- Why Are Feeder Cattle Valuable?
- How Do Ranchers Produce Feeder Cattle?
- Top 10 Beef and Veal Producers
- Top 5 Uses of Cattle
- What Drives the Price of Feeder Cattle?
- 3 Reasons You Might Invest in Feeder Cattle
- Should I Invest in Feeder Cattle?
- What Do the Experts Think About Feeder Cattle?
- How Can I Invest and Trade in Feeder Cattle?
- Feeder Trading Methods Compared
- Top 3 Livestock ETFs
- Further Reading
Why Are Feeder Cattle Valuable?
Feeder cattle are weaned calves that reach a weight of between 600 to 800 pounds. At this point, cattle producers feed them a diet of high-energy feed to promote weight gain. Ultimately, when they reach a weight of about 1,200 to 1,400 pounds, feeder cattle are slaughtered to produce beef.
Worldwide consumption of beef approaches nearly 60 million metric tons annually.
The economic impact of the meat and poultry industry in the United States alone is over $1 trillion. Beef production creates millions of jobs including suppliers, distributors and retailers. Feeder cattle are a vital part of the global ecosystem of beef production and an important commodity in world markets.
How Do Ranchers Produce Feeder Cattle?
Producing feeder cattle is a complex, high-stakes business. Successful production relies on proper animal husbandry techniques as well as good economic decision-making.
Ranchers begin the process by breeding cows (females) with bulls (males) either naturally or with artificial insemination (A.I.). Ranchers traditionally breed cattle in the summer to produce calves in the spring.
A natural breeding process generally requires one bull for each 20 to 25 cows. Many producers prefer A.I. because they can better control the genetics of the calves.
Ranchers must allocate a set amount of acres of pasture or grazing land for each cow and its calf offspring. This set amount of land is known as the stocking rate, and it varies from region to region based on weather conditions and maintenance procedures.
In the United States –the top cattle producing nation in the world – the stocking rate can be as low as five acres per cow-calf pair in high precipitation regions of the East to 150 acres in dry, arid regions of the West and Southwest.
A group of cows on a ranch is called a herd. Each cow generally gives birth to one calf, although some may occasionally produce twins. Not all cows conceive; weather, disease and nutrition can all affect conception rates.
Each year ranchers typically cull about 15 to 25% of the cows in their herd and send them to slaughter. The most common reasons for culling a cow include:
- Failure to reproduce
- Advanced age
- Bad teeth
- Drought conditions
- High feed costs.
Once the calves are born, a certain number of females are held back to replace the cows that are culled. The remaining calves are raised for eventual slaughter. The timeline for raising feeder cattle is as follows:
- First six months: Calves remain with the cow and receive their initial nutrition from nursing. Over time, ranchers supplement this nutrition with grass feeding and eventually with grain.
- Six to eight months of age: Calves typically weight 500 to 600 pounds at this stage. Ranchers wean the calf from the cow. Some very heavy calves go directly into feedlots, but most pass through stocker operations.
- Stocker operations: Calves get fed on summer grass, winter wheat or some other roughage until they reach the weight of 600 to 800 pounds, which is when they become feeder cattle. This phase generally lasts between six to 10 months.
- Feedlot: A rancher with feeder cattle has three options:
- Continue to raise the cattle on the rancher’s property until they reach the designated weight for slaughter
- Send the cattle to a commercial feedlot. A rancher would retain ownership of the cattle while the commercial feedlot feeds them.
- Sell the feeder cattle to another rancher or feedlot operation.
Feeder cattle receive high-energy feed to promote weight gain. They are usually either steers (castrated males) or heifers (females that have not given birth). Cows (females that have given birth) and bulls (sexually intact males) generally are kept for production and not placed in feedlots.
Top 10 Beef and Veal Producers
|Rank||Flag||Country||Beef and Veal Produced per Year (1,000 Metric Tons)|
|#1||United States of America||12,448|
Cattle producers primarily raise cattle as a food source. However, beef accounts for one of several products produced from cattle:
Top 5 Uses of Cattle
|Use of Cattle||Description|
|Beef ||Hamburgers, steaks and roast beef are among the many products produced from beef.|
|Food By-Products||By-products of beef production include the following:|
|Beef Hide||Beef hide is used to make a variety of items:|
|Non-Food Uses (Beef Fats and Fatty Acids)||Some industrial oils, lubricants, soaps, lipsticks, face creams, hand creams, chemicals, pesticides and detergents derive from beef fat products.|
|Bones, Horns and Hooves||Buttons, piano keys, glues and fertilizers are some of the many products made from bones, horns and hooves of cattle.|
What Drives the Price of Feeder Cattle?
