply 1.24 times 40,000- the total value of the contract is $49,600.00.
The most important report for cattle futures is the Cattle on Feed Report. This report contains monthly totals of cattle in the feedlots that will be sent to the market, placement of cattle intended to be slaughtered, and marketings (sales). The USDA reports are also important as it reflects the inputs that are required to feed cattle. Understanding when the reports are released and what analysts to expect is pertinent when trading feeder and live cattle.
Many active traders aren’t familiar with the differences between feeder cattle and live cattle. To properly trade the feeder and live cattle futures, one must have a fundamental understanding of the beef industry. Because of the long time period from newborn calf to slaughter, the market is subject to volatility and directional moves. Knowing market fundamentals can make all the difference between timely and well-planned trades, whether one is hedging or speculating.
Hedging with Livestock Futures and Options Guide
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