Live Cattle futures (LE) control and deliver cattle from when they are young calves grazing on hay until they weigh about 600-800 pounds. Upon reaching that weight, ranchers move the cattle to feed lots for an accelerated growth period of five to six months, during which they reach the typical slaughter weight of 1,250 pounds. During this stage, the cattle are represented by CME Feeder Cattle (GF) contract. This entire process from calf to steak typically takes two years.
U.S. beef production is centered in Arizona, California, Colorado, Iowa, Kansas, Nebraska and Texas and generates around approximately 25% of the world’s beef demand. However, due massive domestic demand and the global dispersion of production, the U.S. remains a net beef importer, with both Brazil and the EU acting as leading exporters.
Each Live Cattle futures contract represents 40,000 pounds with a minimum price fluctuation of $.00025 per pound, or $10 per tick. The contract trades Monday-Friday from 8:30 a.m. to 1:05 p.m. Central Time (CT).
Market participants trading LE monitor reports from the U.S. Department of Agriculture, or USDA. Cattle traders await the Monthly Cattle on Feed Report, which contains information about the quantity and quality of the herd size for both feeder and live cattle.
Market participants also closely analyze reports detailing cattle auctions, slaughter figures and the supply of frozen meat.To devise a trading strategy, an LE trader combines USDA reports with information about the weather, corn and other agricultural grains.
A hundred-pound calf can typically grow to 1,250 pounds if it is constantly fed a diet of corn. Consequently, corn prices dramatically impact the price of LE. Should the cost of corn and other feed rise too high, a rancher will slaughter the herd early and at a lower weight, which impacts the value on both nearby and back-month cattle contracts.
The size and health of the herd is also sensitive to weather; unusually hot or cold weather slows the rate at which cattle gain weight, which in turn reduces their final slaughter weight. As with other agricultural products, Live Cattle trade is seasonal and LE tends to be higher from November to January and lower from February to May.
Nonetheless, a trader must stay attuned to breaking news and changes to market structure in the cattle market. A news report about mad cow disease outbreak could impact global demand patterns for years. Similarly, global beef supply is poised for continued innovation as China is yet to tap its cattle production capabilities and the South American industry is still expanding.
Source: CME Group