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.
Is it possible to trade cattle futures?
Before executing a futures transaction, it’s critical to understand the benefits and hazards of live cattle futures. In contrast to typical investments, live cattle futures allow you to trade outside of traditional market hours and take advantage of trading opportunities regardless of market direction. Live cattle futures also allow traders to trade with higher leverage and make better use of their trading money. Trading leveraged products like live cattle futures, on the other hand, has the risk of losses exceeding the initial investment, and is not suited for all investors.
How do cattle commodities become traded?
The equities market is not an adequate approach to obtain exposure to live cattle pricing. The majority of cattle ranches are privately held. Traders seeking exposure should go to ETFs that invest in futures rather than stocks.
Contracts for Difference (CFDs)
The use of a contract for difference (CFD) derivative instrument is one approach to trade live cattle.
Traders can speculate on the price of live cattle using CFDs. The difference between the price of live cattle at the time of purchase and the current price is the value of a CFD.
CFDs on live cattle are available from a number of regulated brokers throughout the world. Customers make a deposit with the broker to serve as margin. CFDs offer traders the ability to gain exposure to live cattle prices without having to buy shares, ETFs, futures, or options.
Is it possible to buy beef futures?
Beef futures can be purchased in a variety of ways. Depending on your objectives, you may want to preserve the value of your current commodities, or you may want to avoid having to pay more for beef inventories in the future. You could not have these goals in mind and merely want to profit from market trends. When you buy cattle futures on an exchange to invest in beef, you’re hoping to profit from future price increases in cattle. You pay a specific amount of margin, or a deposit, in exchange for the ability to make a trade. The contract will be set at a given price for a set number of cattle and will be set to expire on a specific month in the future. You can sell your futures at the new price and pocket the difference if the price of cattle futures rises to a suitable level. Because a single contract contains a big unitized quantity, a little price change in futures is exaggerated. That would be 50,000 pounds in the case of feeding cattle. As a result, a ten-cent rise can result in a $5,000 profit.
What are my options for purchasing live cattle?
The cattle are moved to the farm management partner farms after they have been acquired. The animals will receive round-the-clock care and supervision from highly trained farm staff as well as a veterinarian.
- On an average of 107.369 sq.ft. (10.000 m2) of land, just one or two animals graze.
- Animals are kept on open fields all year and gain up to 1.65 pounds (0.75 kilogram) per day from natural grazing.
Two types of hedgers
Hedgers are divided into two types: those who protect against a price drop (short hedge) and those who protect against a price rise (long hedge) (long hedge).
Short hedgers are livestock producers that expect to sell their animals in the future but want to protect themselves from price drops. If a producer sells a futures contract, they become short hedgers (futures contracts that are applicable tothe type of livestock they plan to market).
Short hedgers are the polar opposite of long hedgers.
Long hedgers require a product at some point in the future, don’t want to buy it now, and want to protect themselves from a price increase. If a producer purchases a futures contract, they become long hedgers (futures contract applicable to the type of feed or feederlivestock they plan to purchase).
A cattlefeeder, for example, who plans to put feeder cow in the feedlot in three months but wants to set a price and protect against a price rise in those three months is an example of a long hedger. To hedge against a spike in cash prices, this hedger would purchase feeder cattle futures.
Buying corn futures to fix a price for corn and protect against a price rise is another example of a long hedge by a livestock producer.
Placing a short hedge
Hedging may be appropriate for a producer who is feeding animals, intending to market them later, and wants to set a price now rather than risk price declines.
The first step is to choose the right futures contract, one that matures around the time the livestock is to be sold. Contracts are not available for every month of the year, unfortunately. In January, for example, a producer might expect to sell hogs or cattle. Contracts for hogs and cattle do not expire in January. In such instances, the producer should choose for the contract that expires one month after the livestock are sold. As a result, if a producer wants to hedge hogs or cattle in January, the February futures price should be used. The reason for choosing a contract that matures after the animals are sold is that the futures contract can be offset when the livestock are sold.
