Prices for CME Live Cattle futures are quoted in dollars and cents per pound, and lots of 40000 pounds are traded (18 metric tons).
I’m looking for a place to trade 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 I purchase cattle products?
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.
What is the best way to invest in cattle stocks?
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.
What is the price of a feeder cattle contract?
Feeder cattle futures contracts are valued $12.50 per contract and have a specification of 0.025/cwt (0.025 cents per pound). Feeder cattle futures are traded electronically on the Globex platform from 9:30 a.m. to 2:05 p.m. ET on Monday.
What is the best way to trade feeder cattle?
Traders seeking exposure should go to exchange-traded funds (ETFs) that trade futures rather than shares or stocks.
The use of a contract for difference (CFD) derivative instrument is a popular approach to trade feeder cattle. Traders can speculate on the price of feeder cattle using CFDs.
The difference between the price of feeder cattle at the time of purchase and the current price is the value of a CFD.
CFDs on feeder cattle are available from a number of regulated brokers across the world. Customers make a deposit with the broker to serve as margin.
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.
Two types of hedgers
Hedgers are divided into two types: those who guard 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 distinction between feeder cattle and live 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’s causing the drop in cattle prices?
“Over the last two years, low pricing and drought have both led to herd liquidation,” Nalivka explains. In fact, beef cow slaughter in the United States increased by 10% in 2021, following a 3% increase in 2020.