To be successful in the beef cattle business, today’s cattlemen use a range of tools. Simple and intricate tools of the profession, ranging from fencing pliers to genomic-enhanced EPDs for performance indicators, assist cattlemen in completing the day’s task and making decisions to maximize profitability.
The cattle futures market is a complicated marketing instrument for cattlemen. Animals futures contracts are legally binding contracts between a buyer and a seller for the delivery of cattle at a specific time. These contracts are negotiated in a futures market, such as the CME group or the Chicago Mercantile Exchange, and have been around since 1964.
Scott Varilek works at Kooima & Kaemingk Commodities in Sioux Center, Iowa, as a commodity broker. Varilek assists his customers in placing trade orders based on a risk management strategy and a price that is suitable for that particular producer.
How do cattle futures are calculated?
Each 40,000-pound Live Cattle futures contract has a minimum price variation of $.00025 per pound, or $10 every tick. Monday through Friday, 8:30 a.m. to 1:05 p.m. Central Time, the contract trades (CT). With a minimum tick increment of $, the Feeder Cattle futures contract represents 50,000 pounds.
How do you interpret the price of live cattle?
For example, say 300- to 500-pound steers cost $95 to $118 on average. The fee is for a hundred pounds. In other words, you might get up to $118.00 for every 100 pounds the steer weighs. A 350-pound cow, for example, would fetch $413.00 (3.5 X $118).
What is the price of cattle futures?
Cattle futures contracts are 40,000 pounds or 50,000 pounds in size, priced in cents per pound and representing around 35 head of cattle. For Live Cattle, the tick size is $0.00025 per pound, or $10 per contract, and for Feeder Cattle, it is $12.50 per contract.
Feeder cattle contracts can be fulfilled for cash, however live cattle contracts require physical delivery. The contract months for both cattle futures contracts are different.
Trading cattle futures contracts, like any other futures contract, necessitates an initial performance bond and a maintenance margin. This varies from one futures brokerage to the next, but on average, the initial margin required for Globex Feeder cattle is around $1225 and for Globex Live cattle is around $825.
What is the average weight of a feeder calf?
Yearlings weighing up to 800 to 900 pounds. Packers like animals weighing between 1,100 and 1,200 pounds, thus the most typical weight of calves kept on feed is between 500 and 700 pounds.
How can I determine the worth of my cattle?
The expense of rearing an animal to its current state is represented by the basic value of livestock. For example, the cost of raising heifers from calves through freshening, the start of milk production, is the base value for cows. The cost of raising a bred heifer to breeding age is the animal’s basic value. Base value can be determined using the following methods: 1) the actual or expected cost of developing the animal to its current condition; 2) the market worth of such animals at the time the base value is set; 3) IRS “safe harbor” values; or 4) other business practices.
When employing the base-value method, raised breeding stock is not depreciated. Rather, the costs of producing animals are included as operating expenses on the income statement. Changes in the number of reared breeding animals at each stage of growth, such as replacement heifers, are adjusted on the income statement using the base value. As animals are transferred into the breeding herd or flock, or moved into a new group, such as bred heifers to cows, revenues are adjusted by the change in base value.
For the most part, the basic value will remain consistent over time. However, when the costs of raising breeding stock fluctuate, the base value should be adjusted on a regular basis to appropriately reflect the business’s worth. Changing the base values has an impact on net income and, as a result, retained earnings. The group-value approach and the individual-animal approach, both of which are rarely employed, are two techniques for sustaining base values. 2
Breeding animals are assigned base values when the balance sheet is created using the group-value approach. When an animal moves between stages or classifications, it gains or loses transfer points, which affects the base value. The producer must choose consistent transfer points. Calf, replacement heifer, bred heifer, and cow are examples of transfer points. The expense of achieving a live birth might be assigned a base value, or young stock can be included on the balance sheet as marketable livestock until replacements are found. The rise in cost is measured using a base value estimating the costs of growing an animal from birth through each of its stages, which is then used to alter income and retained profits. It is acceptable to use many transfer points, such as age, or a single transfer point, such as when an animal is placed in service.