Adjusting the futures price for the expected basis, as illustrated in Example 1, is the most typical way of localizing the futures price. At marketing time, the basis represents the projected difference between the local cash price and the futures price (see Basisfiles under Information Files). Understand the differences between the Livestock Basis, the Lean Hog Basis, and the Live Cattle Basis.)
The hedger can evaluate the possible returns from the hedge once the localized futures price has been determined. To get a net return from the hedge, remove three more components from the localized futuresprice. Example 2 shows how to calculate the estimated return.
If the producer wishes to hedge, he will have to pay the broker’s fee for handling futures trading. This cost fluctuates between $50 and $100 each contract (varies by brokerage firm andnumber of contracts traded, which puts the cost of trading at 15 to 20cents per cwt.).
Every contract that is exchanged requires a deposit. The initial margin deposit size varies depending on the type of livestock futures contract and the price level. Typically, the initial margindeposit will be between 5 and 10% of the contract’s value. Furthermore, if the futures market price goes in the opposite direction of the futures position, the hedger will be required to deposit additional monies.
Because the margin deposit must be paid as the market dictates (as the loss accumulates), an interest charge should be included in the cost of hedging, as illustrated in Example 3. The amount of interest charged will be determined by the direction of the futures price and the length of time the contract is held. The most one can do is make an educated guess on the interest rate.
The expected net return from the hedge is determined by comparing the adjusted futures price with the cost of production and pricing objectives as a third element in determining whether or not to hedge. Individual producers have different levels of targeted profit and price risk that they are willing to take on by not hedging. As a result, each producer must assess if the expected return from hedging is adequate.
Lifting the short hedge
Lifting a short hedge entails buying back (offsetting) your futures position and selling your livestock on the cash market at the same time. Example 4 shows an example of hedging. The hedger can disregard both cash and futures markets from the time the hedge is put until it is pulled since the gain (loss) in one market will offset the loss (gain) in the other. If the price falls after the hedge is put in place, the loss in the cash market is countered by the gain in the futures market. The increase in the cash market is offset by the loss in the futures market if the price rises. In the information file Understanding Livestock Basis, the implications of employing basis to lift a hedge are explained.
1. Purchasing a futures contract (for the same contract month that was previously sold) and simultaneously selling the cattle on the open market.
2. Delivering the livestock in accordance with the contract.
The producer should remove the futures position right before selling the livestock on the cash market when lifting a short livestock hedge. The following is the sequence of events:
1. Get a livestock cash price bid.
2. Get the relevant month’s futures price.
3. Examine the basis and compare it to previous data.
4. Purchase the appropriate month’s futures contract.
5. Sell livestock on the open market for cash.
The basis risk increases as the period between the cash transaction and offsetting the hedge grows.
Hold into contract month
Unlike grain hedgers, who are urged not to keep holdings into the delivery period, livestock producers are allowed to hold hedge positions into the delivery period. During the delivery season, the livestock base is more steady, making it more predictable than during non-delivery periods. It is not essential to lift the hedge with cash settlement contracts (lean hogs and feeder cattle). At the settlement price, the hedge will be closed out.
During the delivery period, a cattle hedger should keep an eye on open interest, or the number of contracts that are still open.
If open interest falls below 1,000 contracts, regardless of the basis, the hedge should be lifted.
Hedging in non-contract months
There aren’t futures contracts available for every month of the year. As a result, the livestock producer may have livestock ready to sell in months when no futures contract is available. Non-contract months are riskier to hedge than contract months. The non-contract months’ base is less stable than the contract months’.
Hedging and quality
Producers who sell livestock that isn’t of the grade stipulated in the futures contract run the risk of incurring additional basis risk. Select grade cattle discounts, as well as carcass premiums and discounts, should be considered into the basis.
What is the difference between live and feeder cattle?
What is the fundamental difference between live cattle and feeder cattle, many of you may wonder?
