January 8

Feeder Cattle Trading Strategies – What you should know before you start (Backtest)

Last Updated on 8 January, 2023 by Samuelsson

Feeder Cattle futures strategies are a popular way to access the feeder cattle market and make informed trading decisions. Trading on the CME, feeder cattle futures contracts have a value of 50,000 pounds and a tick size of $12.5. But what exactly are feeder cattle and how can you make the most of this market?

Feeder cattle are young cows and steers that have reached a weight of around 600 to 800 pounds after weaning. They are typically not used for breeding and are instead kept in a feedlot, where they are fed high-energy diets to fatten them up for slaughter. When they reach a weight of around 1000 to 1400 pounds, they are ready for the slaughterhouse.

There are several strategies traders can use when it comes to feeder cattle futures. One popular approach is to closely monitor the demand for beef, as well as weather patterns and feed costs, to make informed decisions about buying and selling. Additionally, traders can consider using technical analysis to identify trends and make more precise trades.

Overall, trading feeder cattle futures can be a lucrative and exciting way to participate in the cattle market. By staying up-to-date on market conditions and utilizing various strategies, traders can maximize their profits in this dynamic market.

Feeder cattle are young cattle that are raised on a farm or ranch and then sold to a feedlot, where they are fed a diet high in grains to fatten them up before being slaughtered and sold as beef. Feeder cattle futures are financial instruments that allow producers, feedlots, and other market participants to hedge against or speculate on the future price of feeder cattle.

With the global consumption of close to 60 million metric tons per annum, beef plays a great role in the world economy, creating millions of jobs in production, distribution, and retailing. As an important stage in beef production, feeder cattle is a popular commodity in the livestock market, and its futures contracts are widely traded on the commodity exchanges.

Feeder Cattle Futures Contract Specification

Feeder Cattle Trading Strategies - What you should know before you start (Backtest)

 

Feeder Cattle Futures Trading Strategies

If you are interested in getting strategies to use when building trading strategies, we recommend that you have a look at our edge membership.

If you want to build a trading strategy for the feeder cattle market, then futures is the way to go. Even though the feeder cattle market is quite illiquid when compared to other futures contracts like Crude Oil or Soybeans, it’s more liquid than most other options out there.

Finding a Feeder Cattle Futures Trading Strategy that works live and in a backtest is quite hard compared to other markets. However, it will very likely blend in beautifully with the rest of your portfolio!

Feeder cattle futures trading strategies and why you should consider trading them:

  • Diversify your portfolio: Trading feeder cattle futures can be a way to diversify your investment portfolio, as the price of feeder cattle is not highly correlated with other asset classes. This can help to reduce overall portfolio risk.
  • Hedge against price fluctuations: Feeder cattle prices can be volatile, and futures contracts can be used to hedge against price fluctuations. For example, if you are a feedlot operator and you are concerned that feeder cattle prices may decline, you could buy feeder cattle futures as a hedge to protect against potential losses.
  • Take advantage of price trends: Like any other market, the price of feeder cattle can trend upwards or downwards over time. By using technical analysis or other trading strategies, you may be able to identify and capitalize on these trends.
  • Leverage: Futures contracts allow you to trade with leverage, meaning you can potentially make larger profits (or losses) with a smaller initial investment. This can be a powerful tool, but it also carries additional risks, so it is important to carefully consider your risk tolerance and use appropriate risk management strategies.
  • Liquidity: Feeder cattle futures are highly liquid, meaning it is generally easy to buy and sell contracts. This can be beneficial for traders who need to enter or exit positions quickly.

Overall, trading feeder cattle futures can be a way to diversify your portfolio, hedge against price fluctuations, take advantage of price trends, and leverage your investment. However, it is important to thoroughly research and understand the market and the risks involved before trading.

Feeder Cattle Futures Seasonality

Seasonality is a pattern that occurs regularly over a particular period of time, and it can have a significant impact on the price of feeder cattle futures. In the United States, the demand for beef tends to be higher in the summer months when more people are grilling and entertaining outdoors. As a result, feeder cattle prices tend to be higher in the summer. Conversely, demand for beef tends to be lower in the winter months, and feeder cattle prices tend to be lower as well.

There are several factors that can influence the seasonality of feeder cattle futures, including the weather, economic conditions, and the overall supply and demand for beef. For example, if there is a drought or other adverse weather conditions that reduce the availability of feed for cattle, it can lead to higher feeder cattle prices. On the other hand, if there is an abundance of feed and a large supply of feeder cattle, it can lead to lower prices.

In conclusion, feeder cattle futures are subject to seasonality, with prices tending to be higher in the summer and lower in the winter. This pattern is influenced by a variety of factors, including the weather, economic conditions, and the overall supply and demand for beef.

Here is a chart of the seasonal effects on the feeder cattle futures market. (from equityclock)

Feeder Cattle Futures Seasonality

Feeder Cattle Futures COT

The Commitments of Traders (COT) report is a weekly publication produced by the Commodity Futures Trading Commission (CFTC) that provides information on the size and direction of the positions held by different categories of traders in various futures and options markets, including feeder cattle futures. The report is based on data collected from futures commission merchants and is released every Friday at 3:30pm Eastern Time. It provides insight into the market sentiment and can be used to inform trading decisions.

