Live Cattle Trading: Why (and How) You’d Want to Trade Livestock


Guide to Trading Live Cattle
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The global live cattle market is worth billions of dollars to the world economy. Live cattle trading is mostly motivated by attempts to hedge against inflation or to capitalize on increased demand due to global growth.

Some of the choices available to trade live cattle are live cattle futures, options of futures, ETFs, and CFDs. If you’re keen to get started, jump to our list of brokers who offer live cattle trading instruments.

Reasons You May Want to Trade Live Cattle

Trading live cattle can be a great addition to your portfolio for the following reasons:

Bet on Global Growth

Growth in the global economy might be the best reason to trade 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. Trading live cattle can be 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

Trading live cattle can be a 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

Trading live cattle might be a feasible way to diversify a portion of a portfolio out of stocks and bonds and into commodities.

How to Trade Live Cattle

Traders have several ways to get exposure to live cattle. Here is a comparison of some of the trading methods:

Method of InvestingComplexity Rating (1 = easy, 5 = hard)Expiration Dates?Mgmt. Costs?Leverage?Regulated Exchange?
Live Cattle Futures5YNYY
Live Cattle Options5YNYY
Live Cattle ETFs (ETNs)2NYNY
Live Cattle CFDs3NNYY

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.

Trading 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 trade 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 for trading live cattle specifically, there are three ETFs for trading livestock in general:

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. Traders seeking exposure are better off looking to ETFs that invest in futures than to equities.

CFDs

One way to trade 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.

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 the trader can have exposure to live cattle prices without having to purchase shares, ETFs, futures, or options.

Where Can You Trade Live Cattle?

If you are looking to start trading live cattle and other agricultural commodities, here’s a list of regulated brokers available in to consider.

Top Brokers Available in

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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.

Factors to Consider Before Trading 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.

Potential Risks of Trading Live Cattle

Traders should also consider the potential risks of investing in live cattle:

  1. A global economic slowdown could seriously limit the 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.

Further Reading

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