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.
What exactly are cattle futures?
On the Chicago Mercantile Exchange, live cattle futures are standardized, exchange-traded contracts (CME). The contracts cover the delivery of full-grown calves that have achieved a weight of between 1,200 and 1,400 pounds and are ready to be delivered to meat processors. Because futures were primarily traded on storable commodities like grain at the time, the introduction of live cattle futures in 1964 was a bold step. Since then, the live cattle futures contract has gone through a number of revisions, each of which has improved the contract’s utility in risk management systems. Cattle producers have been able to better manage their pricing risk thanks to these technologies.
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 average weight of a feeder calf?
Feeder cattle, also known as store cattle in some nations and regions, are young cattle that are mature enough to be backgrounded or fattened in preparation for slaughter. They could be steers (males who have been castrated) or heifers (females who have not been castrated) (females who have not dropped a calf). The expression frequently implies a desire to sell to other owners for fattening (finishing). Backgrounding takes place in a backgrounding operation, whereas fattening takes place in a feedlot. Feeder calves are under a year old, whereas feeder yearlings are between the ages of one and two. In a cow-calf farm, both types are frequently produced. Feeder cattle become finished cattle when they reach a certain weight and are sold to a packer (finished cattle are also called fattened cattle, fat cattle, fed cattle, or, when contrasted with carcasses, live cattle). The cattle are slaughtered and the flesh is sold in carcass boxes.
Feedlots buying 500-850 pound feeder cattle calves and feed to grow them into 850-1400 pound cattle will normally buy 500-850 pound feeder cattle calves and feed. Backgrounding enterprises usually buy 300-600 pound feeder cattle calves and feed them till they reach 650-875 pound backgrounded weight. Backgrounding cattle weighing between 650 and 700 pounds are suited for grass feeding operations, while those weighing between 800-825 pounds are suitable for feedlot operators. Feeder cattle buyers prefer cattle with a high average increase (in weight) and a low feed-to-gain ratio. Varied feeder cattle purchasers will look for different weight and grade ranges depending on the situation.
Feeder cattle pricing, weights, time to fatten, death rates, and other feeder cattle parameters are balanced against feed prices, live cattle prices, and other operating considerations by cattle producers and backgrounding businesses to profit from their operations.
What is the difference in price between live and feeder cattle?
The graph for this week emphasizes the relationship between those two markets. Since the market moved through the steep drop of 2015, the price connection has remained surprisingly constant. The CME feeder cattle index has been around $30 ahead of the postponed live cattle contract in recent weeks. To that end, the deferred fed index has averaged $114 over the last four years, while the feeder cattle index has averaged $144.
Inevitably, one of the most frequently asked questions by farmers is, “How do you see feeder prices developing?” The answer inevitably prompts a question on the other side, based on this trend “How do you see fed prices developing?”
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.
What is the formula for calculating cattle basis?
The gap between the local cash market and the price of a futures contract (Basis = Cash Price Futures Price) is known as basis. When assessing projected sale or purchase prices at the end of a futures or options hedge, evaluating a current cash market quote, and anticipating cash prices, historical basis trends might be useful. This book explains how cattle basis is calculated, outlines a method for compiling a local basis history, and examines how historical basis data can be utilized to forecast basis.
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.