COT reportable feeder cattle futures are financial contracts that allow traders to speculate on the price of young cattle that have not yet reached maturity and are typically used for beef production. These contracts, which are traded on exchanges such as the Chicago Mercantile Exchange (CME), are influenced by factors such as the supply and demand for feeder cattle, the cost of feed and other inputs, and overall economic conditions. Market participants, including producers, feedlots, and meat processors, use these futures contracts to hedge against price fluctuations or speculate on future price movements.

Feeder Cattle Futures – Price quotes

The best source for prices for feeder cattle futures can be found here.

Who are the Largest Producers and Consumers of Feeder Cattle?

Almost every country in the world produces beef for domestic consumption, and feeder cattle are an important stage in the normal process of beef production. Hence, the largest producers of beef will also be the largest producers of feeder cattle. The top 10 producers of beef and veal meat are the US, Brazil, the European Union, China, India, Argentina, Mexico, Pakistan, Turkey, and Russia.

The United States is also topping the list of beef consumers, followed by China, Brazil, the EU, India, Argentina, Mexico, Russia, Pakistan, Turkey, Japan, South Africa, and Canada.

Why You Should Trade Feeder Cattle Futures Contracts?

For someone with the right skills and temperament, trading feeder cattle futures contracts can be very profitable. But some investors are not in the feeder cattle market to make some quick profits from short-term trades. In fact, different traders have different reasons for trading the commodity.

  1. Speculation: The growing global economy may increase the demand for beef, as more people are able to afford animal proteins. And, the increasing demand will add more liquidity to the feeder cattle market, making it more attractive for speculative trading. Moreover, the correlation between feeder cattle and some agricultural commodities, like corn and soybeans, provides good tradable opportunities.
  2. Hedging against inflation: Some investors play the feeder cattle market to hedge against the loss of purchasing power due to inflation, and here is why. As a tangible asset, livestock is expected to increase in value when inflation bites hard. Moreover, with the central banks printing more notes and lowering interest rates, paper money is consistently losing their purchasing power.
  3. Diversifying Portfolio: Portfolio diversification is very necessary for securing your investment against catastrophic events in the financial markets. Spreading your investment across different asset classes makes it more difficult to lose all your investment if one market is experiencing a hiccup, and feeder cattle is one of the commodities you can diversify into.

How can you invest in feeder cattle?

You can invest in Feeder Cattle either through ETFs or through Future contracts. The Future contracts are traded on CME and the ETFs are traded on stock exchanges. The following are ETFs that cover Feeder Cattle price.

COW: iPath DJ-UBS Livestock ETN (NYSE: COW)

UBC: E-TRACS UBS Bloomberg CMCI Livestock ETN (UBC)

LSTK: iPath Pure Beta Livestock ETN

What are Feeder Cattle used for?

Feeder cattle futures contracts are actively traded because feeder cattle are necessary for the production of live cattle. Basically, the uses of this commodity are centered around meat production, but there are other uses.

Beef production: When feeder cattle are grown to the right sizes, they are slaughtered to produce beef, which is an important source of protein in many diets.

Other edible by-products: Apart from the beef, other edible products from cattle include kidneys, liver, tongue, brain, and tripe. Gelatin and oleo oil gotten from cattle can be used to ice cream and margarine.

Hides and skin: The skin can be dried and used in making leather products, football, and some textiles.

Beef fats: These can be used to make detergents, soaps, body creams, and lubricants.

Bones and horns: The horn, hooves, and bones can be used to make products, like glues, buttons, fertilizers, and piano keys.

How to Trade and Play the Feeder Cattle Market

While there may be other ways to play the feeder cattle market — such as feeder cattle options on futures, feeder cattle exchange-traded funds, and feeder cattle CFDs, the best way to trade the feeder cattle market is via the futures contracts, which trade on commodity exchanges.

Feeder cattle futures contracts are traded on the Chicago Mercantile Exchange (CME), and through the Globex electronic trading platform, the contracts can be traded from any part of the world, even after regular market hours.

A feeder cattle contract is equivalent to 50,000 pounds or 23 metric tons of feeder cattle, and it normally expires in the months of January, March, April, May, August, September, October, and November. At expiration, the contract is settled with cash, so you need not worry about taking or making a delivery of the commodity.

What it takes to start trading feeder cattle futures is just to create an account with the futures exchange through your broker and deposit the required margin. Being a leveraged instrument, you don’t need to have the total worth of a contract to trade it.

However, you should be aware that leveraged instruments are doubled-edged swords — while they can help you make more money, they can also make you lose more money.

What makes Feeder Cattle Prices go up and down?

The price of feeder cattle futures contracts can be affected by a lot of factors, including the following:

The demand for beef: Feeder cattle are a part of the beef production ecosystem, so the demand for beef influences the prices of the futures contracts. Rising beef demand will increase feeder cattle prices, while a declining global demand for beef will bring down feeder cattle prices.

USDA’s Cattle on Feed Report: It is a monthly report that outlines the number of cattle and calves on feed, the number of cattle in feedlots, and the number shipped out of feedlots to be slaughtered.

The prices of feed: Feed prices are inversely correlated to the prices of feeder cattle. The reason is that when feed prices are low, ranchers will likely keep their feeder cattle to grow to full sizes because of the reduced cost of feeding, thereby creating a scarcity of feeder cattle in the market. Rising feed prices will make ranchers push their feeder cattle to the market, creating a supply surplus.

Conclusion

Feeder cattle are part of the ecosystem of beef production. The best way to play the feeder cattle market is through the futures market, and the futures contracts are traded on the CME and through CME Globex electronic trading platform.

Here is our archive with articles about other tradeable futures markets.


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