Live cattle are cattle that have reached a desirable weight (850-1,000 pounds for heifers and 1,000-1,200 pounds for steers) and are ready to be sold to a packer. Feeder cattle are weaned calves who have recently been put to feedlots (approximately 6-10 months old). The cattle are slaughtered by the packer, who then sells the meat in carcass boxes.
The USDA’s predictions for net exports of US meat and poultry, which are likely to climb again this year from past years, are another short-term bullish reason for fat/live cattle.
What is the basis for live cattle futures?
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).
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.
What are futures on feeder cattle?
Feeder Cattle futures are standardized, exchange-traded contracts in which the contract buyer agrees to accept delivery of a particular number of feeder cattle (e.g. 50000 pounds) from the seller at a predetermined price on a future delivery date from the seller.
How does a cattle market function?
Producers across the country are concerned about the future of the cattle industry and how it may affect their businesses as a result of recent market instability. For some ranchers, not completely comprehending how the market works adds an unexpected layer of stress to an already stressful situation.
To put it simply, the cattle market is driven by supply and demand, which is influenced by a number of factors. One of these factors is that most cattle are born in the spring, which means they are presented in the fall, which means there are many more calves for sale in the fall than in the spring. Second, there is a finite amount of space on the kill floor where corpses can be hung and eventually served to people. Although the industry intends to have meat all year for restaurants, consumers, and grocery stores, the majority of beef is delivered in a 6-week period.
Keep in mind that there is an international shipping season for feeder calves from late October to early November, which we can observe when we look at supply and demand. During this time, demand is decreased, but supply is high, resulting in lower cattle prices.
Finding holes in their own herd to improve the quality of their calves and then finding a niche market where the supply isn’t quite as high are two things producers may do to increase the value of their calves. However, there is a risk that demand will be smaller until people discover that this niche would be a gap in the market. Another thing to consider is that the majority of cattle arrive in October and November, thus the months of April, May, and June are extremely busy for packers and feeders.
The cattle industry is highly cyclical. When you look at it from the beginning to the present, you’ll notice that it follows a consistent pattern, which is still evident now. But what it really means is that we need to establish a specialized market for our calves, or a specialty market for our bulls and cull cows. We need to locate a market with a high demand and a limited supply.
Many individuals sell their cull cows as soon as their calves are delivered. They do a preg check, and the ones who aren’t pregnant go to town. Because almost everyone else is doing the same thing, this method has a lot of supply and little demand. Demand picks up again during the holidays or as we progress through the spring, when there is less supply. When it comes to bulls, the same thing happens. Many folks sell their old bulls and draw their new ones at the same time. It’s a supply and demand issue once again.
Another point to remember is that each and every bid a seller receives on their calves is based on a futures board, even if the bidder does not intend to hedge them. They’re looking at the months of April, June, and August on the futures board.
Weight and days-on-feed are the most crucial factors in the April market. Cattle won’t be able to hit the April board in November and December because they won’t have enough days-on-feed. The rule of thumb is to aim for before October 15th in order to make the April board. Historically, the top month on the board is April, followed by June and then August.
What we know about April is that getting a fall calf that harvests in April is really difficult. This is the goal, but based on the June board, the majority of the cattle sold in the fall will be harvested in June or July.
Because replacements are sometimes kept off when heifers are sold, they are often 50-100 pounds lighter in some regions, and this implies that some people may bid on steers on the April board while the heifers are on the June board.
When it comes to marketing cattle, it’s important to pay attention to the board and the on-feed report. Calf value is influenced by a variety of factors, although some of them are purely psychological. For example, if the summer has been particularly difficult, with numerous storms, or if the market hasn’t been particularly favorable, it can be difficult to sell cattle since feeders aren’t in the mood to purchase them. It’s crucial to remember that markets also include a human component.
The easiest approach for producers to get the most out of their cattle is to understand the futures market, know how to analyze it, figure out what calves are worth based on the futures market’s breakeven, monitor the on-feed report, and discover a niche market for their calves, cull cows, and bulls. Finally, engage with someone who can explain these data to you and recommend when you might be able to sell your animals for a larger premium with extra value.