Cattle Market is very interesting and dynamic. A common question asked by new traders is “What are Feeder Cattle and Live Cattle?” We will answer this question and review production and consumption factors that affect the price of Cattle in the United States.
Cattle Market production consists of several phases. The first is the cow/calf operator who is responsible for the birth and early raising of the calves until they are weaned. These calves are moved out to pasture for grazing by the stocker operator.
The cattle graze in the pasture to about 700 pounds (about 12 months old) to become “Feeder Cattle”.
They move to the feedlots for approximately six months to be fed corn and soy meal to reach the optimal slaughter weight of 1200 pounds and now are referred to as “Live Cattle”, also commonly called “Fed Cattle”.
Cattle production and price tends to move through a boom and bust cycle because meat, unlike many other commodities, cannot be stored for long periods of time.
Since cold storage facilities are expensive to maintain, the U.S. storage capacity is only about a nine-day supply. Producers are unable to hold back supply when prices are low, so they tend to go through herd liquidation when prices are low. Heifers, which are breeding cows, are sent to slaughter, resulting in a larger supply, which pushes the price even lower. This cycle lasts three to four years. Eventually, prices recover as the supply dwindles. In reaction to higher prices and low supply in the pipeline, herd expansion takes place as more heifers are retained for calf production, which in turn makes the supply tighter and price higher. The herd expansion process goes for about six to seven years. The overall results are large swings in price over the long term.
Production during the year tends to show some seasonal characteristics. For example, pasture is plentiful in spring so feedlot placements tend to be lower. Feeder cattle prices can tend to be lower because of the availability of pasture. Placements tend to be higher in fall. This coincides with the harvest of grains which typically makes feed more available at an attractive price. Because feedlot placements are lower in spring, the marketing of feeder cattle for slaughter is lower in fall. Marketing is higher in spring due to the heavy placement in the fall. This pattern appears to work well with the seasonal tendency in consumption discussed later.
There is an inverse price correlation between the price of grain and the price of feeder cattle.
For example, the corn stocks were excellent in 1991-94, and corn futures prices ranged between $2.10 and $2.70 per bushel. Feeder cattle prices were high at 80 to 90 cents per pound. In 1996, when the corn stocks were tight and the futures price ran above $5.00 per bushel, the price of feeder cattle declined to below 50 cents per pound. In the year 2000, the price of corn hit a low of $1.75 per bushel in summer and the price of feeder cattle was high, above 85 cents per pound.
Another factor that can influence the price and production levels of cattle is the weather.
Periods of drought in cattle country can lead to early liquidation of cattle to the market and early placement of cattle into feedlots at 600 pounds instead of 700 pounds. This can depress both Live cattle and Feeder cattle prices. Unusually harsh weather during winter can raise near month live cattle prices due to transportation problems in moving cattle to the market.
The disease can also have a great impact on production as we have seen in 2010.
Scattered all over the news is the hoof and mouth disease, which has spread through Europe, causing herd eradication. Another disease also highlighted the last few years is Mad Cow disease, which can also lead to the eradication of large numbers of cattle to prevent the virus from spreading. In the short run, these diseases can lead to lower cattle prices. For example, recently when there was a rumor of hoof and mouth infection in North Carolina on 03/30/2010, the live cattle price plummeted temporarily in mid-session. The logic being that infection in this country would lead to many producers taking cattle to the market in fear of infection hitting their herd. Also, consumption will probably decline despite the fact that this disease does not affect human health. Long term, the destruction of the cattle industry will cause beef prices to be very high for a number of years till supply can meet demand.
Demand Factors – Seasonal Fundamentals
We had mentioned earlier that domestic demand for beef goes through seasonal tendencies. For example, consumption increases during barbecue season from April through Mid July. In the hotter months of summer, demand drops. Starting in September demand picks back up until the holiday season when substitution of traditional holiday meats such as turkey and ham causes beef demand to drop. Beef is welcomed back in January after everybody is sick of turkey and ham. This seasonal demand mirrors our eating habits in the United States.
The per capita consumption of beef in the United States has been on the decline since the early eighties, although the decline has abated in the late nineties. This decline has been attributed to the change in consumer tastes and the affordability of chicken. Back in the eighties, we saw an attempt by the public to eat healthier and reduce the consumption of red meat. Seafood and chicken became more popular. Since 1999, the consumption of beef has been increasing. This was attributed to the strong per capita income growth that the United States had enjoyed in the late nineties and into the year 2000.
Another area of the growing demand for the beef industry has been exports.
Improvements in other economies such as Asia and Mexico in the eighties and nineties have to lead to a steady increase in exports. For example, in 1987, exports were approximately 600 million pounds, and in 1994, over 1400 million pounds. Major export countries include Japan, Mexico, Canada, and South Korea, accounting for 3/4 of export tonnage. China is expected to be a major growth market in the future since the United States has adopted normal trading relations with them in the year 2000. The European market on the other hand has been very resistant to exports from the U.S. because of their distaste for the growth hormones used in production. As a side note, the NAFTA treaty has not impacted the cattle industry negatively despite accusations of cattle being dumped on the U.S. market from Canada and Mexico. The numbers do not seem to indicate that has been a problem.
Live Cattle Futures
Live cattle Futures is a type of futures contract that can be used to hedge and to speculate on fed cattle prices. Cattle producers, feedlot operators, and merchant exporters can hedge future selling prices for cattle through trading live cattle futures, and such trading is a common part of a producer’s price risk management program. Conversely, meat packers and merchant importers can hedge future buying prices for cattle. Producers and buyers of live cattle can also enter into production and marketing contracts for delivering live cattle in cash or spot markets that include futures prices as part of a reference price formula. Businesses that purchase beef as input could also hedge beef price risk by purchasing live cattle futures contracts.
As we end the first quarter of 2020, the critical demand issue will be the weakening economies in the United States and around the world. Beef is perceived to be a luxury item in many countries and on average is the most expensive meat to consume in the United States. Also, the price of cattle in the U.S. is relatively high and may cause exports to be soft in 2020. A major issue is the herd liquidation in Europe due to hoof and mouth disease. This disaster may give U.S. beef producers a chance to export beef to the European community. Grain prices again are headed lower in the first quarter of 2020, which should be supportive of feeder cattle prices. In regards to the boom and bust cycle, according to a report issued by cattle marketing economists indicates herd expansion may be starting in 2020.
There were a high number of placements in 2019, which hinted that herd expansion had already started. But that was doubtful because heifer slaughter rates were average. In either case, it sounds like supplies should be relatively tight for 2020.
Interesting video from CME:
News is very important in the Cattle Markets.
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Disclaimer: There is a risk of loss in all commodity trading. The data contained are believed to be reliable but have not been independently verified. Accordingly, such data cannot be guaranteed as to reliability, accuracy, or completeness, and as such are subject to change without notice.