The recording of revenues resulting from the rise in cost basis will be postponed until the animal develops if a single transfer point is used. When the size of the herd is constant, this has no effect, but when the herd size changes, it might pose problems with comparability.
Replacement heifers, for example, have the same basic value as the other animals in their group.
There is no attempt to track animals on a one-to-one basis. Only variations in the number of animals in each group influence net revenue when the base value remains constant from year to year.
Base values may need to be altered or adjusted across some or all stages due to changes in expenses over time. To compare statements in the current reporting period, pro forma statements from the preceding period should be generated using the new base values. The new base values are then held constant until shifting costs force another modification. When choosing a base value for the group-value approach, using market value may need frequent revisions and result in unfavorable swings in net income.
If you buy young replacement livestock and raise it to production age, the purchase price should be recorded on the cost basis balance sheet until the animal moves on to the next stage. The base value of raising an animal from birth (or hatching) to this stage may not be considerably different from the purchase price plus the cost of raising the animal to this stage. In this situation, the animal’s worth can be evaluated using the group’s specified basic values. Otherwise, a different base value for children who are acquired at an early age and those who are raised from birth might be created.
How are futures prices calculated?
The futures pricing formula deserved its own discussion for a reason. Various types of traders can be found in the futures trading spectrum: some are intuitive traders who make judgments based on gut instincts, while others are technical traders who follow the pricing formula. True, successful futures trading necessitates skills, knowledge, and experience, but before you get started, you’ll need a good grasp of the pricing formula to figure out how to navigate the waters.
So, where does the price of futures come from? The cost of the underlying asset determines the futures price, which moves in lockstep with it. Futures prices will rise if the price of the underlying increases, and will fall if the price of the underlying falls. However, the value of the underlying asset is not necessarily equal. They can be traded on the market for a variety of prices. The spot price of an asset, for example, may differ from its future price. Spot-Future parity is the name given to this price gap. So, what is it that causes the prices to fluctuate over time? Interest rates, dividends, and the amount of time until they expire are all factors to consider. These elements are factored into the futures pricing algorithm. It’s a mathematical description of how the price of futures changes as one or more market variables change.
In an ideal scenario, a risk-free rate is what you can earn throughout the year. A risk-free rate is exemplified by a Treasury note. For a period of two or three months until the futures expire, it can be adjusted accordingly. As a result of the change, the formula now reads:
Let’s have a look at an example. We’ll use the following values as a starting point for our calculations.
We’re presuming the corporation isn’t paying a dividend on it, so we’ve set the value to zero. However, if a dividend is paid, it will be taken into account in the formula.
The ‘fair value’ of a futures contract is calculated using this formula. Taxes, transaction fees, margin, and other factors contribute to the gap between fair value and market price. You may compute a fair value for any expiration days using this formula.
In a futures contract, how many cows are there?
What is the best way to trade live cattle futures? Live cattle futures contracts are traded electronically on the Globex platform Monday 9:30 a.m. ET to 2:05 p.m. ET and represent 40,000 pounds of market ready cattle. To trade live cattle futures, you’ll need a futures account that has been approved.
What is a ten-cent cattle slide?
The slide costs $10 per cwt. At the ranch, calves will be weighed with a 3% shrink. The cattle weigh an average of 480 pounds per head when they are delivered in October. Because the animals weight less than estimated at delivery, the down slide will be used.
Feeder cattle are more expensive than live cattle for what reason?
Feeder cattle and live cattle are the two sorts of cattle that are traded by livestock traders. The stage of the production cycle distinguishes these two commodities.
Weaned calves weighing between 600 and 800 pounds are considered feeder cattle. Feeder cattle are then placed in a feedlot and fed a high-energy feed diet consisting primarily of corn and other grains. Feeder cattle require more than 500 pounds of gain before reaching slaughter weights, therefore corn prices have a significant impact on feeder cattle pricing.
On the other hand, live cattle are ‘finished’ products that are ready to be sold to slaughterhouses.