The Commodity.com Guide to Live Cattle

Live Cattle Trading

Why Are Live Cattle Valuable?

Live cattle are full-grown cattle that have reached the necessary weight for slaughter. Cattle typically get slaughtered for meat and other by-products when they reach a weight of between 1,200 and 1,400 pounds, but this can vary.

For example, in 2016, the average, live federally inspected slaughter weight in the United States was approximately 1,384 pounds.

The beef industry is a global industry with an economic impact in the trillions of dollars. Beef production creates millions of jobs including suppliers, distributors and retailers. Ultimately, live cattle produce the beef and by-products consumed around the globe.

What is the Difference Between Feeder Cattle and Live Cattle?

Livestock traders distinguish between two types of cattle – feeder cattle and live cattle. The difference between these two commodities is the stage of the production cycle.

Feeder cattle are weaned calves that have reached a weight of between 600 and 800 pounds. At this point, feeder cattle are put in a feedlot where they consume a high-energy feed diet consisting mainly of corn and other grains. Feeder cattle typically need to gain more than 500 pounds before they reach slaughter weights, so corn prices have a big impact on feeder cattle prices.

Live cattle, on the other hand, are ‘finished’ products that are ready for sale to slaughterhouses. Supply and demand factors for beef typically play the biggest role in determining live cattle prices.

How Do Ranchers Produce Live Cattle?

Production of live cattle begins with breeding cows (females) with bulls (males) either naturally or with artificial insemination (A.I.). Cows bred in the summer will 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 allocate a certain amount of acres of pasture or grazing land for each cow and its calf offspring. This 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.

Cows Grazing

Cows Grazing – Image via Pixabay

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:

  1. Failure to reproduce
  2. Advanced age
  3. Bad teeth
  4. Drought conditions
  5. 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 cattle is as follows:

  1. 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.
  2. 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.
  3. 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.
  4. Feedlot: A rancher then has three options:
    1. Continue to raise the cattle on the rancher’s property until they reach the designated weight for slaughter
    2. Send the cattle to a commercial feedlot. A rancher would retain ownership of the cattle while the commercial feedlot feeds them.
    3. 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.

Once the cattle reach slaughter weight, they are sold as live cows either directly to a packer or through an auction. Packers slaughter the live cows and sell all of the meat and by-products from the animals.

World's Biggest Beef Producers

Top 10 Beef and Veal Producers

RankFlagCountryBeef and Veal Produced per Year (1,000 Metric Tons)
#1Flag of USAUnited States of America12,448
#2Flag of BrazilBrazil9,700
#3Flag of European UnionEuropean Union7,900
#4Flag of ChinaChina7,110
#5Flag of IndiaIndia4,300
#6Argentina FlagArgentina2,900
#7Flag of MexicoMexico1,960
#8Flag of pakistanPakistan1,800
#9Flag of TurkeyTurkey1,600
#10Russia1,300

Cattle producers primarily raise cattle as a food source. However, beef accounts for one of several products produced from live cattle:

Top 5 Uses of Cattle

Use of CattleDescription
Beef
Burger Icon
Hamburgers, steaks and roast beef are among the many products produced from beef.
Food By-Products
Ice Cream Icon
By-products of beef production include the following:
  • Liver, kidney, brains, tripe, sweetbreads and tongue are food sources in many countries
  • Oleo oil and stock are produced from beef fat and used to make margarine and shortening
  • Oleo stearin is an edible solid beef fat used to make some chewing gums and candies
  • Gelatin from cattle bone and skins is used to make marshmallows, ice cream, canned meats and desserts
  • Beef Hide
    Football Icon
    Beef hide is used to make a variety of items:
  • Leather
  • Felt
  • Some textiles
  • Base for ointments
  • Binder for plaster and asphalt
  • Base for insulation material
  • Brushes
  • Footballs
  • Non-Food Uses (Beef Fats and Fatty Acids)
    Soap Icon
    Some industrial oils, lubricants, soaps, lipsticks, face creams, hand creams, chemicals, pesticides and detergents derive from beef fat products.
    Bones, Horns and Hooves
    Piano Keys Icon
    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 Live Cattle?

    Some of the specific factors that move live cattle prices include:

    1. Beef Demand
    2. Cattle Feeding Spreads
    3. Cattle on Feed Report
    4. Feed Prices

    Beef Demand

    Consumer incomes are one of the major drivers of beef demand and live cattle prices.

    Beef is more expensive than pork or poultry, and demand for animal proteins often shows price elasticity. During previous recessions, beef prices have fallen in response to lower demand and during robust economic expansions, beef demand and prices have risen.

    Butcher's Shop

    Butcher’s Shop Selling Beef – Image via Pixabay

    Cattle Feeding Spreads

    Cattle traders often construct hedges to trade the relationship between (1) the price of live cattle and (2) the price of feeder cattle and grains.

    One such spread is the cattle crush. In this spread the trader might buy (or sell) feeder cattle and corn futures and sell (or buy) an equivalent weight amount of live cattle. Traders have to estimate the hedge ratios of the different components in order to be completely hedged.

    As the price of feeder cattle moves higher (or lower), spread traders expect the price of live cattle to follow in the same direction. In other words, market participants generally expect for there to be a high correlation between feeder cattle and live cattle prices.

    Cattle on Feed Report

    This monthly report by the United States Department of Agriculture (USDA) contains important data that can often dramatically move markets. The report lists three key pieces of data:

    1. Cattle and calves on feed – A measure of how many cattle will end up for processing in a few months.
    2. Placements – The number of cattle in feedlots that are being fed to produce a grade of ‘select’ or better by the USDA.
    3. Marketings – Cattle shipped out of feedlots to be slaughtered.

    Feed Prices

    As with feeder cattle, the price of corn and other feeds is inversely related to the price of live cattle.

