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.
What is the procedure for purchasing beef futures?
Ranchers and foreign investors alike are positive on beef, as market conditions in 2013 appear to be favorable for a price increase in cattle in the coming months. In more ways than one, historically low inventory and a succession of dry conditions affecting grain crops are laying the groundwork for a potential bull run. Live cattle and feeder cattle futures on CME or the Chicago Mercantile Exchange are available to participants in the domestic beef futures markets. Feeder cattle, which weigh between 650 and 849 pounds and require more time to achieve slaughter weight, are older than live cattle.
Step-by-step instructions on how to trade futures
We’ve put together a step-by-step guide to help you learn how to trade futures. It covers everything from locating a brokerage/prop trading firm to technical analysis indicators, developing a trading strategy, practicing with real money, and the ultimate stage, the order’s settlement date.
Choose a Brokerage or a Prop Trading Firm
Futures trading can be done in two ways. These can be done through a brokerage or a firm that specializes in prop trading. These two techniques of trading futures have some significant distinctions, which we will discuss below.
Investing via a brokerage
The idea behind utilizing a broker is simple: to open an account, an investor approaches a broker, deposits funds, and then invests in futures. The broker executes all transactions at the client’s request, and the client reaps the profits or losses.
Investing via a prop trading firm
Proprietary trading, or prop trading for short, is when a trader is paid by a prop trading firm in the form of a salary, commission, or a combination of both. The trader is employed for the benefit of the firm and performs trades for internal personal/house accounts.
Learn about Economic Events
When trading E-mini S&P 500 Index futures, you are frequently trading economic events rather than the unique fundamentals of each component firm. You’ll discover that different economic events can have a significant impact on indexes and, by definition, futures contracts. The following are some of the major economic events:
Learn Technical Analysis Indicators
When you start looking into what moves markets, technical analysis, and different trading tactics, you’ll quickly realize the power of futures trading. You could believe that futures contracts are linked to the stock market. Futures contracts, on the other hand, can really move markets higher or lower.
Buying into an index
Whenever there is a favorable economic statement, it should improve the business climate, employment, and overall GDP growth. As a result, you decide to put your money into the S&P 500 index as a broad indicator of future company and economic possibilities. You can buy an S&P 500 index futures contract, the more cheap and highly liquid E-mini S&P 500 Index futures contract, instead of buying a share in each index component. In effect, you’re buying exposure to the S&P 500 index’s underlying components in one trade.
Futures contracts can be very volatile and move quickly. Several technical analysis indicators might help you focus on markets that are overbought or oversold. The Relative Strength Index is one such metric (RSI). It compares an index’s, stock’s, or commodity’s strength on up days to down days. This comparison is expressed as a score between 0 and 100, with 50 representing a balanced value. An RSI of 70 could indicate a short-term overbought condition, possibly indicating the start of a fresh bullish trend. Meanwhile, an RSI of 30 indicates an oversold condition or the beginning of a negative phase.
Traders will examine several forms of technical analysis indicators and take suitable action based on their findings. However, as we’ve seen, looking at a single indicator in isolation might leave a lot up to personal interpretation.
Learn about Risk Management
You must understand and implement a risk management strategy to be a successful futures trader (or any form of trader). In other words, this assures that your emotions never takes precedence over your head: It allows you to maximize your profits while minimizing your losses. Minimizing your losses is just as important as running your winners!
Returning to our prior time machine scenario, let’s travel back to the 1800s. It makes sense for a grain producer exporting commodities halfway around the world to know the selling price before delivering. Then you may calculate your costs and earnings. In this method, the buyer can bring some consistency to their company’s pricing structure. The alternative is to load your ship and sail halfway around the world only to discover that grain prices have plummeted and you are losing money!
When trading futures, you can employ a variety of risk control measures. Setting stop-loss limits, employing futures contracts to safeguard an underlying investment portfolio, and establishing maximum exposure restrictions are just a few examples. For a trader/investor, especially those exposed to the fast-moving world of futures contracts, allowing your heart to govern your mind can be quite perilous.
Build a Trade Plan
It’s critical to create your own trade strategy. How can you plan how to go there if you don’t have a destination point? Individual trade plans will be unique and personal, and they will not be fixed in stone – you must always be adaptable. There are several considerations to be made, including:-
Individual trading strategy branch offshoots can be seen if you view your trade plan as the roots/foundations of a tree. The principle of your trade plan underpins and underpins everything.
Choose a Contract to Trade
It’s easy to fall into the trap of becoming a “jack of all trades, master of none.” Most of the time, however, it is preferable to concentrate on a single market and one form of futures contract (at least in the early days). Over time, you’ll likely discover that the skills/experience you’ve obtained can be applied to different markets and investments. Let’s look at the S&P 500 Index, which has both original futures contracts and E-mini S&P 500 Index futures. These futures contracts have drastically different values: –
It’s also a good idea to consider the margin requirements for various futures contracts. Your investment budget and overall strategy will be determined by this. As a result, pick a market that interests you and futures contracts that you can afford. Now it’s time to have some fun…..
Practice with Paper Money
So, you’ve thought about the different aspects of brokerage/prop trading firms, examined economic events that would affect your investments, studied technical analysis and risk management, and finally created a trading plan. To begin, select your market and the types of contracts that interest you and are compatible with your investment strategy. Then it’s time to get some experience with paper money!
The key to getting the most out of practicing with others is to start small “Staying true to your trade plan, trading tactics, and risk mentality is “paper money.” When you think about it, it’s a no-brainer “When you reach the point of “only paper money,” you should reconsider your viewpoint and suitability for investing in/trading futures contracts. This is the ideal setting for learning from your blunders. Learn to read markets and feel the difference between a profit and a loss.
If you choose to run The Gauntlet, it will track your progress as if you were making market deals. This is not the time to take a major risk in exchange for a huge reward. Futures trading is not all about taking big risks, contrary to popular opinion. Between a conservative and a speculative trader, there is an evident balance. There are times when you should be cautious and other times when you should be more daring. Finally, you must maintain control over whatever decision you choose.
Place and Monitor your Order
When you consider that futures contracts like the E-mini S&P 500 Index can be traded “after hours,” it’s evident that futures contract trading isn’t a weekend hobby. Futures contracts, such as the E-mini S&P 500 Index, are unique in that they may be traded online. You can place your order and keep track of prices on your laptop, desktop, or even your phone using apps. Set up limit alerts, regular updates, and everything else you need to maintain track of your open positions. Never overlook open market opportunities!
Watch for the Expiration and Settlement Date
Futures trading is a pretty easy process. Upon debut, each futures contract has a three-month expiry/settlement date. As a result, you may have contracts that expire in March, June, September, and December. There is, of course, the daily margin call adjustment, but that is something distinct.
While most futures contracts are closed before the expiration/settlement date, a contract may be maintained until it expires on rare occasions. Physical settlement (commodities, metals, etc.) or cash settlement are common in futures contracts, depending on the configuration. This would be a cash settlement in the case of the E-mini S&P 500 Index futures contract. The amount is determined by the index’s value on the contract’s settlement date.
Futures contracts must be monitored for expiry/settlement dates. Mostly because there will be additional fees if you keep them for the entire period. Additionally, your investment funds will be locked up until the settlement is completed.
When are feeder cattle traded?
January, March, April, May, August, September, October, and November are the main trading months for feeder cattle futures and options.
How do I go about purchasing cattle stock?
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 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 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.
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.