Risk Warning: Your Capital is at Risk.
So you’ve learned about how feeder cattle are produced, which countries produce the most, and what role they play in various markets.
In this feeder cattle trading guide, we explore some reasons you may or may not consider trading feeder cattle instruments, as well as the type of trading products you can choose from.
Reasons You Might Trade Feeder Cattle Instruments
Buying feeder cattle can be a great addition to a trading 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 trade feeder cattle instruments.
As emerging economies expand, their appetite for animal proteins including beef is likely to continue to increase.
Buying feeder cattle is a bet on continued solid growth from emerging market countries.
Trading 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.
Trading feeder cattle might be a way to diversify a portion of a portfolio out of stocks and bonds and into commodities.
Where Can You Trade Feed Cattle?
If you want to get started trading feeder cattle and other agricultural commodities, here’s a list of regulated options available in to consider.
Top Brokers Available in
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 73.90%-89.00% of retail investor 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.
Ways To Trade Feeder Cattle
Traders have several ways to get exposure to feeder cattle trading products:
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.
Trading 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 trade 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 cover feeder cattle prices, there are three ETFs that trade in general livestock:
|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.
Traders seeking exposure are better off looking to ETFs that trade futures than to equities or stocks.
A popular way to trade 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.
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 speculate on feeder cattle prices 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.
Should I Trade 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 a diversified commodity basket.
Trading such baskets of commodities that include 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
Risks Of Betting On Feeder Cattle Prices
However, traders should also consider these three risks of trading 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
Learn more about other Agricultural Commodities and see other anima-related commodity guides on:
- Live Cattle: How Does Cattle Trade Impact The Global Economy?
- Lean Hogs: What Are Lean Hogs Primarily Used For?
- Pork Belly: Is Pork Belly A Valuable Commodity?
If you’d like to find out more about how feeder cattle are produced and what role they play in the global economy, see our Feeder Cattle Commodity Guide.