    However, the reason for this inverse relationship with live cattle is slightly different. With feeder cattle, corn prices influence the cost of finishing the product. As finishing costs (corn) decline, buyers are willing to pay more for the “intermediate” product.

    With live cattle, a rise in corn prices may lead ranchers to bring cattle to market prematurely. This, in turn, creates an oversupply and lower prices.

    3 Reasons You Might Invest in Live Cattle

    Buying live cattle can be a great addition to an investment portfolio for the following reasons:

    1. Bet on Global Growth
    2. Inflation Hedge
    3. Portfolio Diversification

    Bet on Global Growth

    Growth in the global economy might be the best reason to invest in live 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 live cattle is a bet on continued solid growth from emerging market countries.

    emerging markets map

    Emerging Markets Are Likely to Consume More Beef – Image via Wikipedia

    Inflation Hedge

    Investing in live cattle is a great way to hedge against the loss of purchasing power from inflation.Livestock is almost certain to become more expensive if the world economy starts to overheat.

    Low interest rates from the Federal Reserve and other central banks have produced speculative bubbles in assets ranging from equities to high-yield debt to cryptocurrencies.

    Yet food remains the most basic and fundamental necessity. Food commodity prices could see the largest increases if the economy experiences higher inflation. Live cattle prices could benefit from these conditions.

    Portfolio diversification

    Investing in live cattle might be a good way to diversify a portion of a portfolio out of stocks and bonds and into commodities.

    Should I Invest in Live Cattle?

    Live cattle prices are extremely volatile. Unlike crude oil or gold, the primary traders of the commodity are not speculators, but industry players hedging their risk exposures.

    Changes in feeder cattle supply, corn prices or demand for beef, among other things, could create enormous volatility. Traders should think carefully before taking large speculative positions in the commodity.

    However, traders might want to consider buying a diversified basket of commodities that includes live cattle.

    Investing in a basket of commodities that includes live cattle, other livestock and poultry, other agricultural commodities, metals and energy can provide a portfolio with protection against inflation. It could also insulate against large movements in individual commodities.

    The specific reasons for including live cattle in this basket are to capitalize on growing global demand for food. As incomes and wealth rise in emerging market countries such as China, India and Brazil, the demand for beef products will certainly grow as well.

    However, traders should also consider the potential risks of investing in live cattle:

    1. A global economic slowdown could seriously limit demand for beef.
    2. Trends toward healthier living are creating negative perceptions about beef consumption.
    3. Beef production is heavily energy intensive. Environmental concerns and the green energy movement have created negative publicity for the beef industry.
    4. Bovine spongiform encephalopathy (BSE), also known as mad cow disease, has the potential to cripple demand for beef products.

    What Do the Experts Think About Live Cattle?

    Live Cattle Trading Experts

    Experts have a cautiously optimistic view about live cattle prices. On the one hand, placements remain high, which suggests that more feeder cattle will be coming into production shortly. On the other hand, beef consumption remains strong:

    …all year long we have seen beef demand defy expectations. The economy is in good shape, unemployment is low and the consumer appears willing and able to pay for beef.

    – Daily Livestock Report

    How Can I Invest in Live Cattle?

    Investors have several ways to get investment exposure to live cattle:

    Live Cattle Trading Methods Compared

    Method of InvestingComplexity Rating (1 = easy, 5 = hard)Storage Costs?Security Costs?Expiration Dates?Management Costs?

    Leverage?

    Regulated Exchange?
    Live Cattle Futures5NNYNYY
    Live Cattle Options5NNYNYY
    Live Cattle ETFs (ETNs)2NNNYNY
    Live Cattle CFDs3NNNNYY

    Live Cattle Futures

    The Chicago Mercantile Exchange (CME) offers a futures contract that settles into 40,000 pounds (18 metric tons) of live cattle.

    The contract trades globally on the CME Globex electronic trading platform and has various expiration months.

    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, live cattle contracts are settled by physical delivery.

    Investing in futures requires a high level of sophistication since factors such as storage costs and interest rates affect pricing.

    Live Cattle Options on Futures

    The CME offers an options contract on live 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 live 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 live cattle futures to profit from their trades.

    Live 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 live cattle, there are three ETFs that invest generally in livestock:

    Top 3 Livestock ETFs

    iPath Bloomberg Livestock Total ReturnE-TRACS UBS Bloomberg Livestock Commodity Total ReturniPath Pure Beta Livestock ETN

    Shares of Live Cattle Companies

    There is no adequate way to gain exposure to live cattle prices through the equity market. Most ranches that raise cattle are privately owned. Investors seeking exposure are better off looking to ETFs that invest in futures than to equities.

    CFDs

    A popular and easy way to invest in live cattle is through the use of a contract for difference (CFD) derivative instrument. CFDs allow traders to speculate on the price of live cattle. The value of a CFD is the difference between the price of live cattle at the time of purchase and its current price.

    Opening an Account with Plus500

    Many regulated brokers worldwide offer CFDs on live cattle. Customers deposit funds with the broker, which serve as margin. The advantage of CFDs is that trader can have exposure to live cattle prices without having to purchase shares, ETFs, futures or options.

    Plus500 logo

    One of the leading brokers for trading agricultural commodities, like live cattle, is Plus 500. Here’s why:

    • No commission on trades (other charges may apply)
    • Free demo account
    • Easy to use (mobile-friendly) platform
    • Industry-leading risk management tools
    • Trade live cattle and hundreds of other markets
    • Your funds are safe – publicly listed company regulated by the UK’s Financial Conduct Authority and Cyprus’ Securities and Exchange Commission

    Start Trading at Plus500.com Important: Your capital is at risk. CFD services are suitable for experienced traders only.

    Further Reading

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