Beef is one of the most sought-after agricultural products. On a global scale, about 134 billion pounds of beef are consumed every year. In 2019, the U.S. alone accounted for approximately 27 billion billion pounds, making it a primary contributor to the $1 trillion annual meat and poultry industry. According to the United Nations Food and Agriculture Organization (FAO), these figures will only rise in the coming years.
If the FAO is correct, then feeder cattle futures are likely to explode in both size and popularity in the next decade. Let’s take a look at what you need to know before getting started in this exciting and opportune market.
What Are Feeder Cattle Futures?
Like wheat, corn, soybeans, and even gold, cattle are a commodity. Accordingly, there are several different types of cattle, each defined by its function. Feeder cattle are those designated solely for the production of beef.
By definition, feeder cattle are weaned calves that weigh between 600-800 pounds. When they reach the 600- to 800-pound threshold, steers (castrated males) and heifers (females yet to calve) are then fed a high-calorie diet designed to promote weight gain. When they reach 1,200-1,400 pounds, the steers and heifers are then slaughtered to produce beef.
Listed for trade on the Chicago Mercantile Exchange (CME), feeder cattle futures are contracts that price the value of beef at some future point in time. Here are the contract specifications:
|Feeder Cattle||GF||50,0000 lbs||U.S. cents/lb||$12.50||Financial|
Note: Eight contracts per year are listed, with January, March, April, May, August, September, October, November expiries.
It’s important to remember that feeder cattle futures differ from the CME’s other beef livestock listing, live cattle futures (LE). Although each of these contracts technically faces cattle, they serve very different purposes for hedgers and speculators.
Feeder Cattle 101: Market Drivers, Keys to Watch
As with most commodity futures, the evolving relationship between supply and demand is the quintessential underpinning of the feeder cattle market. When supply and demand are in disequilibrium, we see either a bullish (demand exceeds supply) or a bearish (demand lags supply) move in prices. In these instances, it’s beneficial for livestock producers and speculators to trade feeder cattle futures to hedge risk or capitalize on pricing volatility.
So what are the key indicators of supply and demand for feeder cattle? Here are the critical events and data points:
USDA Cattle Inventory Reports
Released on Fridays toward the end of January and July, the U.S. Department of Agriculture’s Cattle Inventory report gives livestock market participants a look at evolving supply levels. The January report estimates the total cattle inventory, including the number of calves born the previous year on a state-by-state basis. The July report focuses on the number of U.S. calves born through the first half of the current calendar year. For feeder cattle, the January/July calve numbers are important barometers of future feeder cattle supplies.
USDA WASDE Reports
Throughout the year, the USDA releases monthly WASDE reports designed to address the current state of U.S. and global agriculture. For beef, U.S.-centric information such as production levels and average prices are key data points. Projections for grain supplies and prices essential to the production of feeder cattle are also included.
If you’re going to trade feeder cattle futures, then it’s important to stay abreast of when the USDA Cattle Inventory and monthly WASDE reports are released to the public. Each divulges important information regarding future herd strength, producer costs, and potential trends in beef pricing.
Similar to other commodity markets, such as crude oil, many external factors can impact the prices of beef. One of the most significant factors for feeder cattle is the broader economic cycle. During periods of prosperity, consumers are prone to purchase beef, thus pressuring supplies and driving prices up. However, amid recession or downturn, cheaper substitutes like chicken or pork become more popular. This phenomenon can prompt a supply glut of cattle and send beef prices south.
Interested in Trading Cattle Futures?
To learn more about the potential and opportunity of feeder cattle futures, check out The Cattleman’s Advisory, available at Daniels Trading’s online trading advice portal. In it, you’ll find valuable tips for maximizing your performance in the cattle markets.