Some of the specific factors that move feeder cattle prices include:
- Feed Prices
- Global Demand For Beef
- Energy Prices
Historically the price of livestock feed, especially corn, is inversely related to the price of feeder cattle. The rationale is that as the cost of producing the “finished” animal declines, buyers are willing to pay more for the “intermediate” product.
Corn is such an integral part of the process of raising feeder cattle that many ranchers and others dependent on cattle prices will hedge their exposure to this risk.Traders looking to invest in feeder cattle should keep a careful eye on grain markets and the factors that influence grain prices.
Weather can affect feeder cattle prices in several ways. First, weather has a big impact on grain prices. Severe drought conditions or excessive cold spells can diminish grain supply and send prices higher. This, in turn, usually has a negative effect on feeder cattle prices.
Weather can also directly affect the process of raising feeder cattle. Excessive heat can lower cattle appetite and lengthen the time it takes to produce fully-fed cattle.
Global Demand for Beef
Beef is a discretionary item and generally more costly than other animal and vegetable food sources.
Demand for beef is historically correlated with overall wealth. As emerging market economies have grown wealthier, beef consumption has risen. Similarly, in developed economies, the level of beef consumption has often been tied to overall economic growth. Therefore, feeder cattle traders should pay attention to metrics such as GDP growth and unemployment for clues about future feeder cattle prices.
Beef competes with other animal products such as chicken, pork, lamb and fish.
Many factors can impact which of these products consumers choose, but cost often plays the biggest role. As the cost of beef rises, consumers may substitute other animal proteins in their diets.
Other factors that could lead to substitution are the discovery of diseases in cattle such as Bovine Spongiform Encephalopathy (BSE or mad cow disease).
The energy required to raise cattle far exceeds that of other food sources. By some estimates, raising beef requires 10 times the resources needed to raise poultry, dairy, eggs and pork.
Many of the added input costs of beef production – land use, water and nitrogen fertilizer, just to name a few – are very sensitive to energy prices. Ultimately, the price of oil, natural gas, coal and other energy sources can greatly impact beef prices.
3 Reasons You Might Invest in Feeder Cattle
Buying feeder cattle can be a great addition to an investment portfolio for the following reasons:
- Bet on Global Growth
- Inflation Hedge
- Portfolio Diversification
Bet on Global Growth
Growth in the global economy might be the best reason to invest in feeder cattle.
As emerging economies expand, their appetite for animal proteins including beef is likely to continue to increase.
After the United States, China and Brazil now consume the second and third most beef globally. China, South Korea and Russia comprise three of the top five global importers of beef. Buying feeder cattle is a bet on continued solid growth from emerging market countries.
Investing in feeder cattle is a way to hedge against the loss of purchasing power from inflation. Livestock is certain to become more expensive if the world economy starts to overheat.
Easy money policies from the Federal Reserve and other central banks have kept global interest rates low and created speculation in many different asset classes. At some point this speculation could show up in food markets such as feeder cattle, particularly if there is a global food shortage. A weak dollar, in particular, could signal inflation and higher feeder cattle prices.
Investing in feeder cattle might be a way to diversify a portion of a portfolio out of stocks and bonds and into commodities.
Should I Invest in Feeder Cattle?
Feeder cattle prices can be volatile. Changes in weather, corn prices and beef demand, among other things, could lead to large price swings.
However, traders might want to consider including feeder cattle as part of an investment in a diversified basket of commodities.
Investing in a basket of commodities that includes feeder cattle, other livestock and poultry, other agricultural commodities, metals and energy can accomplish two goals:
- It can protect a portfolio against inflation
- It can protect a trader from the volatility of movements in individual commodities
However, traders should also consider these three risks of investing in feeder cattle:
- An emerging market slowdown could seriously limit demand for beef
- Trends toward healthier living are creating negative perceptions about beef consumption
- Beef production is heavily energy intensive. Environmental concerns and the green energy movement have created negative publicity for the beef industry
What Do the Experts Think About Feeder Cattle?
