The U.S. exports more than 2 billion pounds of beef per year, making the production and marketing of cattle a significant enterprise. In order to offer financial benefits to industry participants, the CME Group offers Live and Feeder Cattle futures products.
Each contract has distinct specifications and plays a unique role in the aggregate cattle market. Feeder Cattle are recently weaned calves, ready to be sent to the feedlot. Conversely, Live Cattle have reached a desired weight and are ready for slaughter. The relationship between the two can be complex, leaving traders to craft cattle market predictions according to a variety of factors:
- Production/supply levels
- Global demand
- Market technicals
In periods where the cattle markets experience extreme volatilities, one or more of the above considerations may be out of balance. When all are simultaneously unstable, market conditions can become chaotic.
Supply-Side Analysis
The available supply of beef is a critical aspect used in the valuation of cattle futures. Supply stems from slaughter-ready Live Cattle. In turn, production costs related to Live Cattle production are key determinants of physical supply levels.
Production costs are broken down into two areas:
30% to 40% attributed to the cost of feed
The price of assorted feeds used to bring Feeder Cattle up to weight may vary. Corn, grain and soybean market volatilities may impact feed cost considerably. As the cost of these inputs increase, beef production and supply is prone to decrease.
60% to 70% attributed to the cost of feeder cattle
The supply or relative herd strength of Feeder Cattle is instrumental to market valuations. Harsh weather may reduce herd strength through limiting the availability of pasture, thus reducing animal weight. A shortage in the supply of Feeder Cattle increases costs, reducing the production and supply of beef.
When formulating accurate cattle market predictions, a producer must be aware of the circumstances that impact the supply-side dynamic. The condition of related agricultural markets, including corn and soybeans, as well as the presence of extreme weather cycles are capable of moving the cattle markets considerably.
Global Demand
In contrast to supply-side concerns that impact the cattle market, demand also plays a vital role in establishing baseline valuations.
Leading beef consumers, such as the U.S., European Union, China and Brazil, have a tremendous influence on global demand levels. Here are several factors that drive consumption and desire for beef products:
Economic outlook
The economic performance of a region or nation is a major contributor to local demand. A considerable increase in personal income typically equates to an increase in the demand of beef over other foods.
Pricing of alternatives
As the prices of chicken, pork and other meat staples rise, the price differential becomes negligible. In turn, demand for beef increases.
A prime example of global demand impacting cattle market predictions, is the 2017 reintroduction of U.S. beef into China. The lifting of the ban opened the world’s largest consumer market to the largest beef exporter. As a result, many analysts issued predictions of Live Cattle prices rallying as much as 20% by year end.
Futures Market Technicals
In addition to the fundamental market drivers related to supply and demand, technical trading levels also periodically influence cattle pricing. A highly public technical level can draw both retail and institutional participation to a perceived inefficient market.
Here are a few prominent market technicals that attract the attention of producers, traders and investors:
Historic highs and lows
Decade and yearly high and low values are used to provide relative context to the cattle market.
Popular moving averages
The 50, 100, and 200 period moving averages are frequently implemented in trade-related strategies.
Momentum indicators
Oscillators such as the Relative Strength Index (RSI) are popular among traders and industry analysts for determining whether the cattle market is overbought or oversold.
The presence of high-profile technical tools or indicators typically attract participation to the marketplace. While fundamentals drive long-term trends in cattle pricing, the location or convergence of market technicals are capable of influencing valuations in the short-term.
Making Your Own Cattle Market Predictions
Being an accurate cattle futures prognosticator is equal parts experience, know-how, and luck. However, a thorough understanding of the fundamental and technical factors behind a market move can be a valuable part of competently addressing the unexpected.
For more information on the current pulse and potential of the cattle market, consult the livestock specialists at Daniels Ag Marketing.