Experts generally have a pessimistic outlook about feeder cattle prices. One analyst cites the abundant supply of three sources of meat – poultry, pork and beef – as reasons to sour on the market:
All three of the major meats are in expansion mode, and that’s scary.
– Randy Blach, CEO CattleFax
Another expert concurs. Jeremy Klassen, manager of the Canadian office of Swiss-based grain trader GAP SA Grain Products Ltd., believes growth in the calf crop signals problems for the market:
…the 2017 calf crop was estimated at 36.5 million head, up 3.5 per cent from the 2016 calf crop of 35.0 million head. The last time the U.S. calf crop was this large was back in 2007 when it reached 36.8 million head. We haven’t seen a sharp increase in the cow slaughter so the U.S. cattle herd continues to expand at a rapid pace.
– Jeremy Klassen, Manager GAP SA Grain Products Ltd.
How Can I Invest and Trade in Feeder Cattle?
Investors have several ways to get investment exposure to feeder cattle:
Feeder Trading Methods Compared
|Method of Investing||Complexity Rating (1 = easy, 5 = hard)||Storage Costs?||Security Costs?||Expiration Dates?||Management Costs?|
|Feeder Cattle Futures||5||N||N||Y||N||Y||Y|
|Feeder Cattle Options||5||N||N||Y||N||Y||Y|
|Feeder Cattle ETFs (ETNs)||2||N||N||N||Y||N||Y|
|Feeder Cattle CFDs||3||N||N||N||N||Y||Y|
Feeder Cattle Futures
The Chicago Mercantile Exchange (CME) offers a futures contract that settles into 50,000 pounds (23 metric tons) of feeder cattle.
The contract trades globally on the CME Globex electronic trading platform and has eight expiration months: January, March, April, May, August, September, October and November.
Futures are a derivative instrument through which traders make leveraged bets on commodity prices. If prices decline, traders must deposit additional margin in order to maintain their positions. At expiration, feeder cattle contracts are financially settled.
Investing in futures requires a high level of sophistication since factors such as storage costs and interest rates affect pricing.
Feeder Cattle Options on Futures
The CME offers an options contract on feeder cattle futures.
Options are also a derivative instrument that employs leverage to invest in commodities. As with futures, options have an expiration date. However, options also have a strike price, which is the price above which the option finishes in the money.
Options buyers pay a price known as a premium to purchase contracts. An options bet succeeds only if the price of feeder cattle futures rises above the strike price by an amount greater than the premium paid for the contract. Therefore, options traders must be right about the size and timing of the move in feeder cattle futures to profit from their trades.
Feeder Cattle ETFs
These financial instruments trade as shares on exchanges in the same way that stocks do.
While there is no ETF that specifically invests in feeder cattle, there are three ETFs that invest generally in livestock:
Top 3 Livestock ETFs
|iPath Bloomberg Livestock Total Return||E-TRACS UBS Bloomberg Livestock Commodity Total Return||iPath Pure Beta Livestock ETN|
Shares of Feeder Cattle Companies
It is impossible to get pure-play exposure to feeder cattle prices through the equity market. Most ranches that raise feeder cattle are privately owned. Investors seeking exposure are better off looking to ETFs that invest in futures than to equities.
A popular way to invest in feeder cattle is through the use of a contract for difference (CFD) derivative instrument. CFDs allow traders to speculate on the price of feeder cattle. The value of a CFD is the difference between the price of feeder cattle at the time of purchase and its current price.
Many regulated brokers worldwide offer CFDs on feeder cattle. Customers deposit funds with the broker, which serve as margin. The advantage of CFDs is that traders can have exposure to feeder cattle prices without having to purchase shares, ETFs, futures or options.
- No commission on trades (other charges may apply)
- Free demo account
- Easy to use (mobile-friendly) platform
- Industry-leading risk management tools
- Trade hundreds of CFDs
- Your funds are safe – publicly listed company regulated by the UK's Financial Conduct Authority and Cyprus' Securities and Exchange Commission
Important: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail trader accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.